PROSPECTUS Registration No. 333-58883
[Logo] Filed Pursuant to Rule 424(b)(3)
FIRST NILES FINANCIAL, INC.
(Proposed Holding Company for Home Federal Savings and Loan Association
of Niles)
Up to 2,645,000 Shares of Common Stock
$10.00 Per Share
Home Federal Savings and Loan Association of Niles ("Home Federal" or the
"Association") is converting from the mutual to the stock form of organization
(the "Conversion"). As part of the Conversion, Home Federal will become a wholly
owned subsidiary of First Niles Financial, Inc. First Niles Financial, Inc. was
formed in July 1998 and upon consummation of the Conversion will own all of the
shares of Home Federal. The common stock of First Niles Financial, Inc. is being
offered for sale to the public in accordance with a plan of conversion. The plan
of conversion must be approved by the Office of Thrift Supervision and by a
majority of the votes eligible to be cast by members of Home Federal. No common
stock will be sold if Home Federal does not receive these approvals or if First
Niles Financial, Inc. does not receive orders for at least the minimum number of
shares.
Terms of the Offering
Keller & Co., Inc., an independent appraisal firm, has estimated the pro forma
market value of Home Federal, on a converted basis, to be between $17,000,000
and $23,000,000. Based on this estimate, First Niles Financial, Inc. will offer
between 1,700,000 shares and 2,300,000 shares, to depositors, borrowers,
directors and officers of Home Federal, and the public. Home Federal may
increase the number of shares offered to up to 2,645,000 shares, subject to
regulatory approval. Based on these estimates, First Niles Financial, Inc. is
making the following offering of shares of common stock:
Adjusted
Minimum Midpoint Maximum Maximum
------- -------- ------- -------
Per Share Price ........ $ 10.00 $ 10.00 $ 10.00 $ 10.00
Number of Shares ....... 1,700,000 2,000,000 2,300,000 2,645,000
Underwriting Commission
and Other Expenses ... $ 582,596 $ 624,000 $ 665,387 $ 712,991
Net Proceeds ........... $16,417,404 $19,376,000 $22,334,613 $25,737,009
Net Proceeds per share . $ 9.66 $ 9.69 $ 9.71 $ 9.73
Please refer to Risk Factors beginning on page 13 of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
For information on how to subscribe, call the Stock Information Center at (330)
505-1765.
First Niles Financial, Inc. anticipates that its common stock will be traded on
the Nasdaq National Market under the symbol "FNFI".
CHARLES WEBB & COMPANY,
a Division of Keefe, Bruyette & Woods, Inc.
The date of this Prospectus is September 11, 1998
[MAP OF OHIO]
PROSPECTUS SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to the financial statements of Home
Federal Savings and Loan Association of Niles. References in this document to
"Home Federal", the "Association", "we", "us", and "our" refer to Home Federal
Savings and Loan Association of Niles either in its present form or as a stock
savings association following the Conversion. References in this document to the
"Company" refer to First Niles Financial, Inc. In certain instances where
appropriate, the "Company" refers collectively to First Niles Financial, Inc.
and to Home Federal Savings and Loan Association of Niles.
The Company:
First Niles Financial, Inc.
55 North Main Street
Niles, Ohio 44446-5097
(330) 652-2539
First Niles Financial, Inc. is not an operating company and has not engaged in
any significant business to date. It was formed in July 1998 as a
Delaware-chartered corporation to be the holding company for Home Federal. The
holding company structure will provide greater flexibility in terms of
operations, expansion and diversification. See "First Niles Financial, Inc." on
pages 20 and 21.
The Association:
Home Federal Savings and Loan Association of Niles
55 North Main Street
Niles, Ohio 44446-5097
(330) 652-2539
Home Federal was established in Niles, Ohio in 1897. We are a community
and customer oriented federal mutual savings association serving primarily the
Niles, Ohio area through our one office located in Niles. We provide financial
services to individuals, families and small businesses. Historically, we have
emphasized residential mortgage lending, primarily originating one- to
four-family mortgage loans. Deposits at the Association are insured up to the
applicable limits by the Federal Deposit Insurance Corporation. At April 30,
1998, Home Federal had total assets of $72.5 million, deposits of $57.8 million,
and retained earnings of $12.2 million. See "Home Federal Savings and Loan
Association of Niles" on pages 19 and 20.
The Conversion
On July 6, 1998, we adopted a Plan of Conversion, which was
subsequently amended, pursuant to which we will convert from a federally
chartered mutual savings institution to a federally chartered stock savings
institution and immediately thereafter become a wholly owned subsidiary of the
Company. The Conversion will include adoption of a federal stock charter and
bylaws which will authorize us to issue capital stock.
Under the Plan, Home Federal common stock is being sold to the Company and
Company common stock is being offered to the public on a priority basis.
Currently, in our mutual form, our depositors and borrowers are members
and have voting rights. Subsequent to Conversion, voting rights will be vested
exclusively in the Company as the sole stockholder of the Association. Voting
rights as to the Company will be held exclusively by its stockholders. Our
members will have the opportunity to vote on the Plan of Conversion at our
Special Meeting of Members to be held on October 21, 1998. See "The Conversion"
on pages 83 to 100.
Important Risks in Owning First Niles Financial, Inc.'s Common Stock
Before you decide to purchase stock in the offering, you should read
the "Risk Factors" section on pages 13 to 19 of this document, in addition to
the other sections of this Prospectus. The Common Stock is subject to investment
risk, including the possible loss of principal invested.
The Stock Offering
First Niles Financial, Inc. is offering between 1,700,000 and 2,300,000
shares of common stock ("Common Stock") at $10.00 per share. The Company may
increase the offering to 2,645,000 shares without further notice to you. Any
increase over 2,645,000 shares would require the approval of the Office of
Thrift Supervision (the "OTS"). You may not change or cancel any stock order
previously delivered to us as a result of an increase in the offering within
these limits.
Stock Purchase Priorities and Limitations
The shares of Common Stock will be offered on the basis of priorities.
Certain of our depositors and borrowers and the Employee Stock Ownership Plan
established by the Association will receive subscription rights to purchase
shares of Common Stock. Any shares not subscribed for by depositors and
borrowers will be offered in a direct community offering or a public offering,
with a preference given, except for certain shares which may be reserved for
institutional investors, to natural persons residing in a geographic area
encompassing a radius of 35 miles from the Association's headquarters.
Subscriptions for shares of Common Stock will be subject to the maximum and
minimum purchase limitations set forth in the Plan of Conversion and as further
described in this Prospectus. See "The Conversion - Offering of Holding Company
Common Stock" on pages 88 to 91.
Prohibition on Transfer of Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law and may result in the forfeiture of
your subscription rights.
Stock Pricing and Number of Shares to be Issued
First Niles Financial, Inc.'s board of directors set the purchase price
per share of the Common Stock at $10.00. It is the price most commonly used in
stock offerings involving conversions of mutual savings institutions. The number
or range of shares of Common Stock to be issued in the offering is based on an
independent appraisal of the pro forma market value of the Common Stock
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by Keller & Company, Inc. ("Keller & Company"). Keller & Company is an appraisal
firm experienced in appraisals of savings institutions. The independent
valuation prepared by Keller & Company estimates that as of June 26, 1998, the
pro forma market valuation range (the "Estimated Valuation Range" or "EVR") of
First Niles Financial, Inc. was between $17,000,000 and $23,000,000 (with a
midpoint of $20,000,000). Based on this valuation and the $10.00 per share
price, the number of shares of Common Stock that First Niles Financial, Inc.
will issue will range from between 1,700,000 shares to 2,300,000 shares. See
"Pro Forma Data" on pages 24 to 28.
The appraisal was based both upon our financial condition and
operations and upon the effect of the additional capital we will raise in this
offering. The independent appraisal will be updated before we complete the
Conversion. Changes in market and financial conditions and demand for the Common
Stock may cause the Estimated Valuation Range to increase by up to 15%, to up to
$26,450,000. If this occurs, the maximum number of shares that can be sold in
this offering can increase to up to 2,645,000 shares. Subscribers for Common
Stock will not be notified if the maximum number of shares to be sold increases
by 15% or less. If, however, the Estimated Valuation Range of the Common Stock
is either below $17,000,000 or above $26,450,000, then you will be notified and
will have the opportunity to modify or cancel your order. See "The Conversion -
Stock Pricing and Number of Shares to be Issued" on pages 86 to 88.
The independent valuation prepared by Keller & Company is not a
recommendation as to the advisability of purchasing the Common Stock.
Accordingly, you should not buy the Common Stock based on the independent
valuation.
Termination of the Offering
The subscription offering will terminate at 12:00 noon, Niles, Ohio
time, on October 14, 1998. Any direct community offering or public offering may
terminate at any time without notice, but no later than November 28, 1998,
without approval by the OTS. If the offering is not completed by November 28,
1998, all subscribers will be notified and will be given the opportunity to
cancel or modify their order.
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Benefits to Management and Employees from the Offering
General. Our Board of Directors and employees will participate in the
offering through individual purchases. Directors and executive officers have
indicated their intent to purchase approximately $1.5 million (or 8.82% at the
minimum of the EVR and 5.67% at the adjusted maximum of the EVR) of the Common
Stock issued in the Conversion. For information on the individual purchases of
our directors and executive officers, see "The Conversion - Participation by the
Board and Executive Officers" on page 97.
Management and employees of Home Federal may also receive certain
monetary benefits in connection with the Conversion, as described below. In
addition to these monetary benefits, the implementation of the stock plans
described below will provide management, at either no cost or a reduced cost to
them, with additional voting power with respect to the Common Stock. See "Risk
Factors - Possible Voting Control of Shares by the Board,
Management and Employee Plans" on page 14.
ESOP. We intend to establish an Employee Stock Ownership Plan ("ESOP")
which will purchase Common Stock in connection with the Conversion. An ESOP is a
tax-qualified defined contribution retirement plan, in which virtually all of
the employees of Home Federal will participate. Directors who are not also
employees of Home Federal are not eligible to participate in the ESOP.
First Niles Financial, Inc. intends to lend a portion of the net
proceeds received in the Conversion to the ESOP to fund the ESOP's purchase of
8% of the Common Stock issued in the Conversion. Based upon the initial purchase
price of $10.00 per share, the dollar amount of the ESOP loan would range from
$1.4 million to $1.8 million (or up to $2.1 million based upon the sale of
shares at the adjusted maximum of the EVR). The stock purchased with the loan
proceeds will be held in a "suspense account" in the ESOP. As we make annual
contributions to the ESOP on behalf of our participating employees, those
contributions will be used to make payments on the loan. The appropriate number
of shares then will be removed from the suspense account and allocated to the
accounts of our employees. It is currently anticipated that the ESOP will repay
the loan over a 12 year period; accordingly, approximately one-twelfth or 17,633
shares of the 211,600 shares of Common Stock (at the adjusted maximum of the
EVR) held by the ESOP would be allocated to our employees on an annual basis.
For additional information on the financial accounting implications of the
allocation of ESOP shares, see "Risk Factors - ESOP Compensation Expense" on
page 14 and "Pro Forma Data" on pages 24 to 28.
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Furthermore, each employee is entitled to instruct the trustee of the
ESOP as to how to vote the shares allocated to his or her account. With respect
to shares of Common Stock which have not yet been allocated to employees'
accounts, the trustee will vote all such shares in the same proportion as those
shares for which the trustee receives voting instructions on allocated shares.
The trustee will not be affiliated with the Company or Home Federal.
For additional information concerning the ESOP, see "Risk Factors -
Possible Voting Control of Shares by the Board, Management and Employee Plans"
on page 14, "Use of Proceeds" on pages 24 to 28, and "Management of the
Association - Employee Stock Ownership Plan" on pages 81 and 82.
Employment Agreements. We intend to enter into an employment agreement
with each of the following executive officers of the Association upon completion
of the Conversion: William L. Stephens, President and Chief Executive Officer;
George J. Swift, Vice President and Secretary; and Lawrence Safarek, Vice
President and Treasurer. The employment agreements are designed to assist us in
maintaining a stable and competent management team after the Conversion. The
employment agreements will have an initial term of three years and provide for
an annual base salary in an amount not less than such individual's current
salary. Officers Stephens, Swift and Safarek currently have a base salary of
$142,440, $142,440 and $62,400, respectively. The agreements provide for
extensions of one year, in addition to the then-remaining term under the
agreements, on each anniversary of the effective date of the agreements, subject
to a formal performance evaluation performed by disinterested members of the
Board of Directors of Home Federal. The agreements also provide for
participation in an equitable manner in employee benefits applicable to all
executive personnel. See "Management of the Association - Employment Agreements"
on page 80.
Stock Option and Incentive Plan and Recognition and Retention Plan. As
do most converting institutions, we may consider the implementation of a stock
option and incentive plan and a restricted stock plan for the benefit of our
directors, officers and employees. We anticipate that any stock option and
incentive plan and restricted stock plan adopted by us would authorize a number
of shares equal to 10% (264,500 shares at the adjusted maximum of the EVR) and
4% (105,800 shares at the adjusted maximum of the EVR), respectively, of the
Common Stock sold in the Conversion. The estimated dollar value of the Common
Stock that would be available for awards to our current and future directors,
officers and employees, based on a 4% restricted stock plan and a $10.00
offering price, would be between $680,000 and $1.1 million at the minimum and
adjusted maximum of the Estimated Valuation Range, respectively. Grants of
Common Stock made pursuant to the restricted stock plan will be issued at no
cost to the recipient. See "Management of the Association - Other Stock Benefit
Plans."
We have no current intention to implement any stock option and
incentive plan or restricted stock plan within one year of the date of the
consummation of the Conversion, subject to continuing OTS jurisdiction. When and
if a determination is made to implement a stock option and incentive plan or
restricted stock plan, it is anticipated that any such plans will be submitted
to stockholders for their consideration at which time stockholders would be
provided with detailed information regarding such plans. If such plans are
approved and effected, they will have a dilutive effect on the Company's
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stockholders as well as affect the Company's net income and stockholders'
equity, although the actual results cannot be determined until such plans are
implemented. See also, "Risk Factors - Dilutive Effect of Restricted Stock Plan
and Stock Options" on page 14, "Risk Factors -Possible Voting Control of Shares
by the Board, Management and Employee Plans" on page 14, "Use of Proceeds" on
pages 21 and 22, and "Pro Forma Data" on pages 24 to 28 for additional
information on the effects of the adoption of a stock option and incentive plan
and restricted stock plan.
Use of the Proceeds Raised from the Sale of Common Stock
First Niles Financial, Inc. will use the net proceeds received from the
offering as follows. The percentages used are estimates.
* 50% will be used to buy all of the capital stock of Home Federal.
* 8% will be loaned to the ESOP to fund its purchase of Common
Stock.
* 42% will be retained and initially be placed in short-term
investments, which may later be used as a possible source of
funds for stock repurchases, the payment of dividends to
stockholders, and for other general corporate purposes.
The proceeds received by Home Federal will increase our capital and
will be available for expansion of our retail banking franchise through future
lending and investment, in addition to general corporate purposes. See "Use of
Proceeds" on pages 21 and 22.
Dividends
First Niles Financial, Inc. has not made a decision regarding the
future declaration of dividends. A dividend policy may, however, be established
in the future. See "Dividends" on page 23.
Market for the Common Stock
We anticipate the Common Stock to be traded on the Nasdaq National
Market System under the symbol "FNFI". An active and liquid trading market,
however, may not develop or be
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maintained. Investors should have a long-term investment intent. Persons
purchasing shares may not be able to sell their shares when they desire or sell
them at a price equal to or above $10.00. Webb has informed us that Keefe,
Bruyette & Woods, Inc. ("KBW") has agreed to make a market in the Common Stock.
KBW will, however, not be subject to any obligation with respect to such
efforts. See "Market for the Common Stock" on pages 23 and 24.
Prospectus Delivery and Procedures for Purchasing Common Stock
To ensure that each person or entity is properly identified as to such
party's stock purchase priorities, such party must list all deposit accounts on
the order form accompanying this prospectus, giving all names on each account
and the account numbers at the applicable date. The failure to provide accurate
and complete account information on the order form may result in a reduction
or elimination of your order.
Only orders submitted on original order forms will be accepted for
processing. Photocopies or facsimile copies of order forms or the form of
certification will not be accepted. Payment by cash, check, money order, bank
draft or withdrawal from an existing account at Home Federal must accompany your
order form. No wire transfers will be accepted. See "The Conversion - Method of
Payment for Subscriptions" on pages 94 to 96.
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SELECTED CONSOLIDATED FINANCIAL INFORMATION
The summary information presented below under "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years ended December 31 is derived from Home Federal's audited financial
statements. The selected data presented below as of April 30, 1998, and for the
four months ended April 30, 1998 and 1997 is derived from Home Federal's
unaudited financial statements. The following information is only a summary and
you should read it in conjunction with our financial statements and notes
beginning on page F-1.
December 31,
April 30, ------------------------------------
1998 1997 1996 1995
------ ------ ------ -----
(In Thousands)
Selected Financial Condition Data:
Total assets......................................... $72,539 $72,497 $71,213 $70,221
Loans receivable, net................................ 36,151 36,744 33,183 29,514
Mortgage-backed and related securities............... 12,589 12,359 12,900 13,908
Investment securities................................ 17,485 17,741 22,098 23,762
Deposits............................................. 57,765 57,854 57,673 57,774
Total borrowings..................................... 400 400 500 ---
Retained earnings.................................... 12,186 11,899 11,513 11,087
Four Months Ended
April 30, Years Ended December 31
----------------- ---------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Selected Operations Data:
Total interest income..................................... $1,671 $1,652 $5,002 $4,780 $4,649
Total interest expense.................................... 824 793 2,476 2,402 2,290
------ ------ ------ ------ ------
Net interest income.................................... 847 859 2,526 2,378 2,359
Provision for loan losses................................. 20 --- 700 40 60
-------- -------- ------- -------- -------
Net interest income after provision for loan losses..... 827 859 1,826 2,338 2,299
Fees and service charges.................................. 6 6 18 17 18
Gain on sales of investment securities.................... 461 --- 4 --- ---
Other non-interest income................................. 2 2 5 6 8
--------- --------- --------- --------- --------
Total non-interest income................................. 469 8 27 23 26
Total non-interest expense................................ 890 457 1,380 1,751 1,213
------- ------- ------ ------ ------
Income before taxes and extraordinary item.............. 406 410 473 610 1,112
Income tax provision...................................... 119 112 87 184 378
------- ------- -------- ------- -------
Net income.............................................. $ 287 $ 298 $ 386 $ 426 $ 734
====== ====== ===== ====== ======
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Four Months
Ended
April 30, Years Ended December 31,
--------------- ------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets (ratio of net income to
average total assets)(1)......................................... 1.19% 1.25% 0.54% 0.60% 1.05%
Return on average retained earnings (ratio of
net income to average retained earnings)(1)...................... 7.15 7.67 3.27 3.75 6.84
Interest rate spread:
Average during period............................................ 2.77 2.92 2.83 2.66 2.77
End of period.................................................... 2.62 3.01 2.82 2.85 2.73
Net interest margin(2)............................................. 3.58 3.67 3.58 3.40 3.43
Ratio of operating expense to average total assets................. 3.62 1.86 1.86 2.42 1.74
Ratio of average interest-earning assets to average interest-
bearing liabilities............................................ 1.23 1.22 1.22 1.21 1.20
Quality Ratios:
Non-performing assets to total assets at end of period............. 2.33 1.34 2.29 1.37 1.77
Allowance for loan losses to non-performing loans, end
of period..................................................... 50.29 31.19 51.38 30.90 21.05
Allowance for loan losses to loans receivable, net, end
of period...................................................... 2.36 0.85 2.32 0.91 0.88
Capital Ratios:
Retained earnings to total assets at end of period................. 16.80 16.45 16.41 16.17 15.79
Average retained earnings to average assets........................ 16.61 16.31 16.37 16.07 15.43
Other Data:
Number of full-service offices..................................... 1 1 1 1 1
- ---------
(1) Percentages for the four-month periods have been annualized.
(2) Net interest income divided by average interest earning assets.
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RECENT FINANCIAL DATA
The summary information presented below as of December 31, 1997 is
derived from the audited financial statements of the Association. The summary
information presented below as of June 30, 1998 and April 30, 1998, and for the
two and six months ended June 30, 1998 and 1997 is derived from Home Federal's
unaudited financial statements. In the opinion of management of the Association,
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of results of or as of the periods indicated have been
included. The results of operations and other data for the two and six months
are not necessarily indicative of the results of operations for the fiscal year
end. The following information is only a summary and you should read it in
conjunction with our financial statements and notes beginning on page F-1.
June 30, April 30, December 31,
1998 1998 1997
---- ---- ----
(In Thousands)
Selected Financial Condition Data:
Total assets .......................... $72,936 $72,539 $72,497
Loans receivable, net ................. 36,112 36,151 36,744
Mortgage-backed and related
securities .......................... 12,842 12,589 12,359
Investment securities ................. 17,529 17,485 17,741
Deposits .............................. 57,967 57,765 57,854
Total borrowings ...................... 400 400 400
Retained earnings ..................... 12,138 12,186 11,899
For the Two For the Six
Months Ended Months Ended
June 30, June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Selected Operations Data:
Total interest income ................. $ 832 $ 834 $2,503 $2,486
Total interest expense ................ 412 425 1,236 1,218
------ ------ ------ ------
Net interest income ................ 420 409 1,267 1,268
Provision for loan losses ............. -- -- 20 --
------ ------ ------ ------
Net interest income after
provision for loan losses ........ 420 409 1,247 1,268
Fees and service charges .............. 3 1 9 4
Gain on sales of investment
securities .......................... -- 4 461 4
Other non-interest income ............. 2 2 4 7
------ ------ ------ ------
Total non-interest income ............. 5 7 474 15
Total non-interest expense ............ 540 239 1,430 696
------ ------ ------ ------
Income before taxes and
extraordinary item ................ (115) 177 291 587
Income tax (benefit) expense .......... (67) 46 52 158
------ ------ ------ ------
Net income .......................... $ (48) $ 131 $ 239 $ 429
====== ====== ====== ======
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At and For the At and For the
Two Months Six Months
Ended Ended
June 30, June 30,
--------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets (ratio of net income to
average total assets)(1)........................................... (0.40)% 1.09% 0.66% 1.22%
Return on average retained earnings (ratio of
net income to average retained earnings)(1)........................ (2.37) 6.58 3.95 7.27
Interest rate spread:
Average during period............................................ 2.79 2.73 2.81 2.90
End of period.................................................... 2.65 2.89 2.65 2.89
Net interest margin(2)............................................... 3.55 3.48 3.57 3.61
Ratio of operating expense to average total assets................... 4.36 1.93 3.91 1.88
Ratio of average interest-earning assets to average
interest-bearing liabilities....................................... 1.22 1.21 1.22 1.21
Quality Ratios(3):
Non-performing assets to total assets at end of period............... 2.39% 1.32% 2.39% 1.32%
Allowance for loan losses to non-performing loans, end
of period.......................................................... 48.91 31.42 48.91 31.42
Allowance for loan losses to loans receivable, net, end
of period.......................................................... 2.36 0.84 2.36 0.84
Capital Ratios:
Retained earnings to total assets at end of period................... 16.64% 16.50% 16.64% 16.50%
Average retained earnings to average assets.......................... 16.72 16.58 16.64 16.44
Other Data:
Number of full-service offices....................................... 1 1 1 1
- -----------
(1) Percentages for the two-month and six-month periods have been annualized.
(2) Net interest income divided by average interest earning assets.
(3) In August 1998, approximately $662,000 of non-performing loans were
paid-off, reducing non-performing assets to approximately $1.0 million as
of August 31, 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT RESULTS
Comparison of Financial Condition at June 30, 1998 and April 30, 1998
Total assets at June 30, 1998 increased by $400,000 to $72.9 million
from $72.5 million at April 30, 1998. Net loans receivable decreased by $39,000,
while mortgage-backed and related securities and investment securities increased
$253,000 and $44,000, respectively. The increase in mortgage-backed and related
securities and investment securities was funded primarily by the funds received
from maturing loans and an increase in deposits.
Total liabilities at June 30, 1998 were $59.7 million compared to $59.3
million at April 30, 1998, an increase of $400,000. The increase in liabilities
was primarily attributable to a $202,000 increase in deposits and a $288,000
contribution to executive officer deferred compensation plans. The additional
contributions to the executive deferred compensation plans was the result of the
Board of Directors' decision to suspend after August 31, 1998 any further
contributions to the executives under such plans. See "Management of the
Association - Benefit Plans -- Supplemental Executive Retirement Plan." These
increases were partially offset by a decrease in other liabilities.
Retained earnings decreased $48,000 from April 30, 1998 to June 30,
1998, as a result of the net loss incurred during the two month period.
Comparison of Operating Results for the Two and Six Months Ended June 30, 1998
and June 30, 1997
Net Income (Loss). Net income decreased $179,000 to ($48,000) and
$190,000 to $239,000 for the two and six months ended June 30, 1998,
respectively, compared to the same periods in 1997. The primary reasons for the
decreases in net income were increases in noninterest expenses of $301,000 and
$734,000 during the two and six months ended June 30, 1998, respectively,
compared to the same periods the prior year. The major components of these
increases were the $288,000 contribution at June 30, 1998 to the deferred
compensation plans of the Association's two most senior officers as discussed
above and bonuses totaling $435,000 paid to directors, officers and employees of
the Association during April 1998. Net income for the six months ended June 30,
1998 was also affected by a $20,000 provision for loan losses recorded during
such period, while no provision was made for the same period in the prior year.
The increase in non-interest expense for the two months ended June 30,
1998 was partially offset by the federal income tax benefit of $67,000 recorded
by the Association in connection with its net loss for the period. The increase
in non-interest expense for the six months ended June 30, 1998 was partially
offset by a $461,000 gain on sales of investment securities during such period.
For the two and six months ended June 30, 1998, annualized returns on
assets were (0.40%) and 0.66%, respectively, compared to 1.09% and 1.22% for the
same periods in 1997. Annualized returns on retained earnings were (2.37%) and
3.95% for the two and six months ended June 30, 1998, respectively, compared to
6.58% and 7.27% for the same periods in 1997.
-12-
Net Interest Income. Net interest income increased $11,000 to $420,000
and decreased $1,000 to $1.3 million for the two and six months ended June 30,
1998, respectively, compared to the same periods in 1997. Interest income of
$832,000 for the two months ended June 30, 1998 remained relatively unchanged
compared to the same period in 1997. Interest expense declined $13,000 to
$412,000 for the two months ended June 30, 1998 compared to the same period in
1997, primarily as a result of a decline in our cost of funds. Interest income
increased $17,000 for the six months ended June 30, 1998, primarily as a result
of an increase in the average outstanding balance of interest-earning assets and
a slight shift in our asset mix from lower-yielding securities and
interest-bearing deposits to higher yielding mortgage loans. However, the
increase in interest income was offset by the $18,000 increase in interest
expense for the six months ended June 30, 1998, primarily as a result of the
higher rate paid on, and the higher average outstanding balance of, certificate
accounts.
Our average outstanding balance of interest-earning assets to
interest-bearing liabilities was 1.22x at June 30, 1998 compared to 1.21x at
June 30, 1997. Our average interest rate spread for the comparative six-month
periods decreased nine basis points to 2.81% from 2.90%, as a result of the
yield on interest-earning assets declining three basis points and cost of funds
rising six basis points. Our cost of funds increased for the six months ended
June 30, 1998 compared to the six months ended June 30, 1997, primarily as a
result of the increased balance of higher costing certificate accounts.
Provision for Loan Losses. No provision for loan losses was recorded
for the two months ended June 30, 1998 or June 30, 1997. For the six months
ended June 30, 1998, we recorded a $20,000 provision for loan losses, compared
to no provision for the six months ended June 30, 1997. This provision was a
result of management's ongoing analysis of risks inherent in the Association's
loan portfolio from time to time, as well as a charge of $21,000 against the
allowance account for a loan loss.
Noninterest Income. Noninterest income was $5,000 for the two months
ended June 30, 1998, compared to $7,000 for the two months ended June 30, 1997.
Noninterest income was $474,000 for the six months ended June 30, 1998, or
$459,000 higher than the $15,000 of noninterest income recorded for the six
months ended June 30, 1997. The increase in noninterest income was almost
entirely attributable to a $461,000 gain on sales of investment securities.
Other components of noninterest income, primarily comprised of fees and service
charges, totaled $13,000 for the six months ended June 30, 1998, compared to
$11,000 for the same period in 1997.
Noninterest Expense. Noninterest expense increased $301,000, or 126%,
to $540,000 and $734,000, or 106%, to $1.4 million for the two and six months
ended June 30, 1998, respectively, compared to the same periods in 1997. These
increases primarily were attributable to the lump-sum contribution to the
executive deferred compensation plans as discussed above and a bonus paid to
directors, officers and employees in April 1998. Excluding these two expenses,
noninterest expense rose only 5.4% and 1.6% for the two and six months ended
June 30, 1998, compared to the same periods in 1997.
-13-
Federal Income Taxes. For the two months ended June 30, 1998, we
recorded a federal income tax benefit of $67,000, compared to a $46,000 federal
income tax expense for the same period in 1997. For the six months ended June
30, 1998, federal income taxes were $52,000, compared to $158,000 for the same
period in 1997. The tax benefit recorded for the two months ended June 30, 1998
and the decrease in federal income tax expense for the six months ended June 30,
1998 are the result of the decline in income before taxes during such periods
compared to the same periods in the prior year.
Capital Requirements
The following table sets forth the Association's historical compliance
with its capital requirements at June 30, 1998. See "Regulation-Regulatory
Capital Requirements."
At June 30, 1998
----------------------
Amount Percent(1)
------- ----------
(Dollars In Thousands)
Tangible Capital:
Actual ............................. $12,139 18.78%
Required ........................... 1,085 1.50
------- -----
Excess ............................. $11,054 17.28%
======= =====
Core Capital:
Actual ............................. $12,139 18.78%
Required ........................... 2,171 3.00
------- -----
Excess ............................. $ 9,968 15.78%
======= =====
Risk-based capital:
Actual ............................. $12,627 31.36%
Required ........................... 3,096 8.00
------- -----
Excess ............................. $ 9,531 23.36%
======= =====
----------
(1) Tangible and core capital levels are shown as a percentage
of total adjusted assets; risk-based capital levels are
shown as a percentage of risk-weighted assets.
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in the
Common Stock.
Decreased Return on Average Equity and Increased Expenses Immediately After
Conversion
As a result of the Conversion, our equity will increase substantially.
Expenses are expected to increase due to the costs associated with our employee
stock ownership plan, our restricted stock plan, and being a public company.
Because of the increases in our equity and expenses, our return on equity may
decrease as compared to our performance in previous years. A lower return on
equity could limit the trading price potential of the Common Stock. See "Use of
Proceeds" and "Pro Forma Data."
Potential Impact of Changes in Interest Rates
Our ability to make a profit largely depends on our net interest
income. Net interest income is the difference between what we earn on
interest-earning assets (such as loans, mortgage-backed and related securities
and investment securities) and what we pay on interest-bearing liabilities (such
as deposits and borrowings). The rates we earn on assets and pay on liabilities
are generally established for a contractual period of time. We, like many
savings institutions, have liabilities that generally have shorter contractual
maturities than our assets. This imbalance can create significant earnings
volatility, since market interest rates change over time. In a period of rising
interest rates, the interest income earned on our assets may not increase as
rapidly as the interest expense paid on our liabilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management" and "Business of Home Federal."
-14-
Changes in interest rates can also affect the average life of loans and
mortgage-backed and related securities. Historically, a reduction in interest
rates has resulted in increased prepayments of loans and mortgage-backed and
related securities, as borrowers refinanced their mortgages in order to reduce
their borrowing cost. Under these circumstances, we are subject to reinvestment
risk to the extent that we are not able to reinvest such prepayments at rates
which are comparable to the rates on the prepaid loans or securities.
ESOP Compensation Expense
In November 1993 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 93-6 "Employers' Accounting for Employee
Stock Ownership Plans" ("SOP 93-6"). SOP 93-6 requires an employer to record
compensation expense in an amount equal to the fair value of shares committed to
be released to employees from an employee stock ownership plan. Assuming shares
of Common Stock appreciate in value over time, the adoption of SOP 93-6 will
increase compensation expense relating to the ESOP to be established in
connection with the Conversion. It is impossible to determine at this time the
extent of such impact on future net income.
Dilutive Effect of Restricted Stock Plan and Stock Options
The Company expects to ask stockholders to approve a restricted stock
plan and stock option plan approximately one year following completion of the
Conversion. If approved, we will issue stock and options to purchase stock to
our directors, officers and employees through these plans. If the shares for the
restricted stock plan and stock options are issued from our authorized but
unissued stock, your voting interests may be diluted by up to approximately
12.3% and the trading price of our stock may be limited. See "Pro Forma Data,"
"Management of the Association - Benefit Plans - Other Stock Benefit Plans."
Possible Voting Control of Shares by the Board, Management and Employee Plans
Our Board of Directors and executive officers intend to purchase
approximately 8.82% (at the minimum of the EVR), 7.50% (at the midpoint of the
EVR), 6.52% (at the maximum of the EVR) and 5.67% (at the adjusted maximum of
the EVR) of the Common Stock issued in the Conversion. These purchases, together
with the purchase of shares by the ESOP (anticipated to equal 8% of the shares
issued in the offering), as well as the potential acquisition of Common Stock
through the proposed stock option plan and restricted stock plan, together with
the votes of a few supporters, could make it difficult for a stockholder to
obtain majority support for stockholder proposals which are opposed by our
management and board of directors. In addition, the voting of those shares could
block the approval of transactions (including, but not limited to, business
combinations and amendments to the Company's certificate of incorporation and
bylaws) requiring the approval of 80% of the stockholders under the Company's
certificate of incorporation. See "Management of the Association - Benefit
Plans," "Description of Capital Stock" and "Restrictions on Acquisitions of
Stock and Related Takeover Defensive Provisions."
Large Concentration of Non-Owner Occupied One- to Four-Family Loans in a Limited
Number of Borrowers
At April 30, 1998, 112 loans totaling approximately $4.3 million or
17.0% of the aggregate principal balance of our one- to four-family mortgage
loans were held by seven borrowers or groups of related borrowers. All of these
loans are secured by properties located in the Niles, Ohio area and were
performing at April 30, 1998. Each loan is secured by a separate one- to
four-family property and certain of the loans carry cross-default provisions.
These loans generally are secured by rental properties and are considered to
involve a higher degree of risk than typical residential mortgage loans which
are secured by properties occupied by the borrower. This increased risk is the
result of the fact that payments on such loans are typically dependent on rental
income generated from the property, which may be significantly affected by the
supply and demand conditions in the local market for such housing and the
effects of general economic conditions in the area. The large concentration of
loan principal in a limited number of borrowers also creates a greater risk of
loss for the Association than would otherwise exist if the principal was
allocated among a larger group of borrowers.
While we currently believe that our loans are adequately secured or
reserved for, in the event the real estate rental market substantially weakens
or economic conditions in our market area deteriorate, it is possible both that
some of these borrowers may default and that the value of the real estate
collateral may be insufficient to fully secure the loan. In such event, the
Association may experience increased levels of delinquencies and related losses
having an adverse impact on net income.
-15-
Weakness in Local Economy
Our primary market area for retail deposits and loans consists of
Trumbull County, including the city of Niles. Since 1990, this market area has
evidenced a decline in population and higher unemployment rates relative to the
comparable group markets, Ohio and the United States. The unemployment rate in
Trumbull County averaged 5.4% in 1997, compared to 4.3% for Ohio and 4.4% for
the United States, and although Trumbull County's unemployment rate decreased to
4.5% in April 1998, it remains above state and national averages. Per capita
income and median household income in our county and city are considerably lower
than state, national and the comparable group averages, reflecting the market
area's higher unemployment and lower paying jobs. The median housing value in
the city of Niles is 23.4% lower than in Ohio and 38.6% lower than in the United
States. The median housing value in Trumbull County is 16.2% and 32.7% lower,
respectively, than in Ohio and the United States.
Our market area comprises a broad range of ethnic groups, income and
educational levels and employment sectors. In both Niles and Trumbull County,
the services and manufacturing sectors represent approximately equal shares of
the business and employment base, followed by the wholesale/retail sector. The
level of financial competition in both Niles and Trumbull County is strong and
dominated by commercial banks, with financial institutions of varying sizes and
characteristics operating in and around Home Federal's market area. These
economic conditions and strong competition have also resulted in reduced loan
demand which, in turn, has resulted in a high condentration of investment
securities and mortgage-backed and related securities in the Association's
portfolio compared to typical savings institutions. In the event current
economic and market conditions persist or worsen, and loan demand remains weak,
no assurances can be given that the Association will be able to maintain or
increase its mortgage loan portfolio, which could adversely affect the
operations and financial results of the Association. See "--Limited Potential
for Asset, Loan and Deposit Growth."
Limited Potential for Asset, Loan and Deposit Growth
During the past five years, we have experienced lower than average
growth in assets, loans and deposits compared to many other savings
institutions. Our average annual asset growth rate from 1993 to 1997 was
approximately 1.3% compared to 10.7% for all savings institutions and 9.9% for
Midwest savings institutions. Our low asset growth rate is reflective of our
negative average annual deposit growth rate and low loan growth rate for the
same five year period. Our annual loan growth averaged approximately 7.9% from
1993 to 1997, from a low of (5.1)% in 1993 to a high of 12.5% in 1996, compared
to average growth rates of 12.0% for all savings institutions and 12.1% for
Midwest savings institutions. We have experienced an average annual decrease in
deposits of approximately 0.4% from 1993 to 1997, from $60.2 million at December
31, 1993 to $57.9 million at December 31, 1997. Deposits declined further to
$57.8 million during the four months ended April 30, 1998. Annual deposit
changes have ranged from a low of (2.4)% in 1994 to a high of 1.8% in 1993,
compared to positive average growth rates of 6.1% for all savings institutions
and 4.8% for Midwest savings institutions.
Our ability to maintain the Association's asset base and deposits in
the future is, to a great extent, dependent on our being able to price our loan
and savings products competitively and to maintain a high quality of service to
our customers. Home Federal operates a single office in the city of Niles,
which, along with Trumbull County, is projected to experience a continuing
decrease in population and no meaningful increase in households over the next
several years. Niles and Trumbull County have per capita income and median
household income significantly lower than Ohio and the United States and in
April 1998, Trumbull County also had an unemployment rate higher than Ohio and
the United States. See "--Weakness in Local Economy."
Our dependence on the Niles and Trumbull County market, with no
immediate plans to expand beyond this market area, will likely result in asset
and deposit growth being challenging and possibly costly, considering that 37.8%
of our deposits are in passbook savings accounts, which are projected to
decrease during the next few years. Our highly competitive yet economically
depressed operating environment, together with our share of passbook accounts
higher than the comparable group, is likely to limit the Association's growth
potential in assets and deposits relative to our competitors and to institutions
of similar size and operations.
-16-
Geographical Concentration of Loans
At April 30, 1998, substantially all of our real estate mortgage loans
were secured by properties located in the Niles, Ohio area. While we currently
believe that our loans are adequately secured or reserved for, in the event that
real estate prices in our market area substantially weaken or economic
conditions in our market area deteriorate, some borrowers may default and the
value of the real estate collateral may be insufficient to fully secure the
loan. In such events, we may experience increased levels of delinquencies and
related losses which could adversely impact net income.
Absence of Prior Market for Common Stock
Home Federal, as a mutual thrift institution, and the Company, as a
newly organized company, have never issued capital stock. Consequently, there is
not at this time an existing market for the Common Stock. We expect the Common
Stock of the Company to be traded on the Nasdaq National Market. If the Common
Stock cannot be quoted and traded on the Nasdaq National Market, it is expected
that transactions in the Common Stock will be traded on the Nasdaq SmallCap
Market. Webb has informed us that KBW has agreed to make a market in the
Company's Common Stock upon completion of the offering. However, KBW will not be
subject to any obligation with respect to such efforts.
An active trading market may not develop or be maintained. If an active
market does not develop, you may not be able to sell your shares promptly or at
a price equal to or above the price you paid for them. See "Market for the
Common Stock."
Risk of Delay In Completion of the Offering
The completion of the offering is subject to market conditions and
other factors beyond our control. No assurance can be given as to the length of
time that will be required to complete the sale of shares being offered in the
Conversion following the meeting of our members at which the Plan of Conversion
is being submitted for approval. If delays are experienced, significant changes
may occur in our estimated pro forma market value upon Conversion together with
corresponding changes in the offering price and the net proceeds to be realized
by us from the sale of the shares. In the event the Conversion is terminated, we
will charge all Conversion expenses against current income and any funds
collected by us in the offering will be promptly returned, with interest, to
each potential investor.
The subscription offering will expire at 12:00 noon, Niles, Ohio time
on October 14, 1998 unless extended by us. All orders generally will be
irrevocable unless the Conversion is not completed by November 28, 1998. If the
Conversion is not completed by November 28, 1999, subscribers for Common Stock
will have the right to modify or rescind their subscriptions and to have their
subscription funds returned with interest.
Competition
We experience strong competition in our local market area in
originating loans and attracting deposits. This competition arises from a highly
competitive market area with numerous savings institutions and commercial banks,
as well as credit unions, mortgage bankers and, with respect to deposits,
banking institutions and other financial intermediaries. We recognize the need
to monitor competition and modify our products and services as necessary and as
possible, taking into consideration the cost impact. As a result, such
competition may limit our future growth and profitability. See "Business of Home
Federal - Competition" and "- Loan Originations, Purchases and Repayments."
Certain Anti-Takeover Provisions
Provisions in the Company's certificate of incorporation and bylaws,
the General Corporation Code of Delaware, and certain federal regulations may
make it difficult for someone to pursue a tender offer, change in control or
takeover attempt which is opposed by our management and board of directors.
These provisions include: restrictions on the acquisition of the Company's
equity securities by certain stockholders and limitations on voting rights; the
classification of the terms of the members of the board of directors; certain
provisions relating to meetings of stockholders; denial of cumulative voting to
stockholders in the election of directors; the ability to issue preferred stock
and additional shares of Common Stock without shareholder approval; and
super-majority provisions for the approval of certain business combinations. As
a result, stockholders who may desire to participate in such a transaction may
not have such an opportunity. These provisions will also render the removal of
the current board of directors or management of the Company more difficult. In
addition, the effect of these provisions could be to limit the trading price
potential of the Common Stock. See "Restrictions on Acquisition of Stock and
Related Takeover Defensive Provisions."
-17-
Restrictions on Repurchase of Shares
Generally, during the first year following the Conversion, the Company
may not repurchase its shares without regulatory approval. During each of the
second and third years following the Conversion, the Company may repurchase up
to 5% of its outstanding shares, with additional repurchases subject to
regulatory approval. During those periods, even if the Company believes that
additional repurchases would be a good use of funds, we would not be able to do
so without first obtaining OTS approval. There is no assurance that OTS approval
would be given. See "The Conversion - Restrictions on Repurchase of Stock."
Possible Year 2000 Computer Problems
A great deal of information has been disseminated about the widespread
computer problems that may arise in the year 2000. Computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date,
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operation of Home Federal. Data
processing is also essential to most other financial institutions and many other
companies.
All our material data processing that could be affected by this problem
is provided by a third party service bureau. The service bureau used by Home
Federal has advised us that it expects to resolve this potential problem by
October 1998, and to begin testing the system in November 1998. If by the end of
this year it appears that our primary data processing service bureau will be
unable to resolve this problem in a timely manner, then we will identify a
secondary data processing service provider to complete the task. If we are
unable to do this, we will identify those steps necessary to minimize the
negative impact the computer problems could have on us. If we are unable to
resolve this potential problem in time, we will likely experience significant
data processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the financial condition and results
of operation of the Association. We have also received year 2000 updates from
most of our material non-information system providers, including but not limited
to security cameras, credit card and ATM card processors, the vault alarm, check
printers, telephone systems, participation loan servicers, and institutions we
invest through or with, and based on these updates do not anticipate any
significant year 2000 issues. At this time we cannot determine the expense that
may be incurred in connection with year 2000 issues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation -Year
2000 Issues."
In addition to expenses related to our own systems, we could incur
losses if loan payments are delayed due to year 2000 problems affecting any of
our significant borrowers or impairing the payroll systems of large employers in
our market area. We have been communicating with our vendors to assess their
progress in evaluating their systems and implementing any corrective measures
required by them to be prepared for the year 2000. We have also sent year 2000
readiness request letters to 23 borrowers. These borrowers were selected based
on the aggregate amounts owed to the Association, the type of loans outstanding,
and the perceived Year 2000 risk based on our knowledge of the loan customers
and their operations. To date, we have not been advised by such parties that
they do not have plans in place to address and correct the issues associated
with the year 2000 problem; however, no assurance can be given as to the
adequacy of such plans or to the timeliness of their implementation. Currently,
due to the types of borrowers doing business with the Association and the nature
of our loans with such borrowers, we do not consider the year 2000 issue as part
of our underwriting criteria.
-18-
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NILES
Home Federal, established in 1897, is a federally chartered mutual
savings institution located in Niles, Ohio. We currently serve primarily the
Niles, Ohio area. We serve this area through our one full service office located
at 55 North Main Street, Niles, Ohio; our telephone number at that address is
(330) 652-2539. Deposits at the Association are insured up to the applicable
limits by the Federal Deposit Insurance Corporation (the "FDIC"). At April 30,
1998, we had total assets of $72.5 million, deposits of $57.8 million, and
retained earnings of $12.2 million.
We intend to continue to be a community-oriented financial institution
offering a variety of financial services to meet the needs of our community. Our
principal business consists of attracting retail deposits from the general
public and investing those funds primarily in permanent and construction loans
secured by first mortgages on one- to four-family residences. We also originate
permanent and construction loans secured by first mortgages on commercial and
multi-family real estate and, to a much lesser extent we originate consumer and
commercial business loans. While our primary business is the origination of one-
to four-family residential mortgage loans funded through retail deposits,
competition from other financial institutions has limited the volume of loans
the Association has been able to originate and place in its portfolio. As a
result, we invest our excess funds into short-term, lower-yielding investment
and mortgage-backed and related securities.
At April 30, 1998, our gross loan portfolio totaled $39.3 million,
including $25.0 million of one- to four-family residential mortgage loans. We
also had on that date $17.2 million of investment securities (excluding Federal
Home Loan Bank stock) and $12.6 million of mortgage-backed and related
securities, which consisted primarily of short-term mutual funds and
collateralized mortgage obligations (issued by United States agencies and
government-sponsored enterprises).
FIRST NILES FINANCIAL, INC.
First Niles Financial, Inc. was formed at our direction in July 1998
for the purpose of owning all of the outstanding stock of Home Federal issued in
the Conversion. The Company is incorporated under the laws of the State of
Delaware, and authorized to do business in the State of Ohio, and generally is
authorized to engage in any activity that is permitted by the Delaware General
Corporation Law. Initially, the business of the Company will consist only of the
business of Home Federal. The holding company structure will, however, provide
the Company with greater flexibility than the Association has to diversify its
business activities, through existing or newly formed subsidiaries, or through
acquisitions or mergers of both mutual and stock thrift institutions as well as
other companies. Although there are no current arrangements, understandings or
agreements regarding any such activity or acquisition, the Company will be in a
position after the Conversion, subject to regulatory restrictions, to take
advantage of any favorable acquisition opportunities that may arise.
The Conversion will structure the Association in the stock form used in
the United States by all commercial banks, most major business corporations and
most savings institutions. The Conversion will permit our members to become
shareholders of the Company, thereby allowing members to own stock in the
financial organization in which they maintain deposit accounts or with which
they have a borrowing relationship. We expect that such ownership will encourage
members to promote the Association to others, thereby further contributing to
the Association's growth. We also expect the Association to benefit from its
management and employees owning stock, because stock ownership is viewed as an
effective performance incentive and a means of attracting, retaining and
compensating personnel.
The assets of the Company initially will consist of the stock of Home
Federal, the loan to the ESOP and 50% (less the amount loaned to the ESOP) of
the net proceeds from the Conversion. Initially, any activities of the Company
are anticipated to be funded by these retained proceeds and the income generated
thereon and dividends from Home Federal, if any. See "Dividends" and "Regulation
- - Holding Company Regulation." Thereafter, activities of the Company may also be
funded through sales of additional securities, through borrowings and through
income generated by other activities of the Company. At this time, there are no
plans regarding such other activities other than the intended loan to the ESOP
to facilitate its purchase of Common Stock in the Conversion.
The executive offices of the Company are located at 55 North Main
Street, Niles, Ohio 44446. Its telephone number at that address is (330)
652-2539.
-19-
USE OF PROCEEDS
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. It is presently anticipated,
however, that such net proceeds will be between $16.3 million and $22.3 million
(or up to $25.7 million if the Estimated Valuation Range is increased up to the
adjusted maximum). See "Pro Forma Data" and "The Conversion - Stock Pricing and
Number of Shares to be Issued" as to the assumptions used to arrive at such
amounts.
The Company will contribute approximately 50% of the net proceeds received
from the sale of its Common Stock in exchange for all of the common stock of
Home Federal issued in the Conversion. The proceeds we receive from the Company
in exchange for the common stock of Home Federal will become part of our general
funds for use in our business and will be used to support the Association's
existing operations. We anticipate initially investing all such proceeds into
short-term assets similar to those currently in the Association's portfolio.
Thereafter, we intend to invest the net proceeds (approximately $11.2 million at
the maximum of the EVR) in the origination of loans, primarily one- to
four-family and consumer loans, and the purchase of investment and
mortgage-backed and related securities, subject to market conditions. See "Risk
Factors--Weakness in Local Economy" and "--Limited Potential for Asset, Loan and
Deposit Growth." We may use the proceeds to establish or acquire additional
branch offices or engage in acquisitions, when and if the opportunity arises, or
for investment purposes, including, but not limited to the modernization of our
office facility. Currently, we have no plans or understandings regarding any
acquisitions or expansion, or modernization of our office facility. There are no
current plans as to the specific allocation of the proceeds, however, one of the
principal purposes for the Conversion is to structure the Association in the
stock form used in the United States by all commercial banks, most major
business corporations and most savings institutions. See "First Niles Financial,
Inc."
Furthermore, the Company intends to lend a portion of the net proceeds
to the ESOP to fund the ESOP's purchase of 8% of the Common Stock. Based upon
the initial purchase price of $10.00 per share, the dollar amount of the ESOP
loan would range from $1.4 million to $1.8 million (or up to $2.1 million based
upon the sale of shares at the adjusted maximum of the Estimated Valuation
Range). The interest rate to be charged by the Company on the ESOP loan will be
based upon the IRS prescribed applicable federal rate at the time of
origination. It is anticipated that the ESOP will repay the loan through
periodic tax-deductible contributions from the Association over a twelve-year
period.
The remainder of the net proceeds will be retained by the Company
(approximately $9.3 million at the maximum of the EVR). The Company anticipates
that initially the remaining proceeds will be invested in short-term investments
similar to those currently in the Association's portfolio. These funds would be
available for general corporate purposes which may include expansion of
operations through acquisitions of other financial service organizations and
diversification into other related or unrelated businesses, or for investment
purposes. See "Regulation - Holding Company Regulation" for a discussion of OTS
activity restrictions. Currently, there are no specific plans being considered
for the expansion of the business of the Company. In addition, the funds may be
used to infuse additional capital into the Association when and if appropriate.
There are no current plans as to the specific allocation of the proceeds.
The Company also may use a portion of the proceeds to fund a restricted
stock plan, subject to shareholder approval of such plan. Compensation expense
related to the restricted stock plan will be recognized as share awards vest.
See "Pro Forma Data." Following shareholder ratification of the restricted stock
plan, such plan will be funded either with shares purchased in the open market
or with authorized but unissued shares. Based upon the initial purchase price of
$10.00 per share, the amount required to fund the restricted stock plan through
open-market purchases would range from $680,000 to $920,000 (or up to $1.1
million based upon the sale of shares at the adjusted maximum of the Estimated
Valuation Range). In the event that the per share price of the Common Stock
increases above the initial $10.00 per share purchase price following completion
of the offering, the amount necessary to fund the restricted stock plan would
also increase. The use of authorized
-20-
but unissued shares to fund the restricted stock plan could dilute the holdings
of shareholders who purchase the Common Stock. See "Management of the
Association -- Benefit Plans -- Other Stock Benefit Plans."
The Board of Directors of the Company may use the net proceeds received
in the Conversion to repurchase (at prices which may be above or below the
initial offering price) shares of Common Stock, subject to regulatory
restrictions. Under current OTS regulations, no repurchases may be made within
the first year following Conversion except with OTS approval. During the second
and third years following Conversion, OTS regulations permit, subject to certain
limitations, the repurchase of up to five percent of the outstanding shares of
stock during each twelve-month period with a greater amount permitted with OTS
approval. The OTS regulations generally do not restrict repurchases after the
third year following the Conversion; however, after the Conversion, the
principal source of funds for the Company will be dividends from the
Association. OTS regulations do place limits on the Association's ability to pay
dividends to the Company. For a description of these restrictions, see
"Dividends" and "The Conversion - Restrictions on Repurchase of Stock."
The Company will make decisions relating to the repurchase of the
Common Stock based on its view of the appropriateness of the repurchase price of
the Common Stock as well as the Company's and the Association's investment
opportunities, capital needs, current and projected results of operations and
asset/liability structure, the economic environment and tax and other regulatory
considerations. Other facts and circumstances that may influence the Company's
decision to repurchase shares of Common Stock in the future include but are not
limited to (i) market and economic factors such as the price at which the stock
is trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and the effect on the Company's return on
equity; (ii) the avoidance of dilution to shareholders by not having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and (iii) any other circumstances in which repurchases
would be in the best interests of the Company and its shareholders. A stock
repurchase program may have the effect of: (a) reducing the overall market value
of the Company; (b) increasing the overall cost of capital; (c) promoting a
temporary demand for Common Stock; and (d) increasing the percentage of shares
outstanding held by shareholders, including management. The Company currently
has no specific plan to repurchase any of its stock.
Home Federal also has several business purposes for the Conversion. The
Conversion will structure the Association in the stock form used in the United
States by all commercial banks, most major business corporations and most
savings institutions. In addition, our Board of Directors believes that a
holding company structure can facilitate the diversification of our business
activities. While diversification will be maximized if a unitary holding company
structure is utilized because the types of business activities permitted to a
unitary holding company are broader than those of a multiple holding company,
either type of holding company may engage in a broader range of activities than
may a thrift institution directly. Currently, there are no plans that the
Company engage in any material activities apart from holding the shares of the
Association although the Board may determine to expand the Company's activities
after Conversion. See "First Niles Financial, Inc."
DIVIDENDS
The Company may consider a policy of paying cash dividends on the
Common Stock after the completion of the Conversion. No decision has been made,
however, as to the amount or timing of such dividends, if any. Dividends, when
and if paid, will be subject to determination and declaration by the Board of
Directors at its discretion, which will take into account the Company's
consolidated financial condition and results of operations, tax considerations,
industry standards, economic conditions, regulatory restrictions, general
business practices and other factors. The Company may also consider making a one
time only special dividend or distribution (including a tax-free return of
capital) provided that the Company will take no steps toward making such a
distribution for at least one year following the completion of the Conversion.
No assurances can be given that dividends will be declared.
-21-
It is not presently anticipated that the Company will conduct
significant operations independent of those of Home Federal for some time
following the Conversion. As such, the Company does not expect to have any
significant source of income other than earnings on the net proceeds from the
Conversion retained by the Company (which proceeds are currently estimated to
range from $6.8 million to $10.8 million based on the minimum and the adjusted
maximum of the EVR, respectively) and dividends from Home Federal, if any.
Consequently, the ability of the Company to pay cash dividends to its
shareholders will be dependent upon these retained proceeds and income
generated, and upon the ability of Home Federal to pay dividends to the Company.
Home Federal, like all savings associations regulated by the OTS, is
subject to certain restrictions on capital distributions, including the payment
of dividends, based on its net income, its capital in excess of the regulatory
capital requirements, and the amount of regulatory capital required for the
liquidation account to be established in connection with the Conversion. See
"The Conversion - Effects of Conversion to Stock Form on Depositors and
Borrowers of the Association -- Liquidation Rights in Proposed Converted
Institution" and "Regulation - Regulatory Capital Requirements," "- Limitations
on Dividends and Other Capital Distributions" and "- Federal and State
Taxation." At April 30, 1998, Home Federal had available $5.0 million (without
giving effect to any proceeds received upon Conversion) which could be
distributed pursuant to OTS regulations.
MARKET FOR THE COMMON STOCK
Home Federal, as a mutual thrift institution, and First Niles
Financial, Inc., as a newly organized company, have never issued capital stock.
Consequently, there is not at this time an existing market for the Common Stock.
Following the completion of the offering, it is anticipated that the Common
Stock will be traded on the Nasdaq National Market under the symbol "FNFI". In
order to be quoted on the Nasdaq National Market, among other criteria, there
must be at least three market makers for the Common Stock. Webb has informed us
that KBW has agreed, subject to certain conditions, to act as a market maker for
the Common Stock following the offering, and to assist in securing additional
market makers to do the same.
A public market having the desirable characteristics of depth,
liquidity and orderliness depends upon the presence in the marketplace of both
willing buyers and sellers of the Common Stock at any given time, which is not
within the control of the Company or any market maker. There can be no assurance
that an active or liquid trading market will develop for the Common Stock, or if
a market develops, that it will continue. Accordingly, there can be no assurance
that purchasers of the Common Stock will be able to sell their shares at or
above the amount that they paid for such Common Stock.
-22-
PRO FORMA DATA
The following tables set forth the historical net income, equity and
per share data of Home Federal at and for the four months ended April 30, 1998
and the fiscal year ended December 31, 1997, and after giving effect to the
Conversion, the pro forma net income, capital stock and shareholders' equity and
per share data of the Company at and for the four months ended April 30, 1998
and the fiscal year ended December 31, 1997. The pro forma data has been
computed on the assumptions that (i) the specified number of shares of Common
Stock was sold at the beginning of the specified periods and yielded net
proceeds to the Company as indicated, (ii) 50% of such net proceeds were
retained by the Company and the remainder were used to purchase all of the stock
of Home Federal, and (iii) such net proceeds, less the amount to fund the ESOP
and restricted stock plan, were invested by the Association and Company at the
beginning of the periods to yield a pre-tax return of 5.39% and 5.30% for the
four months ended April 30, 1998 and for the fiscal year ended December 31,
1997, respectively. The after-tax rate of return is 3.56% and 3.50%,
respectively, assuming a combined federal and state income tax rate of 34%. The
assumed return is based upon the market rate of one-year U.S. Government
Treasury Securities as of the end of the periods indicated. The use of this rate
is viewed to be more relevant than the use of an arithmetic average of the
weighted average yield earned by the Association on its interest-earning assets
and the weighted average rate paid on its interest-bearing liabilities during
such periods. In calculating the underwriting fees to be paid as part of the
offering, the table assumes that (i) no commission was paid on $1,500,000 of
shares sold to directors, officers and employees, (ii) 8% of the total shares
sold in the Conversion were sold to the ESOP at no commission, and (iii) the
remaining shares were sold at a 1.5% commission. (These assumptions represent
management's estimate as to the distribution of stock orders in the Conversion.
However, there can be no assurance that such estimate will be accurate and that
a greater proportion of shares will not be sold at a higher commission, thus
increasing offering expenses.) Fixed expenses are estimated to be $395,500.
Actual Conversion expenses may be more or less than those estimated because the
fees paid to Webb and other brokers will depend upon the actual amount of shares
purchased by directors, officers and employees of the Association and the ESOP,
and the number of shares, if any, sold by brokers other than Webb. The pro forma
net income amounts derived from the assumptions set forth herein should not be
considered indicative of the actual results of operations of the Company that
would have been attained for any period if the Conversion had been actually
consummated at the beginning of such period, and the assumptions regarding
investment yields should not be considered indicative of the actual yields
expected to be achieved during any future period.
The total number of shares to be issued in the Conversion may be
increased or decreased significantly, or the price per share decreased, to
reflect changes in market and financial conditions prior to the close of the
offering. However, if the aggregate purchase price of the Common Stock sold in
the Conversion is below $17,000,000 (the minimum of the EVR) or more than
$26,450,000 (the adjusted maximum of the EVR), subscribers will be offered the
opportunity to modify or cancel their subscriptions. See "The Conversion - Stock
Pricing and Number of Shares to be Issued."
-23-
At or For the Four Months Ended April 30, 1998
--------------------------------------------------------------
Adjusted
Minimum Midpoint Maximum Maximum
1,700,000 2,000,000 2,300,000 2,645,000
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
per Share per Share per Share per Share
--------- --------- --------- ---------
(Dollars in Thousands, Except Per Share Amounts)
Pro forma market capitalization ................................ $ 17,000 $ 20,000 $ 23,000 $ 26,450
Less offering expenses and commissions ......................... (583) (624) (665) (713)
----------- ----------- ----------- -----------
Estimated net conversion proceeds ............................. 16,417 19,376 22,335 25,737
Less ESOP shares ............................................... (1,360) (1,600) (1,840) (2,116)
Less restricted stock plan shares .............................. (680) (800) (920) (1,058)
----------- ----------- ----------- -----------
Estimated proceeds available for investment(1) ................ $ 14,377 $ 16,976 $ 19,575 $ 22,563
=========== =========== =========== ===========
Net Income:
Historical ................................................... $ 287 $ 287 $ 287 $ 287
Pro Forma Adjustments:
Net earnings from proceeds(2) ............................... 170 201 232 268
ESOP(3) ..................................................... (25) (29) (34) (39)
Restricted stock plan (4) ................................... (30) (35) (40) (47)
----------- ----------- ----------- -----------
Pro forma net income(5) ................................... $ 402 $ 424 $ 445 $ 469
=========== =========== =========== ===========
Net Income Per Share:
Historical(6) .............................................. $ 0.18 $ 0.16 $ 0.14 $ 0.12
Pro forma Adjustments:
Net earnings from proceeds ................................ 0.11 0.11 0.11 0.11
ESOP(3) ................................................... (0.02) (0.02) (0.02) (0.02)
Restricted stock plan(4) .................................. (0.02) (0.02) (0.02) (0.02)
----------- ----------- ----------- -----------
Pro forma net income per share(4)(5) .................. $ 0.25 $ 0.23 $ 0.21 $ 0.19
=========== =========== =========== ===========
Ratio of offering price to pro forma net income per share
(annualized) ................................................ 13.33x 14.49x 15.87x 17.54x
Number of shares used in calculating EPS(3)(6) ............ 1,567,777 1,844,444 2,121,111 2,439,277
Shareholders' Equity (Book Value)(7):
Historical ................................................... $ 13,282 $ 13,282 $ 13,282 $ 13,282
Pro Forma Adjustments:
Estimated net Conversion proceeds ............................ 16,417 19,376 22,335 25,737
Plus tax benefit of Stock Contribution ....................... 102 102 102 102
Less common stock acquired by:
ESOP(3) ..................................................... (1,360) (1,600) (1,840) (2,116)
Restricted stock plan(4) .................................... (680) (800) (920) (1,058)
----------- ----------- ----------- -----------
Pro forma shareholder's equity(4) ....................... $ 27,659 $ 30,258 $ 32,857 $ 35,845
=========== =========== =========== ===========
Shareholders' Equity (Book Value)Per Share(7):
Historical(6) ................................................ $ 7.81 $ 6.64 $ 5.77 $ 5.02
Pro Forma Adjustments:
Estimated net Conversion proceeds ............................ 9.66 9.69 9.71 9.73
Plus tax benefit of Stock Contribution ....................... .06 .05 .04 .04
Less: Common stock acquired by:
ESOP(3) ..................................................... (0.80) (0.80) (0.80) (0.80)
Restricted stock plan(4) .................................... (0.40) (0.40) (0.40) (0.40)
----------- ----------- ----------- -----------
Pro forma book value per share(4)(5) .................... $ 16.27 $ 15.13 $ 14.28 $ 13.55
=========== =========== =========== ===========
Pro forma price to book value .................................. 61.46% 66.09% 70.03% 73.80%
Number of shares ............................................... 1,700,000 2,000,000 2,300,000 2,645,000
-24-
At or For the Year Ended December 31, 1997
--------------------------------------------------------------
Adjusted
Minimum Midpoint Maximum Maximum
1,700,000 2,000,000 2,300,000 2,645,000
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
per Share per Share per Share per Share
--------- --------- --------- ---------
(Dollars in Thousands, Except Per Share Amounts)
Pro forma market capitalization ................................ $ 17,000 $ 20,000 $ 23,000 $ 26,450
Less offering expenses and commissions ......................... (583) (624) (665) (713)
----------- ----------- ----------- -----------
Estimated net conversion proceeds ............................. 16,417 19,376 22,335 25,737
Less ESOP shares ............................................... (1,360) (1,600) (1,840) (2,116)
Less restricted stock plan shares .............................. (680) (800) (920) (1,058)
----------- ----------- ----------- -----------
Estimated proceeds available for investment(1) ................ $ 14,377 $ 16,976 $ 19,575 $ 22,563
=========== =========== =========== ===========
Net Income:
Historical ................................................... $ 386 $ 386 $ 386 $ 386
Pro Forma Adjustments:
Net earnings from proceeds(2) ............................... 503 594 685 789
ESOP(3) ..................................................... (75) (88) (101) (116)
Restricted stock plan(4) .................................... (90) (106) (121) (140)
----------- ----------- ----------- -----------
Pro forma net income(5) ................................... $ 724 $ 786 $ 849 $ 919
=========== =========== =========== ===========
Net Income Per Share:
Historical(6) .............................................. $ 0.25 $ 0.21 $ 0.18 $ 0.16
Pro forma Adjustments:
Net earnings from proceeds ................................ 0.32 0.32 0.32 0.32
ESOP(3) ................................................... (0.05) (0.05) (0.05) (0.05)
Restricted stock plan(4) .................................. (0.06) (0.06) (0.06) (0.06)
----------- ----------- ----------- -----------
Pro forma net income per share(4)(5) .................. $ 0.46 $ 0.42 $ 0.39 $ 0.37
=========== =========== =========== ===========
Ratio of offering price to pro forma net income per share ...... 21.74x 23.81x 25.64x 27.03x
Number of shares used in calculating EPS(3)(6) ................. 1,575,333 1,853,333 2,131,333 2,451,033
Shareholders' Equity (Book Value)(7):
Historical ................................................... $ 13,163 $ 13,163 $ 13,163 $ 13,163
Pro Forma Adjustments:
Estimated net Conversion proceeds ............................ 16,417 19,376 22,335 25,737
Less common stock acquired by:
ESOP(3) ..................................................... (1,360) (1,600) (1,840) (2,116)
Restricted stock plan(4) .................................... (680) (800) (920) (1,058)
----------- ----------- ----------- -----------
Pro forma shareholders' equity(4) ....................... $ 27,540 $ 30,139 $ 32,738 $ 35,726
=========== =========== =========== ===========
Shareholders' Equity (Book Value) Per Share(7):
Historical(6) ................................................ $ 7.74 $ 6.58 $ 5.72 $ 4.98
Pro Forma Adjustments:
Estimated net Conversion proceeds ............................ 9.66 9.69 9.71 9.73
Less: Common stock acquired by:
ESOP(3) ..................................................... (0.80) (0.80) (0.80) (0.80)
Restricted stock plan(4) .................................... (0.40) (0.40) (0.40) (0.40)
----------- ----------- ----------- -----------
Pro forma book value per share(4)(5) .................... $ 16.20 $ 15.07 $ 14.23 $ 13.51
=========== =========== =========== ===========
Pro forma price to book ........................................ 61.73% 66.36% 70.27% 74.02%
Number of shares ............................................... 1,700,000 2,000,000 2,300,000 2,645,000
-25-
- -------------
(1) Reflects a reduction to net proceeds for the cost of the ESOP and the
restricted stock plan (assuming shareholder ratification is received) which
it is assumed will be funded from the net proceeds retained by the Company.
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion. For purposes of
calculating pro forma net income, proceeds attributable to purchases by the
ESOP and restricted stock plan, which purchases are to be funded by the
Company and the Association, have been deducted from net proceeds.
(3) It is assumed that 8% of the shares of Common Stock issued in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP from the Company. The Association
intends to make contributions to the ESOP in amounts at least equal to the
principal and interest requirement of the debt. The Association's payment
of the ESOP debt is based upon equal installments of principal and interest
over a 12-year period. Interest income earned by the Company on the ESOP
debt will offset the interest paid by the Association. Accordingly, the
only expense to the Company on a consolidated basis will be related to the
allocations of earned ESOP shares which will be based on the number of
shares committed to be released to participants for the year at the average
market value of the shares during the year tax-effected at 34%. The amount
of ESOP debt is reflected as a reduction of shareholders' equity. In the
event that the ESOP were to receive a loan from an independent third party,
both ESOP expense and earnings on the proceeds retained by the Company
would be expected to increase. For purposes of calculating earnings per
share, unallocated ESOP shares are not considered to be outstanding. In
addition, the ESOP shares committed to be released at the end of the year
are assumed to be outstanding at the beginning of the year. For the interim
period, shares committed to be released for the year have been allocated on
a pro rata basis.
(4) Adjustments to both book value and net earnings have been made to give
effect to the proposed open market purchase (based upon an assumed purchase
price of $10.00 per share) following Conversion by the restricted stock
plan (assuming shareholder ratification of such plan is received) of an
amount of shares equal to 4% of the shares of Common Stock issued in the
Conversion for the benefit of certain directors, officers and employees. It
is assumed that the sale of the shares to the restricted stock plan
occurred at the beginning of the period. Funds used by the restricted stock
plan to purchase the shares will be contributed to the restricted stock
plan by the Company if the restricted stock plan is ratified by
shareholders following the Conversion. Therefore, this funding is assumed
to reduce the proceeds available for reinvestment. For financial accounting
purposes, the amount of the contribution will be recorded as a compensation
expense (although not an actual expenditure of funds) over the period of
vesting. These grants are expected to vest in equal annual installments
over a period of years following shareholder ratification of the restricted
stock plan. In the event the restricted stock plan is unable to purchase a
sufficient number of shares of Common Stock to fund the restricted stock
plan, the restricted stock plan may issue authorized but unissued shares of
Common Stock from the Company to fund the remaining balance. In the event
the restricted stock plan is funded by the issuance of authorized but
unissued shares in an amount equal to 4% of the shares sold in the
Conversion, the interests of existing shareholders would be diluted up to
approximately 3.8%. The Association has no current plans to implement a
restricted stock plan within one year of the date of the consummation of
the Conversion, subject to continuing OTS jurisdiction. See
"Management of the Association--Benefit Plans--Other Stock Benefit Plans."
In the event that the restricted stock plan is funded through authorized
but unissued shares, for the four months ended April 30, 1998 and year
ended December 31, 1997, pro forma net income per share would be $0.27,
$0.24, $0.22 and $0.21 and $0.51, $0.48, $0.45 and $0.43, respectively, and
pro forma shareholders' equity per share would be $16.03, $14.93, $14.12
and $13.42 and $15.96, $14.87, $14.07 and $13.37,
-26-
respectively, in each case at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range.
(5) No effect has been given to the shares to be reserved for issuance under
the proposed Stock Option Plan which is expected to be adopted by the
Company following the Conversion, subject to shareholder approval. In the
event the Stock Option Plan is funded by the issuance of authorized but
unissued shares in an amount equal to 10% of the shares sold in the
Conversion, at $10.00 per share, the interests of existing shareholders
would be diluted as follows: pro forma net income per share for the four
months ended April 30, 1998 and the year ended December 31, 1997 would be
$0.23, $0.21, $0.19 and $0.17 and $0.41, $0.38, $0.36 and $0.34,
respectively, and pro forma shareholders' equity per share would be $14.79,
$13.75, $12.99 and $12.32 and $14.73, $13.70, $12.94 and $12.28,
respectively, in each case at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range. In the alternative, the Company
may purchase shares in the open market to fund the Stock Option Plan
following shareholder approval of such plan. To the extent the entire 10%
of the shares to be reserved for issuance under the Stock Option Plan is
funded through open market purchases at the purchase price of $10.00 per
share, proceeds available for reinvestment would be reduced by $1,700,000,
$2,000,000, $2,300,000 and $2,645,000 at the minimum, midpoint, maximum and
adjusted maximum of the Estimated Valuation Range. The Association has no
current plans to implement a Stock Option Plan within one year of the date
of the consummation of the Conversion, subject to continuing OTS
jurisdiction. See "Management of the Association -- Benefit Plans -- Other
Stock Benefit Plans."
(6) Historical per share amounts have been computed as if the shares of Common
Stock indicated had been outstanding at the beginning of the periods or on
the dates shown, but without any adjustment of historical net income or
historical equity to reflect the investment of the estimated net proceeds
of the sale of shares in the Conversion as described above. All ESOP shares
have been considered outstanding for purposes of computing book value per
share. Pro forma share amounts have been computed by dividing the pro forma
net income or shareholders' equity (book value) by the number of shares
indicated as outstanding under SOP 93-6.
(7) "Book value" represents the difference between the stated amounts of the
Association's assets (based on historical cost) and liabilities computed in
accordance with generally accepted accounting principles. The amounts shown
do not reflect the effect of the Liquidation Account which will be
established for the benefit of Eligible and Supplemental Eligible Account
Holders in the Conversion, or the federal income tax consequences of the
restoration to income of the Association's special bad debt reserves for
income tax purposes which would be required in the unlikely event of
liquidation. See "The Conversion - Effects of Conversion to Stock Form on
Depositors and Borrowers of the Association" and "Regulation - Federal and
State Taxation." The amounts shown for book value do not represent fair
market values or amounts, if any, distributable to shareholders in the
unlikely event of liquidation.
-27-
PRO FORMA REGULATORY CAPITAL ANALYSIS
At April 30, 1998, the Association exceeded each of the OTS regulatory
capital requirements. Set forth below is a summary of the Association's
compliance with the OTS regulatory capital requirements as of April 30, 1998
based on historical capital and also assuming that the indicated number of
shares were sold as of such date using the assumptions contained under the
caption "Pro Forma Data."
Pro Forma at April 30, 1998
------------------------------------------------------------------------------
1,700,000 2,000,000 2,300,000 2,645,000
Historical Shares Sold at Shares Sold at Shares Sold at Shares Sold at
at April 30, 1998 Minimum Midpoint Maximum Adjusted Maximum
------------------ ---------------- --------------- ---------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
GAAP Capital(1)............ $13,282 18.3% $19,451 24.7% $20,570 25.8% $21,690 26.8% $22,977 27.9%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Tangible Capital(2):
Capital level............ $12,186 17.1% $18,355 23.6% $19,474 24.7% $20,594 25.8% $21,881 27.0%
Requirement.............. 1,072 1.5 1,164 1.5 1,181 1.5 1,198 1.5 1,217 1.5
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Excess................... $11,114 15.6% $17,191 22.1% $18,293 23.2% $19,396 24.3% $20,664 25.5%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Core Capital(2):
Capital level(3)......... $12,186 17.1% $18,355 23.6% $19,474 24.7% $20,594 25.8% $21,881 27.0%
Requirement.............. 2,143 3.0 2,328 3.0 2,362 3.0 2,396 3.0 2,434 3.0
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Excess................... $10,043 14.1% $16,027 20.6% $17,112 21.7% $18,198 22.8% $19,447 24.0%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Risk-Based Capital(2):
Capital level(4)(5)...... $12,675 32.4% $18,843 44.3% $19,963 46.3% $21,082 48.2% $22,369 50.3%
Requirement.............. 3,129 8.0 3,400 8.0 3,449 8.0 3,498 8.0 3,555 8.0
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Excess................... $ 9,546 24.4% $15,443 36.3% $16,514 38.3% $17,584 40.2% $18,814 42.3%
======== ==== ======= ==== ======= ==== ======= ==== ======= ====
- --------------
(1) Total equity as calculated under generally accepted accounting principles
("GAAP"). Assumes that the Association receives 50% of the net proceeds,
offset in part by the aggregate purchase price of Common Stock acquired at
a price of $10.00 per share by the ESOP in the Conversion and the
anticipated expenses associated with the restricted stock plan.
(2) Tangible and core capital figures are determined as a percentage of total
adjusted assets; risk-based capital figures are determined as a percentage
of risk-weighted assets. Adjusted assets assumed for tangible and core
capital are $71.4 million, $77.6 million, $78.7 million, $79.9 million and
$81.1 million at historical, minimum, midpoint, maximum and adjusted
maximum. Risk-weighted assets are assumed to be $39.1 million, $42.5
million, $43.1 million, $43.7 million and $44.4 million at historical,
minimum, midpoint, maximum and adjusted maximum, respectively. See Note K
of the Notes to Consolidated Financial Statements.
(3) In April 1991, the OTS proposed a core capital requirement for savings
associations comparable to the requirement for national banks that became
effective on November 30, 1990. This proposed core capital ratio is 3% of
total adjusted assets for thrifts that receive the highest supervisory
rating for safety and soundness ("CAMEL" rating), with a 4% to 5% core
capital requirement for all other thrifts. See "Regulation - Regulatory
Capital Requirements."
(4) Includes $853,000 of general valuation allowances, of which $489,000
qualifies as supplementary capital. See "Regulation - Regulatory Capital
Requirements."
(5) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 54.9% risk-weight.
-28-
CAPITALIZATION
Set forth below is the capitalization, including deposits, of Home
Federal as of April 30, 1998, and the pro forma capitalization of the Company at
the minimum, the midpoint, the maximum and the adjusted maximum of the Estimated
Valuation Range, after giving effect to the Conversion and based on other
assumptions set forth in the table and under the caption "Pro Forma Data."
Company - Pro Forma
Based Upon Sale at $10.00 per share
-----------------------------------------------
Adjusted
Home Federal Minimum Midpoint Maximum Maximum
Existing 1,700,000 2,000,000 2,300,000 2,645,000
Capitalization Shares Shares Shares Shares
-------------- ------ ------ ------ ------
(In Thousands)
Deposits(1) ........................................ $ 57,765 $ 57,765 $ 57,765 $ 57,765 $ 57,765
Borrowings ......................................... 400 400 400 400 400
-------- -------- -------- -------- --------
Total Deposits and borrowed funds .................. $ 58,165 $ 58,165 $ 58,165 $ 58,165 $ 58,165
======== ======== ======== ======== ========
Shareholders' Equity:
Serial Preferred Stock ($0.01 par value)
authorized - 500,000 shares; none to be
outstanding ..................................... $ -- $ -- $ -- $ -- $ --
Common Stock ($0.01 par value)
authorized - 6,500,000 shares; to be
outstanding (as shown)(2) ...................... -- 17 20 23 26
Additional paid-in capital ....................... -- 16,400 19,356 22,312 25,711
Shares issued to the Foundation .................. -- 300 300 300 300
Retained earnings, substantially
restricted(3) .................................. 12,186 12,186 12,186 12,186 12,186
Net unrealized gain (loss) on securities
available for sale ............................. 1,096 1,096 1,096 1,096 1,096
Less:
Common Stock acquired by ESOP(4) ................. -- (1,360) (1,600) (1,840) (2,116)
Common Stock acquired by restricted
stock plan(4) .................................. -- (680) (800) (920) (1,058)
-------- -------- -------- -------- --------
Total Shareholders' Equity ......................... $ 13,282 $ 27,659 $ 30,258 $ 32,857 $ 35,845
======== ======== ======== ======== ========
- --------------
(1) No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing Common Stock in the Conversion. Any such withdrawals
will reduce pro forma deposits by the amount of such withdrawals.
(2) Does not reflect the shares of Common Stock that may be reserved for
issuance pursuant to the Stock Option Plan.
(3) See "Dividends" and "Regulation - Limitations on Dividends and Other
Capital Distributions" regarding restrictions on future dividend payments
and "The Conversion - Effects of Conversion to Stock Form on Depositors and
Borrowers of the Association" regarding the liquidation account to be
established upon Conversion.
(4) Assumes that 8% of the shares issued in the Conversion will be purchased by
the ESOP. The funds used to acquire the ESOP shares will be borrowed from
the Company. The Association intends to make contributions to the ESOP
sufficient to service and ultimately retire the ESOP's debt over a
twelve-year period. Also assumes that an amount of shares equal to 4% of
the
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amount of shares issued in the Conversion will be acquired by the
restricted stock plan, following shareholder ratification of such plan
after completion of the Conversion. In the event that the restricted stock
plan is funded solely by the issuance of authorized but unissued shares,
the interest of existing shareholders would be diluted by approximately
3.8%. The amount to be borrowed by the ESOP and the Common Stock acquired
by the restricted stock plan is reflected as a reduction of shareholders'
equity. See "Management of the Association - Benefit Plans - Employee Stock
Ownership Plan" and "- Other Stock Benefit Plans."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is intended to assist you in understanding the financial condition
and results of operations of Home Federal. The information contained in this
section should also be read in conjunction with our Financial Statements and
Notes to the Financial Statements included elsewhere in this document.
General
The Company has recently been formed and, accordingly, has no results
of operations. The following discussion relates only to Home Federal's financial
condition and results of operations. Our results of operations depend primarily
on net interest income, which is determined by (i) the difference between rates
of interest we earn on interest-earning assets, consisting primarily of mortgage
loans, collateralized mortgage obligations and other investments, and the rates
we pay on interest-bearing liabilities, consisting primarily of deposits and
borrowings, and (ii) the relative amounts of such interest-earning assets and
interest-bearing liabilities. The level of noninterest income, such as fees
received from customer deposit account service charges and gains on sales of
investments, and the level of noninterest expense, such as federal deposit
insurance premiums, salaries and benefits, office occupancy costs, and data
processing costs, also affect our results of operations. Finally, our results of
operations may also be affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, all of which are
beyond our control. See "Risk Factors--Weakness in Local Economy" and "--Limited
Potential for Asset, Loan and Deposit Growth."
Financial Condition
April 30, 1998 Compared to December 31, 1997. Total assets of $72.5
million and total liabilities of $59.3 million at April 30, 1998 remained
relatively unchanged compared to December 31, 1997. Loans receivable and
investment securities categorized as available for sale declined $593,000 and
$263,000, respectively, between December 31, 1997 and April 30, 1998 as a result
of such loans and investments maturing and being repaid. These declines were
partially offset by a $230,000 increase in securities, primarily collateralized
mortgage obligations ("CMOs"), categorized by the Association as held to
maturity at April 30, 1998.
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We experienced a slight decrease in deposits at April 30, 1998 compared
to December 31, 1997, as withdrawals exceeded deposits and interest credited.
Our ability to maintain our deposit base in the future is, to a great extent,
dependent on our being able to price our savings products competitively and
maintain a high quality of service to our customers. Our dependence on the Niles
and Trumbull County market, with no immediate plans to expand beyond this
current market area, will likely result in deposit growth being challenging and
possibly costly, considering that 37.8% of our deposits are in passbook savings
accounts, which are projected to decrease during the next few years. Our highly
competitive yet economically depressed operating environment, together with our
share of passbook accounts higher than the comparable group, is likely to limit
our deposit growth potential. See "Risk Factors--Weakness in Local Economy" and
"--Limited Potential for Asset, Loan and Deposit Growth."
Equity increased $119,000 from December 31, 1997 to April 30, 1998 as a
result of $287,000 of net income earned during such four-month period and a
$168,000 decrease in unrealized gains for securities categorized as available
for sale.
December 31, 1997 Compared to December 31, 1996. Total assets increased
$1.3 million, or 1.8%, to $72.5 million at December 31, 1997 from $71.2 million
at December 31, 1996. The increase in total assets resulted from a $3.6 million
increase in the loan portfolio to $36.7 million and a $2.6 million increase in
cash and cash equivalents to $4.9 million at December 31, 1997. These increases
were partially offset by a $4.9 million decline in the securities portfolio at
December 31, 1997, as a result of sales and maturities of such securities. The
increase in the loan portfolio is attributable to a reduction in loan
prepayments in 1997. Proceeds from the sales and maturities of securities were
used to fund loan growth.
Total liabilities increased $284,000 to $59.3 million at December 31,
1997. The increase was attributable to a $181,000 increase in deposits to $57.9
million.
Equity increased $1.0 million, or 8.2%, as a result of $386,000 of net
income earned by the Association and a $614,000 increase on unrealized gains for
securities categorized as available for sale.
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Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances.
Four Months Ended April 30, Year Ended December 31,
-------------------------------------------------------- ----------------------------
1998 1997 1997
----------------------------- ------------------------ ----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
Interest-Earning Assets: (Dollars in Thousands)
Loans receivable(1)..................... $36,447 $1,016 8.36% $34,165 $ 936 8.22% $35,507 $2,959 8.33%
Mortgage-backed and related securities.. 12,502 250 6.00 11,588 237 6.14 11,677 665 5.70
Investment securities................... 17,300 321 5.57 22,068 435 5.91 19,210 1,150 5.99
FHLB stock.............................. 297 7 7.07 276 6 6.52 283 20 7.07
Interest bearing deposits............... 4,337 77 5.33 2,077 38 5.49 3,791 208 5.49
------- ------ ------- ----- ------- -----
Total interest-earning assets(1)....... $70,883 1,671 7.07 $70,174 1,652 7.06 $70,468 5,002 7.10
======= ------ ======= ----- ======= -----
Interest-Bearing Liabilities:
Savings deposits........................ $25,392 259 3.06 $26,176 267 3.06 $26,340 806 3.06
Demand and NOW deposits................. 2,951 30 3.05 2,754 28 3.05 2,885 88 3.05
Certificate accounts.................... 28,770 523 5.45 28,102 483 5.16 28,231 1,539 5.45
Borrowings.............................. 400 12 9.00 500 15 9.00 488 43 8.81
------- ------ ------- ----- ------- -----
Total interest-bearing liabilities..... $57,513 824 4.30 $57,532 793 4.14 $57,944 2,476 4.27
======= ------ ======= ----- ======= -----
Net interest income...................... $ 847 $ 859 $2,526
====== ===== ======
Net interest rate spread................. 2.77% 2.92% 2.83%
==== ==== ====
Net earning assets....................... $13,370 $12,642 $12,524
======= ======= =======
Net yield on average interest-
earning assets......................... 3.58% 3.67% 3.58%
==== ==== ====
Average interest-earning assets to average
interest-bearing liabilities........... 1.23x 1.22x 1.22x
==== ==== ====
Year Ended December 31,
-----------------------------
1996
-----------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable(1)............................ $30,753 $2,510 8.16%
Mortgage-backed and related securities......... 14,536 845 5.81
Investment securities.......................... 21,756 1,266 5.82
FHLB stock..................................... 263 18 6.84
Interest bearing deposits...................... 2,631 141 5.36
------- ------
Total interest-earning assets(1).............. $69,939 4,780 6.83
======= ======
Interest-Bearing Liabilities:
Savings deposits............................... $27,320 836 3.06
Demand and NOW deposits........................ 2,820 86 3.05
Certificate accounts........................... 27,453 1,475 5.37
Borrowings..................................... 62 5 8.06
------- ------
Total interest-bearing liabilities........... $57,655 2,402 4.17
======= ------
Net interest income............................. $2,378
======
Net interest rate spread........................ 2.66%
====
Net earning assets.............................. $12,284
=======
Net yield on average interest-earning assets.... 3.40%
====
Average interest-earning assets
to average interest-bearing liabilities....... 1.21x
====
- --------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves. Includes non-accrual loans.
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Rate/Volume Analysis of Net Interest Income
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the changes
related to outstanding balances and that due to the changes in interest rates.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
Four Months Ended
April 30, Years Ended December 31,
1997 vs. 1998 1996 vs. 1997
--------------------------- -----------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------- Increase ------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
Interest-Earning assets:
Loans receivable......................... $ 69 $ 11 $ 80 $399 $ 50 $449
Mortgage-backed and related securities... 18 (5) 13 (164) (16) (180)
Investment securities.................... (90) (23) (113) (155) 39 (116)
Interest bearing deposits and other...... 40 (1) 39 64 5 69
------ ------ ------- ------- ----- -------
Total interest-earning
assets.............................. $ 37 $(18) 19 $144 $ 78 222
==== ==== ------ ==== ==== ----
Interest-Bearing liabilities:
Savings deposits......................... $ (8) $ --- $ (8) $ (30) $ --- $ (30)
Demand and NOW deposits.................. 2 --- 2 2 --- 2
Borrowings............................... (3) --- (3) 37 1 38
Certificate accounts..................... 12 28 40 42 22 64
----- ----- ------ ---- ---- ------
Total interest-bearing
liabilities......................... $ 3 $ 28 31 $ 51 $ 23 74
==== ==== ------ ==== ==== -----
Net interest income........................ $ (12) $148
===== ====
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Interest Rate Spreads
The following table presents the weighted average yields earned on
loans, investments and other interest-earning assets, and the weighted average
rates paid on savings deposits and the resultant interest rate spreads at the
dates indicated. Weighted average balances are based on monthly balances.
At December 31,
April 30, -----------------
1998 1997 1996
---- ---- ----
Weighted average yield on:
Loans receivable ............................. 8.04% 8.34% 8.27%
Mortgage-backed and related securities ....... 6.06 5.96 5.69
Investment securities ........................ 5.46 5.52 6.00
FHLB stock ................................... 7.25 7.31 7.04
Interest bearing deposits .................... 5.44 6.56 6.85
Combined weighted average yield
on interest-earning assets ................. 6.89 7.13 7.04
Weighted average rate paid on:
Savings deposits ............................. 3.06 3.06 3.06
Demand and NOW deposits ...................... 3.05 3.05 3.05
Certificate accounts ......................... 5.41 5.52 5.32
Borrowings ................................... 8.88 8.88 8.88
Combined weighted average rate paid
on interest-bearing liabilities ............ 4.27 4.31 4.19
Spread ........................................ 2.62 2.82 2.85
Results of Operations
Comparison of Operating Results for the Four Months Ended April 30,
1998 and 1997
Net Income. Net income was $287,000 for the four months ended April 30,
1998, compared to $298,000 for the four months ended April 30, 1997,
representing a decrease of 3.7%. Interest income increased $19,000, primarily as
a result of an increase in our outstanding balance of loans, and noninterest
income increased $461,000, as a result of gains on the sales of securities.
These increases were mostly offset by the $31,000 increase in interest expense
resulting from higher certificate account balances and the $435,000 increase in
noninterest expense relating to bonuses paid to directors, officer and
employees. Our provision for loan losses was also $20,000 higher for the four
months ended April 30, 1998 compared to the same period in 1997. For the four
months ended April 30, 1998 and 1997, the annualized returns on assets were
1.19% and 1.25%, respectively, while the returns on retained earnings were 7.15%
and 7.67%, respectively.
Net Interest Income. Net interest income was $847,000 for the four
months ended April 30, 1998 compared to $859,000 for the four months ended April
30, 1997, representing a decrease of 1.4%. Interest income increased $19,000 to
$1,671,000 for the four months ended April 30, 1998 compared to the same period
in 1997, as a result of a $709,000 increase in the average outstanding balance
of interest-earning assets and a slight shift in our asset mix from
lower-yielding securities and
-34-
interest-bearing deposits to higher yielding mortgage loans. However, the
increase in interest income was more than offset by the $31,000 increase in
interest expense to $824,000 for the four months ended April 30, 1998, compared
to $793,000 for the four months ended April 30, 1997, primarily as a result of
the higher rate paid on, and the higher average outstanding balance of,
certificate accounts. See "- Average Balances, Interest Rates and Yields" and "-
Rate Volume Analysis of Net Interest Income."
Our average outstanding balance of interest-earning assets to
interest-bearing liabilities remained relatively constant at 1.23x for the four
months ended April 30, 1998, compared to 1.22x for the same period in 1997.
Proceeds received from maturing lower-yielding investment and mortgage-related
securities were redeployed into higher-yielding mortgage loans, which resulted
in the increase in interest income. Our average outstanding balance of loans
receivable was $2,282,000 higher for the four months ended April 30, 1998
compared to the same period in 1997, while our average outstanding balance of
our mortgage-backed and related securities, investment securities and
interest-bearing deposits was $1,594,000 lower during the same periods. The
average yield on our loan portfolio also increased to 8.36% for the four months
ended April 30, 1998, compared to 8.22% for the same period in 1997. However,
our net interest rate spread decreased to 2.77% for the four months ended April
30, 1998, compared to 2.92% for same period in 1997, as a result of the
increased balance of higher costing certificate accounts.
Provision for Loan Losses. The provision for loan losses is a result of
management's periodic analysis of the adequacy of the allowance for loan losses.
The provision was $20,000 for the four months ended April 30, 1998. No provision
was made during the four months ended April 30, 1997. The $20,000 provision for
loan losses for the four months ended April 30, 1998 was recorded primarily to
offset the $21,000 charged-off during the four months, as well as a result of
management's continuing reassessment of the portfolio. At April 30, 1998 our
allowance for loan losses totaled $853,000, or 2.36% of net loans receivable and
50.29% of total non-performing loans. See "Business of Home Federal - Asset
Quality."
It is our policy to provide valuation allowances for estimated losses
on loans based upon past loss experience, current trends in the level of
delinquent and specific problem loans, loan concentrations to single borrowers,
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 our market area. Accordingly, the calculation of the
adequacy of the allowance for loan losses is not based directly on the level of
non-performing assets.
We will continue to monitor our allowance for loan losses and make
future additions to the allowance through the provision for loan losses as
economic conditions dictate. Although we maintain our allowance for loan losses
at a level which we consider to be adequate to provide for losses, there can be
no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods. In
addition, our determination as to the amount of the allowance for loan losses is
subject to review by the OTS and the FDIC, as part of their examination process,
which may result in the establishment of an additional allowance.
-35-
Noninterest Income. Our noninterest income consists primarily of
service fees charged on transaction accounts and gains on sales of securities.
Noninterest income was $469,000 for the four months ended April 30, 1998,
compared to $8,000 for the same period in 1997. This increase was the result of
a $461,000 gain on the sale of investment securities as management chose to
realize gains on approximately 20% of its Federal Home Loan Mortgage Corporation
stock, which at the time of sale was at or near record price levels.
Noninterest Expense. Noninterest expense was $890,000 for the four
months ended April 30, 1998 compared to $457,000 for the same period in 1997,
representing a 95% increase. This increase was primarily attributable to
salaries and employee benefits, our largest noninterest expense which was
$745,000 for the four month period ended April 30, 1998 compared to $297,000 for
the same period in 1997, representing an increase of 151%. The increase in
salaries and benefits was the result of a bonus paid to directors, officers and
employees.
Federal Income Taxes. Federal income taxes were $119,000 for the four
months ended April 30, 1998, compared to $112,000 for the same period in 1997.
The increase in federal income taxes, despite the slightly lower taxable income
earned by the Association for the period, was the result of a reduction in the
tax credits generated by our investment in a limited partnership. See
"Subsidiaries and Other Activities." Our effective tax rates were 29.3% and
27.3% for the four months ended April 30, 1998 and 1997, respectively.
Comparison of Operating Results for the Years Ended December 31, 1997
and 1996
Net Income. Net income was $386,000 for the year ended December 31,
1997 compared to $426,000 for the year ended December 31, 1996, representing a
decrease of 9.4%. Net income decreased as a result of a $660,000 increase to our
provision for loan losses as a result of the increased loan balance and
increased nonperforming assets, as well as management's continued assessments of
the portfolio. Net interest income increased $148,000, primarily as a result of
the increase in our average outstanding balance of loans during 1997, and
noninterest expense decreased $371,000, primarily as a result of the absence of
the one-time SAIF assessment paid in November 1996. Absent the SAIF assessment,
net income for 1996 would have been $675,000, or $289,000 higher than net income
in 1997. For the years ended December 31, 1997 and 1996, the returns on assets
were 0.54% and 0.60% (0.95% excluding the SAIF assessment), respectively, while
the returns on retained earnings were 3.27% and 3.75% (5.94% excluding the SAIF
assessment), respectively.
Net Interest Income. Net interest income was $2,526,000 for the year
ended December 31, 1997, compared to $2,378,000 for the year ended December 31,
1996, representing a 6.2% increase. The increase was the result of a $222,000
increase in interest income to $5,002,000 for the year ended December 31, 1997.
Interest expense also increased, but only slightly, to $2,476,000 for 1997
compared to $2,402,000 for 1996, partially offsetting the increase in interest
income.
While our average outstanding balance of interest-earning assets to
interest-bearing liabilities remained relatively constant at 1.22x during 1997
compared to 1.21x during 1996, we were successful in redeploying proceeds
received from maturing lower-yielding securities into higher- yielding loans,
which resulted in increased interest income. Our average outstanding balance of
mortgage loans increased $4.8 million from 1996 to 1997, while our average
outstanding balance of
-36-
securities and interest-bearing deposits decreased $4.2 million during the same
period. The average yield on our loan portfolio also increased 17 basis points
to 8.33% for 1997, compared to 8.16% for 1996. In addition, our net interest
rate spread increased to 2.83% for the year ended December 31, 1997, compared to
2.66% for the year ended December 31, 1996 as a result of the shift in our asset
mix.
The increase in interest expense was due to a $778,000 increase in the
average outstanding balance of certificate accounts and, to a lesser extent, an
8 basis point increase in the rate paid on such accounts. The increased
borrowings associated with our equity investment in a limited partnership to
construct low-cost multi-family housing units also contributed to the increase
in interest expense. See "Subsidiary and Other Activities." These increases were
partially offset by a $1,000,000 decline in our lower costing transaction
accounts. See "- Average Balances, Interest Rates and Yields" and "- Rate/Volume
Analysis of Net Interest Income."
Provision for Loan Losses. During the year ended December 31, 1997, we
recorded a provision for loan losses of $700,000, compared to $40,000 during
1996. The increase in the provision was the result of additional credit risk
inherent in our portfolio as a result of an increased amount of loans held in
portfolio, an increased level of nonperforming loans, a charge-off of $147,000
arising from the write-down of a loan to estimated net realizable value, as well
as management's continuing reassessment of the portfolio. The allowance was
increased to reflect the deterioration of loans made to four separate borrowers
where full collection of loan principal had become uncertain, including three
loans which had become impaired. The increased allowance also reflected
management's assessment of additional credit risk resulting from a significant
increase in loan concentrations to several borrowers for financing one- to
four-family rental properties that are dependent on future rent collections. At
December 31, 1997, our allowance for loan losses totaled $854,000, or 2.32% of
net loans receivable and 51.38% of total non-performing loans. See "Business of
Home Federal - Asset Quality."
Noninterest Income. Noninterest income was $27,000 for the year ended
December 31, 1997, compared to $23,000 for 1996. The $4,000 increase was related
to a gain on the sale of an investment security in 1997.
Noninterest Expense. Noninterest expense decreased by $371,000, or
21.2%, to $1,380,000 for the year ended December 31, 1997 from $1,751,000 for
the year ended December 31, 1996. The decrease primarily was due to the absence
in 1997 of the $378,000 special assessment paid in 1996 to recapitalize the
SAIF. Absent the SAIF assessment, noninterest expense would have increased
$7,000.
Salaries and employee benefits, our largest noninterest expense,
increased $47,000 from 1996 to 1997, representing an increase of 5.7%. The
increase in salaries and benefits was the result of normal wage adjustments and
the addition of one full-time employee. Other operating expenses increased
$60,000, or 19.9%, from 1996 to 1997, primarily as a result of increased data
processing costs.
Federal Income Taxes. Federal income taxes were $87,000 for the year
ended December 31, 1997, compared to $184,000 for the same period in 1996. We
paid less federal income taxes during 1997 as a result of earning less income
and the effect of tax credits generated by our investment in a limited
partnership. Our effective tax rates were 18.4% and 30.2% for 1997 and 1996,
respectively.
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Asset/Liability Management and Market Risk
Qualitative Aspects of Market Risk. As stated above, we derive our
income primarily from the excess of interest collected over interest paid. The
rates of interest we earn on assets and pay on liabilities generally are
established contractually for a period of time. Market interest rates change
over time. Accordingly, our results of operations, like those of many financial
institutions, are impacted by changes in interest rates and the interest rate
sensitivity of our assets and liabilities. The risk associated with changes in
interest rates and our ability to adapt to these changes is known as interest
risk and is the Association's most significant market risk.
Quantitative Aspects of Market Risk. In an attempt to manage our
exposure to changes in interest rates and comply with applicable regulations, we
monitor the Association's interest rate risk. In monitoring interest rate risk
we continually analyze and manage assets and liabilities based on their payment
streams and interest rates, the timing of their maturities, and their
sensitivity to actual or potential changes in market interest rates.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more rapidly or to a greater extent than our liabilities, then
net portfolio value and net interest income would tend to increase during
periods of rising interest rates and decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, then net portfolio value and net interest income
would tend to decrease during periods of rising interest rates and increase
during periods of falling interest rates. Our policy has been to address the
interest rate risk inherent in the historical savings institution business of
originating long-term loans funded by short-term deposits by maintaining
sufficient liquid assets for material and prolonged changes in interest rates.
To manage the interest rate risk, we attempt to originate
adjustable-rate loans; however, due to the low interest rate environment over
the past several years, customer demand for fixed-rate loans has been strong. At
April 30, 1998, ARM loans totaled $21.9 million or 55.7% of our total loan
portfolio. We also maintain a large portfolio of liquid assets which includes
investment securities. Maintaining liquid assets, however, tends to reduce
potential net income because liquid assets usually provide a lower yield than
other interest-earning assets. Despite these strategies we are still more
vulnerable to increases in interest rates than to decreases in interest rates
given current market interest rate levels, as illustrated in the table on the
following page.
Our Board of Directors is responsible for reviewing our asset and
liability position. The Board meets quarterly to review interest rate risk and
trends, liquidity and capital ratios and related regulatory requirements. In
addition, the Board reviews simulations of the effect of interest rates on the
Association's capital, net interest income and net income under various interest
rate scenarios. Management of the Association is responsible for implementing
the policies and decisions of the Board of Directors with respect to our asset
and liability goals and strategies. The Association has operated for the last
three years within the Board's defined asset/liability parameters. Furthermore,
we believe that our liquidity position and capital levels, which are well in
excess of regulatory requirements, assist us in reasonably limiting the effects
of our interest rate risk exposure.
Net Portfolio Value as a Measure of Interest Rate Risk.
In order to encourage savings associations to reduce their interest
rate risk, the OTS adopted a rule incorporating an interest rate risk ("IRR")
component into the risk-based capital rules. The IRR component is a dollar
amount that will be deducted from total capital for the purpose of calculating
an institution's risk-based capital requirement and is measured in terms of the
sensitivity of its net portfolio value ("NPV") to changes in interest rates. NPV
is the difference between
-38-
incoming and outgoing discounted cash flows from assets, liabilities, and
off-balance sheet contracts. An institution's IRR is measured by the change to
its NPV as a result of a hypothetical 200 basis point ("bp") change in market
interest rates. A resulting change in NPV of more than 2% of the estimated
present value of total assets ("PV") will require the institution to deduct from
its capital 50% of that excess change. Based on the Association's asset size and
risk-based capital, we have been informed by the OTS that Home Federal is
exempted from this rule. Nevertheless, the following table presents an estimate
of the change in our NPV at March 31, 1998 as calculated by our personnel, based
on quarterly financial information.
March 31, 1998
----------------------------------------------------------------------------
Net Portfolio Value NPV as % of PV of Asset
-------------------------------------------------- -----------------------
Change in
Rate $ Amount $ Change % Change NPV Ratio BP Change
--------- -------- -------- -------- --------- ---------
(Dollars in Thousands)
+400 bp $10,172 $(3,683) (26.6)% 14.54% (428)
+300 11,403 (2,452) (17.7) 16.02 (280)
+200 12,459 (1,396) (10.1) 17.25 (157)
+100 13,260 (595) (4.3) 18.16 (66)
-- 13,855 -- -- 18.82 --
- -100 14,473 618 4.5 19.49 67
- -200 14,854 999 7.2 19.90 108
- -300 15,006 1,151 8.3 20.07 125
- -400 15,142 1,287 9.3 20.21 139
In the above table, the first column on the left presents the basis
point increments of yield curve shifts. The second column presents the overall
dollar amount of NPV at each basis point increment. The third and fourth columns
present the Association's actual position in dollar change and percentage change
in NPV at each basis point increment. The remaining columns present the
Association's percentage change and basis point change in its NPV as a
percentage of portfolio value of assets.
Were the Association subject to the IRR component at March 31, 1998, it
would not have been considered to have had a greater than normal level of
interest rate exposure and a deduction from capital would not have been
required. Although we have been advised by the OTS that Home Federal is not
subject to the IRR component discussed above, it is still subject to interest
rate risk and, as can be seen above, rising interest rates will reduce the
Association's NPV. The OTS has the authority to require otherwise exempt
institutions to comply with the rule concerning interest rate risk. See
"Regulation - Regulatory Capital Requirements."
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including interest rates, loan
prepayment rates, deposit decay rates, and the market values of certain assets
under the various interest rate scenarios and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in the method of
analysis presented in the computation of NPV. Although certain assets and
liabilities may have similar maturities or
-39-
periods within which they reprice, they may react differently to changes in
market interest rates. 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. In the
event of a change in interest rates, prepayments and early withdrawal levels
could deviate significantly from those assumed in making the calculations set
forth above.
Liquidity and Capital Resources
Our primary sources of funds are deposits, repayments and prepayments
of loans and securities and interest income. Although maturity and scheduled
amortization of loans and securities are relatively predictable sources of
funds, deposit flows and prepayments on loans and securities are influenced
significantly by general interest rates, economic conditions and competition.
Our primary investment activity is originating one- to four-family
residential mortgages and, to a lesser extent, commercial, multi-family and
construction real estate loans to be held to maturity. For the four months ended
April 30, 1998, and the fiscal years ended December 31, 1997 and 1996, we
originated loans for our portfolio in the amount of $3.2 million, $7.0 million
and $9.5 million, respectively. For the four months ended April 30, 1998, and
the fiscal years ended December 31, 1997 and 1996, these activities were funded
from repayments of loans and securities of $7.1 million, $12.6 million and $15.8
million, respectively. Excess funds are generally invested in short-term
investment securities and collateralized mortgage obligations.
Our most liquid assets are cash and cash equivalents. At April 30,
1998, and December 31, 1997 and 1996, cash and cash equivalents were $5.5
million, $4.9 million, and $2.2 million, respectively. The Association's
management monitors and reviews its liquidity and maintains a $2.0 million line
of credit with a commercial bank which can be accessed immediately.
Liquidity management is an ongoing and long-term function of our
asset/liability management strategy. Excess funds generally are invested in
interest-bearing overnight deposits at other financial institutions and in
short-term investment securities. If we require funds beyond our ability to
generate deposits, additional sources of funds are available through certain
other assets as collateral for such advances. We believe, based on our current
balance sheet structure and our ability to acquire funds from the FHLB of
Cincinnati and other sources, that the Association's liquidity is adequate.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary impact of inflation on our
operations is reflected in increased operating costs. Unlike most industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates, generally, have
a more significant impact on a financial institution's performance than does
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
-40-
Year 2000 Issues
The approaching millennium is causing organizations of all types to
review their computer systems for the ability to properly accommodate the year
2000. When computer systems were first developed, two digits were used to
designate the year in date calculations and "19" was assumed for the century. As
a result, there is significant concern about the integrity of date sensitive
calculations when the calendar rolls over to January 1, 2000. An older system
could interpret 01/01/00 as January 1, 1900 potentially causing major problems
calculating interest, payment, delinquency or maturity dates. An internal
committee of the Association, comprised of two officers and an outside director,
has been formed to address the potential risk that year 2000 poses for the
Association.
Accurate data processing is essential to our operations and a lack of
accurate processing by our vendors or by us could have a significant adverse
impact on the Association's financial condition and results of operations. We
have been assured by our data processing service bureau that their computer
services will function properly on and after January 1, 2000. Our data
processing service bureau has advised Management that it, in fact, anticipates
completing programming corrections by October 1998, and will commence testing in
November 1998. If by the end of this year it appears that our primary data
processing service bureau will be unable to resolve this problem in a timely
manner, then we will identify a secondary data processing service provider to
complete the task. If we are unable to do this, we will identify those steps
necessary to minimize the negative impact the computer problems. We do not
anticipate any significant year 2000 issues with respect to our premises or
other non-information systems. At this time we cannot determine the expense that
may be incurred in connection with year 2000 issues.
In addition to expenses related to our own systems, we could incur
losses if loan payments are delayed due to year 2000 problems affecting any of
our significant borrowers or impairing the payroll systems of large employers in
our market area. We have been communicating with our vendors to assess their
progress in evaluating their systems and implementing any corrective measures
required by them to be prepared for the year 2000. We have also sent year 2000
readiness request letters to 23 borrowers. These borrowers were selected based
on the aggregate amounts owed to the Association, the type of loans outstanding,
and the perceived Year 2000 risk based on our knowledge of the loan customers
and their operations. To date, we have not been advised by such parties that
they do not have plans in place to address and correct the issues associated
with the year 2000 problem; however, no assurance can be given as to the
adequacy of such plans or to the timeliness of their implementation.
Recent Accounting Pronouncements
FASB Statement on Reporting Comprehensive Income. In June 1997, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 130. SFAS No. 130 will require the Company to
classify items of other comprehensive income by their nature in the financial
statements and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of equity. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The adoption of this standard is not expected
to have a material impact on the Company's consolidated financial statements.
FASB Statement on Earnings Per Share. In March 1997, FASB issued SFAS
No. 128. SFAS No. 128 establishes standards for computing and presenting
earnings per share and applies to
-41-
entities with publicly held common stock or potential common stock. This
statement simplifies the standards for computing earnings per share previously
found in Accounting Principles Board ("APB") Opinion No. 15, Earnings per Share
("EPS"), and makes them comparable to international EPS standards. It replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and the denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 supersedes Opinion 15
and AICPA Accounting Interpretation 1-102 of Opinion 15. This statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The Company intends to adopt SFAS No. 128 in
the initial reporting period following consummation of the offering.
FASB Statement on Disclosure of Information about Capital Structure. In
February 1997, the FASB issued SFAS No. 129. SFAS No. 129 incorporates the
disclosure requirements of APB Opinion No. 15, Earnings per Share, and makes
them applicable to all public and nonpublic entities that have issued securities
addressed by the Statement. APB Opinion No. 15 requires disclosure of
descriptive information about securities that is not necessarily related to the
computation of earnings per share. This statement continues the previous
requirements to disclose certain information about an entity's capital structure
found in APB Opinions No. 10, Omnibus Opinion- 1966, and No. 15, Earnings per
Share, and FASB Statement No. 47, Disclosure of Long-Term Obligations, for
entities that were subject to the requirements of those standards. SFAS No. 129
eliminates the exemption of nonpublic entities from certain disclosure
requirements of Opinion 15 as provided by FASB Statement No. 21, Suspension of
the Reporting of Earnings per Share and Segment Information by Nonpublic
Enterprises. It supersedes specific disclosure requirements of Opinions No. 10
and No. 15 and FASB Statement No. 47 and consolidates them in this Statement for
ease of retrieval and for greater visibility to nonpublic entities. FASB No. 129
is effective for financial statements for periods ending after December 15,
1997. SFAS No. 129 will be adopted by the Company and the Association in the
initial period following consummation of the offering.
FASB Statement on Accounting for Stock-Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB has encouraged all entities to adopt the fair
value based method, however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by APB Opinion No. 25. Under the
intrinsic value based method, compensation cost is the excess of the market
price of the stock at the grant date over the amount an employee must pay to
acquire the stock. However, most stock option plans have no intrinsic value at
the grant date and, as such, no compensation cost is recognized under APB
Opinion No. 25. Entities electing to continue use of the accounting treatment of
APB Opinion No. 25 must make certain pro forma disclosures as if the fair value
based method had ben applied. The accounting requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years beginning
-42-
after December 15, 1995. Pro forma disclosures must include the effects of all
awards granted in fiscal years beginning after December 15, 1994. The Company
expects to use the "intrinsic value based method" as prescribed by APB Opinion
No. 25.
FASB Statement on Disclosures about Segments of an Enterprise and
Related Information. In June 1997, the FASB issued SFAS No. 131. SFAS No. 131
establishes standards for the way public enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. The adoption of this standard is not
expected to have a material impact on the Company's consolidated financial
statements.
FASB Statement on Employers' Disclosures about Pensions and Other
Post-retirement Benefits. In February 1998, the FASB issued SFAS No. 132. SFAS
NO. 132 revises employers' disclosures about pension and other post-retirement
benefit plans. SFAS No. 132 does not change the measurement or recognition of
those plans and is effective for fiscal years beginning after December 15, 1997.
The adoption of this standard is not expected to have a material impact on the
Company's consolidated financial statements.
FASB Statement on Accounting for Derivative Instruments and Hedging
Activities. In June 1998, the FASB issued SFAS No. 133. SFAS NO. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS No. 133 requires that any entity
recognize all derivatives as either asset or liabilities in the statement of
financial position and measure those instruments at fair value and is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company intends to adopt SFAS No. 133 on its effective date. The adoption of
this standard is not expected to have a material impact on the Company's
consolidated financial statements.
BUSINESS OF HOME FEDERAL
General
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent and construction
loans secured by first mortgages on owner-occupied, one- to four-family
residences. We also originate loans secured by first mortgages on
nonowner-occupied, one- to four-family residences, permanent and construction
loans secured by commercial real estate and multi-family real estate and, to a
much lesser extent, consumer and commercial business loans. While our primary
business is the origination of one- to four-family residential mortgage loans
funded through retail deposits, competition from other financial institutions
has limited the volume of loans the Association has been able to originate and
place in its portfolio. As a result, we invest our excess funds into short-term,
lower-yielding investment and mortgage-related securities.
Our revenues are derived principally from interest on mortgage and
other loans, and interest and dividends on investment and mortgage-related
securities.
We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include passbook and statement savings
accounts, money market deposit accounts, NOW and interest-bearing checking
accounts and certificate accounts with varied terms ranging from 91 days to
three years. We only solicit deposits in our primary market area and we do not
accept brokered deposits.
-43-
Market Area
We intend to continue to be a community-oriented financial institution
offering a variety of financial services to meet the needs of the community we
serve. We primarily serve the Niles, Ohio area. Our primary lending area
consists generally of the area within a 30 mile radius of the City of Niles. We
may grant a loan outside of this 30 mile radius on occasion and only with the
approval of our Board of Directors. We do not grant loans outside the State of
Ohio.
Trumbull County, where the Association is located, consists primarily
of suburban and rural communities with manufacturing and wholesale distribution
activities serving as the basis of the local economy. Major employers in the
area include General Motors Corp. and WCI Steel, Inc.
Our market area has experienced a higher current unemployment rate than
Ohio and the United States. In April 1998, Trumbull County had an unemployment
rate of 4.5%, compared to an unemployment rate of 3.8% in Ohio, and 4.3 % in the
United States. Furthermore, the population of Niles has remained relatively
stagnant from 1990 to 1997, and is projected to remain relatively the same
through the year 2002.
Lending Activities
General. Our primary lending activity is the origination of loans
secured by first mortgages on one- to four-family residential properties. We
also make permanent and construction loans on multi-family and commercial
properties, and a limited number of consumer and commercial business loans. Our
mortgage loans carry either a fixed or an adjustable interest rate. Mortgage
loans are generally long-term and amortize on a monthly basis with principal and
interest due each month. At April 30, 1998, our net loan portfolio totaled $36.2
million, which constituted 50.0% of our total assets.
All loans are originated by management, subject to ratification by the
Board of Directors. Commercial real estate loans and multi-family loans are
generally reviewed by the Board prior to a lending commitment being extended.
Unless we are aware of factors that may lead to an environmental concern, we
generally do not require any environmental study at the time a loan is made. If
an environmental problem were discovered to exist after a loan has been
originated and the loan has become delinquent, we may choose not to foreclose on
the property if the potential environmental liability would render foreclosure
imprudent.
Management is responsible for presenting to the Board information about
the credit-worthiness of a borrower and the estimated value of the subject
property. Information pertaining to credit-worthiness of a borrower generally
consists of a summary of the borrower's credit history, employment, employment
stability, net worth and income. The estimated value of the property must be
supported by an appraisal report prepared in accordance with our appraisal
policy.
At April 30, 1998, the maximum amount which we could have loaned to any
one borrower and the borrower's related entities was approximately $1.9 million.
Except as described below, at April 30, 1998, we had no loans or groups of loans
to related borrowers with outstanding balances in excess of this amount. At that
date, our largest lending relationship to a single borrower or a group of
related borrowers consisted of 12 loans totaling $2.6 million (of which
approximately $808,000 was unfunded at April 30, 1998). Of the 12 loans, three
loans were for the construction of a residential housing development, six loans
were for individual home construction, and three loans were secured by apartment
rental units and commercial office space. This lending relationship was
-44-
within federal regulatory guidelines pursuant to exceptions for residential
housing developments. The second largest lending relationship at April 30, 1998,
consisted of two purchased participation loans totaling $1.9 million (of which
approximately $803,000 was unfunded at April 30, 1998) for the construction of
an apartment complex and a warehouse/office complex in Columbus, Ohio. Each of
these loans was current and performing in accordance with its terms at April 30,
1998.
Our third largest lending relationship at April 30, 1998 totaled $1.4
million and consisted of six loans secured by commercial and residential real
estate. At April 30, 1998, three of the six loans were nonperforming. The three
nonperforming loans totaled approximately $1.0 million at April 30, 1998. See "-
Asset Quality - Nonperforming Assets."
The next two largest lending relationships at April 30, 1998, consisted
of one loan totaling $994,000 secured by 114 nonowner-occupied, single family
residences and one loan totaling $942,000 secured by an apartment complex. Each
of these loans was current and performing in accordance with its terms at April
30, 1998. The loan secured by the apartment complex was paid in full during June
1998.
We had only four other lending relationships which exceeded $700,000 at
April 30, 1998, all of which were current and performing generally in accordance
with their loan terms at such date.
Loan Portfolio Composition. The following table sets forth information
concerning the composition of our loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
December 31,
April 30, --------------------------------------------
1998 1997 1996
---------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family.................... $25,054 63.74% $25,634 64.29% $22,310 62.99 %
Commercial............................. 4,680 11.91 4,603 11.54 4,746 13.40
Multi-family........................... 3,057 7.78 4,143 10.39 3,299 9.31
Construction or development............ 5,310 13.51 4,231 10.61 3,681 10.39
------- ------- ------- ------- ------- ------
Total real estate loans............ 38,101 96.94 38,611 96.83 34,036 96.09
------- ------- ------- ------- ------- ------
Other Loans:
Consumer Loans:
Home equity........................... 909 2.31 926 2.32 931 2.63
Deposit account....................... 63 0.16 84 0.21 197 0.56
-------- -------- ------- ------- ------- ------
Total consumer loans............... 972 2.47 1,010 2.53 1,128 3.19
-------- -------- ------- ------- ------- ------
Commercial business loans.............. 232 0.59 255 0.64 256 0.72
Total other loans.................. 1,204 3.06 1,265 3.17 1,384 3.91
-------- -------- ------- ------- ------- ------
Total loans........................ 39,305 100.00% 39,876 100.00% 35,420 100.00%
====== ====== ======
Less:
Loans in process....................... 2,301 2,278 1,936
Allowance for losses................... 853 854 301
-------- ------- -------
3,154 3,132 2,237
-------- ------- -------
Total loans receivable, net............ $36,151 $36,744 $33,183
======= ======= =======
-45-
The following table shows the composition of our loan portfolio by
fixed- and adjustable-rate at the dates indicated.
December 31,
April 30, -------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ---------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
- -----------------
Real estate:
One- to four-family............. $12,032 30.61% $11,997 30.09% $ 9,354 26.41%
Commercial...................... 612 1.56 1,430 3.59 1,553 4.38
Multi-family.................... 269 0.68 289 0.72 342 0.97
Construction or development..... 3,300 8.40 1,776 4.45 3,581 10.11
-------- --------- -------- ------- -------- -------
Total real estate loans...... 16,213 41.25 15,492 38.85 14,830 41.87
------- --------- ------- ------- ------- -------
Consumer......................... 972 2.47 1,010 2.53 1,128 3.19
Commercial business.............. 232 0.59 255 0.64 256 0.72
-------- --------- --------- ------- -------- -------
1,204 3.06 1,265 3.17 1,384 3.91
-------- --------- -------- ------- -------- -------
Total fixed-rate loans....... 17,417 44.31 16,757 42.02 16,214 45.78
Adjustable-Rate Loans:
- ----------------------
Real estate:
One- to four-family............. 13,022 33.13 13,637 34.20 12,956 36.58
Commercial...................... 4,068 10.35 3,173 7.96 3,193 9.01
Multi-family.................... 2,788 7.09 3,854 9.66 2,957 8.35
Construction or development..... 2,010 5.12 2,455 6.16 100 0.28
-------- ------- ------- ------- ------- -------
Total real estate loans...... 21,888 55.69 23,119 57.98 19,206 54.22
------- ------ ------- ------- ------- -------
Consumer......................... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total adjustable-rate loans.. 21,888 55.69 23,119 57.98 19,206 54.22
------- ------- ------- ------- ------- -------
Total loans.................. 39,305 100.00% 39,876 100.00% 35,420 100.00%
====== ====== ======
Less:
- -----
Loans in process................. 2,301 2,278 1,936
Deferred fees and discounts...... -- -- --
Allowance for loan losses........ 853 854 301
------- ------- -------
3,154 3,132 2,237
------- ------- -------
Total loans receivable, net... $36,151 $36,744 $33,183
======= ======= =======
-46-
The following schedule illustrates the contractual maturity of our loan
portfolio at April 30, 1998 before net items. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
Real Estate
-----------------------------------------------------
Multi-family and Construction Commercial
One-to Four-Family Commercial or Development Consumer Business Total
------------------ ---------------- --------------- ---------------- --------------- ----------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Periods Ending
April 30,
---------
1998(1).............. $ 139 8.68% $ 732 12.69 $ -- --% $ 65 7.37% $ -- --% $ 936 11.73%
1999(1).............. 163 8.82 103 8.50 86 8.50 9 7.77 -- -- 361 8.63
2000................. 343 8.56 20 9.50 874 -- 19 7.61 4 7.50 1,260 2.62
2001 and 2002........ 366 8.34 746 8.87 1,254 8.27 314 8.02 19 8.50 2,699 8.42
2003 to 2004......... 672 7.99 34 8.12 347 8.00 358 8.05 86 8.52 1,497 8.04
2005 to 2019......... 17,167 7.92 5,808 8.50 2,282 9.04 207 8.04 123 7.91 25,587 8.15
2020 and following... 6,204 7.88 294 9.00 467 7.47 -- -- -- -- 6,965 7.90
------- ------ ------ ----- ------ ------
Totals.......... $25,054 $7,737 $5,310 $972 $232 $39,305
======= ====== ====== ==== ==== =======
- ----------
(1) Includes demand loans, non-accrual loans, loans having no stated maturity
and overdraft loans.
The total amount of loans due after April 30, 1999 which have
predetermined interest rates is $16.8 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $21.2
million.
-47-
One- to Four-Family Residential Real Estate Lending. Residential loan
originations are generated by our marketing efforts, present and walk-in
customers, and referrals from real estate brokers and builders. We have focused
our lending efforts primarily on the origination of loans secured by first
mortgages on owner-occupied, one- to four-family residences in our market area.
At April 30, 1998, one- to four-family residential mortgage loans totaled $25.0
million, or 63.7% of our gross loan portfolio.
Home Federal currently originates one- to four-family mortgage loans on
either a fixed or adjustable basis, as consumer demand dictates. The pricing
strategy for fixed-rate mortgage loans revolves around setting interest rates
that are competitive with other local financial institutions. Adjustable-rate
mortgage ("ARM") loans are offered with either one-year or three-year repricing
periods. Due to their wide availability and market rate sensitivity we currently
use the one-year and three-year U.S. Treasury Security Constants plus a margin
of 250 basis points for pricing of ARM loans. During the year ended December 31,
1997 and the four months ended April 30, 1998, we originated $2.9 million and
$612,000 of one- to four-family ARM loans, and $3.2 million and $1.3 million of
one- to four-family, fixed-rate mortgage loans, respectively. We have not sold
any mortgage loans. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -Asset/Liability Management."
Fixed-rate loans secured by one- to four-family residences have maximum
maturities of 30 years, and are fully amortizing, with payments due monthly.
These loans normally remain outstanding, however, for a substantially shorter
period of time because of refinancing and other prepayments. A significant
change in the current level of interest rates could alter the average life of a
residential loan in our portfolio considerably. All of our one- to four-family
loans are not assumable, do not contain prepayment penalties and do not permit
negative amortization of principal. Our real estate loans generally contain a
"due on sale" clause allowing us to declare the unpaid principal balance due and
payable upon the sale of the security property.
Our one- to four-family residential ARM loans are fully amortizing
loans with contractual maturities of up to 30 years, with payments due monthly.
Our ARM loans provide for specified minimum and maximum interest rates. As a
consequence of using caps, the interest rates on these loans may not be as rate
sensitive as are our cost of funds. Our ARM loans are generally not convertible
into fixed-rate loans.
ARM loans generally pose different credit risks than fixed-rate loans,
primarily because as interest rates rise, the borrower's payment rises,
increasing the potential for default. We have not experienced difficulty with
the payment history for these loans. See "- Asset Quality -- Non-Performing
Assets" and "-Asset Quality -- Classified Assets." At April 30, 1998, our one-
to four-family ARM loan portfolio totaled $13.0 million, or 33.1% of our gross
loan portfolio. At that date the fixed-rate residential mortgage loan portfolio
totaled $12.0 million, or 30.6% of our gross loan portfolio.
As mentioned above, we have primarily concentrated our lending
activities on the origination of owner-occupied, one- to four-family residences.
In recent years, however, loans secured by nonowner occupied, one-to four-family
residences have accounted for a growing share of total loan volume. These loans
are underwritten generally using the same criteria as owner-occupied, one- to
-48-
four-family residential loans, but typically are originated at higher rates and
lower loan-to-value ratios than owner-occupied loans.
We generally underwrite our one- to four-family loans based on the
applicant's employment, credit history, and appraised value of the subject
property. Presently, we lend up to 90% of the lesser of the appraised value or
purchase price for one- to four-family loans. Properties securing our one- to
four-family loans are appraised by independent fee appraisers approved and
qualified by the Board of Directors. We generally require our borrowers to
obtain title insurance and fire, property and flood insurance (if necessary) in
an amount not less than the value of the security property.
Commercial and Multi-family Real Estate Lending. We are engaged in
commercial and multi-family real estate lending. These loans are secured
primarily by small retail establishments, small office buildings and other
non-residential and residential properties located in our market area. At April
30, 1998, commercial and multi-family real estate loans totaled $4.7 million and
$3.1 million, or 11.9% and 7.8% of our gross loan portfolio, respectively.
Our loans secured by commercial and multi-family real estate are
originated with either a fixed or adjustable interest rate. The interest rate on
adjustable-rate loans is based on a variety of indices, generally determined
upon negotiation with the borrower. Loan-to-value ratios on our commercial and
multi-family loans typically do not exceed 80% of the appraised value of the
property securing the loan. These loans typically require monthly payments and
have maximum maturities of 30 years. While maximum maturities may extend to 30
years, loans frequently have shorter maturities, generally ranging from 10 to 15
years.
Loans secured by commercial and multi-family real estate are granted
based on the income producing potential of the property and the financial
strength of the borrower. The net operating income (the income derived from the
operation of the property less all operating expenses) must be sufficient to
cover the payments related to the outstanding debt. We generally require
personal guaranties of the borrowers in addition to the security property as
collateral for such loans. Appraisals on properties securing commercial and
multi-family real estate loans are performed by independent fee appraisers
approved by the Board of Directors. See "- Loan Originations, Purchases and
Repayments."
Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Such loans typically involve large
balances to single borrowers or groups of related borrowers. Because payments on
loans secured by commercial and multi-family real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. If the cash flow from the project is reduced (e.g., if leases are
not obtained or renewed), the borrower's ability to repay the loan may be
impaired. See "- Asset Quality -- Nonperforming Loans."
Construction and Development Lending. We originate residential
construction loans to individuals as well as loans secured by building lots or
raw land held for development. Presently, all of these loans are secured by
property located within our market area. At April 30, 1998, we had participation
interests in construction loans secured by an apartment complex and a
warehouse/office
-49-
complex located in Columbus, Ohio totaling $1.9 million (of which approximately
$803,000 was unfunded). At that date, we had $5.3 million in construction and
development loans outstanding, representing 13.5% of our gross loan portfolio.
Construction loans to individuals for their residences generally are
structured to be converted to permanent loans at the end of the construction
phase, which typically runs six months. These construction loans have rates and
terms which match any one- to four-family loans then offered by the Association,
except that during the construction phase, the borrower pays interest only.
Residential construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent residential loans. At April 30, 1998,
$590,000 of our construction loans were to borrowers intending to live in the
properties upon completion of construction.
Loans secured by building lots or raw land held for development are
generally granted with terms of up to five years and are available at a fixed
interest rate. Payments on loans secured by building lots are due monthly and
amortized on a 20-year basis, resulting in a balloon payment at maturity.
Payments on raw land held for development are due monthly, and are interest
only. Loans secured by building lots or raw land for development are granted
based on both the financial strength of the borrower and the value of the
underlying property. At April 30, 1998, we had $1.7 million of loans secured by
building lots and raw land.
Construction loans are obtained principally through continued business
from builders who have previously borrowed from the Association, as well as
referrals from existing and walk-in customers. The application process includes
submission of accurate plans, specifications and costs of the project to be
constructed. These items are used as a basis to determine the appraised value of
the subject property. Loans are based on the lesser of current appraised value
and/or the cost of construction (land plus building). We also conduct periodic
inspections of the construction project being financed.
Because of the uncertainties inherent in estimating construction costs
and the market for the project upon completion, it is relatively difficult to
evaluate accurately the total loan funds required to complete a project, the
related loan-to-value ratios and the likelihood of ultimate success of the
project. Construction loans to borrowers other than owner-occupants also involve
many of the same risks discussed above regarding commercial real estate loans
and tend to be more sensitive to general economic conditions than many other
types of loans.
Other Lending. We also originate a nominal amount of consumer and
commercial business loans, generally as an accommodation to our customers. At
April 30, 1998, consumer and commercial business loans totaled $972,000 and
$232,000, respectively, or 2.5% and .6% of our gross loan portfolio. Our
consumer loan portfolio consists almost entirely of personal loans secured by
first or second mortgages on real estate. Such loans are offered at fixed rates
of interest with terms not exceeding ten years.
-50-
Loan Originations, Purchases and Repayments
We originate loans through our marketing efforts, existing and walk-in
customers and referrals from real estate brokers and builders. While we
originate both adjustable-rate and fixed-rate loans, our ability to originate
loans is dependent upon the relative customer demand for loans in our market.
Demand is affected by local competition and the interest rate environment.
During the last several years, our dollar volume of fixed-rate, one- to
four-family loans has exceeded the dollar volume of the same type of
adjustable-rate loans. While our primary business is the origination of one- to
four-family mortgage loans, competition from other financial institutions
continues to limit the volume of loans we have been able to originate and place
in our portfolio. As a result we have purchased mortgage loans and investment
and mortgage-backed and related securities to supplement our portfolios. We do
not sell loans and our loans are not originated according to secondary market
guidelines. Furthermore, during the past few years, we, like many other
financial institutions, have experienced significant prepayments on loans and
mortgage-backed and related securities due to the sustained low interest rate
environment prevailing in the United States.
In periods of economic uncertainty, the ability of financial
institutions, including Home Federal, to originate large dollar volumes of real
estate loans may be substantially reduced or restricted, with a resultant
decrease in interest income.
-51-
The following table shows our loan origination, purchase and repayment
activities for the periods indicated.
Four Months Ended Years Ended
April 30, December 31,
-------------------- --------------------
1998 1997 1997 1996
---- ---- ---- ----
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to
four-family .................. $ 612 $ 1,456 $ 2,876 $ 2,325
- commercial ............. 70 -- 360 550
- multi-family ........... -- -- -- 224
-------- -------- -------- --------
Total adjustable-rate ........ 682 1,456 3,236 3,099
-------- -------- -------- --------
Fixed rate:
Real estate - one- to
four-family .................. 1,299 1,000 3,188 4,602
- commercial ............. -- -- -- 302
- multi-family ........... 675 -- -- 250
- land ................... 349 -- 95 525
Non-real estate - consumer .... 181 260 462 606
- commercial business .... 10 39 56 155
-------- -------- -------- --------
Total fixed-rate ............. 2,514 1,299 3,801 6,440
-------- -------- -------- --------
Total loans originated ....... 3,196 2,755 7,037 9,539
-------- -------- -------- --------
Purchases:
Real estate - one- to
four-family .................. -- -- 1,000 --
- commercial ............. -- -- 900 --
- multi-family ........... -- -- 1,000 1,000
-------- -------- -------- --------
Total loans purchased ......... -- -- 2,900 1,000
Mortgage-backed and
mortgage-related securities .. 3,561 -- 7,872 7,432
-------- -------- -------- --------
Total purchased ............ 3,561 -- 10,772 8,432
-------- -------- -------- --------
Repayments:
Principal repayments .......... 7,110 1,977 13,645 14,783
-------- -------- -------- --------
Total reductions ............ 7,110 1,977 13,645 14,783
Increase (decrease) in other
items, net .................... 8 (16) (668) 6
-------- -------- -------- --------
Net increase (decrease) ..... $ (345) $ 762 $ 3,496 $ 3,194
======== ======== ======== ========
Asset Quality
When a borrower fails to make a payment on a loan on or before the
default date, the loan is considered 30 days past due, at which time we
generally send out a delinquent notice to the borrower. All delinquent accounts
are reviewed by our collection officer, and at his or her discretion, we attempt
to cause the delinquency to be cured by contacting the borrower. If the loan
becomes 60 days delinquent, the collection officer will generally send a
personal letter to the borrower requesting payment of the delinquent amount in
full, or the establishment of an acceptable repayment plan to bring the loan
current within 90 days. If the account becomes 90 days delinquent, and an
acceptable repayment plan has not been agreed upon, the collection officer will
generally refer the account to legal counsel, with instructions to prepare a
notice of intent to foreclose. The notice of intent to foreclose allows the
borrower up to 30 days to bring the account current. During this 30 day period,
the collection officer may accept a written repayment plan from the borrower
which would bring the
-52-
account current within 90 days. Once the loan becomes 120 days delinquent, and
an acceptable repayment plan has not been agreed upon, the collection officer,
after receiving consent from the Association's Board of Directors, will turn
over the account to our legal counsel with instructions to initiate foreclosure.
Delinquent Loans. The following table sets forth our loan delinquencies
by type, number, amount and percentage of type at April 30, 1998.
Loans Delinquent For:
------------------------------------------------------------
30-89 Days 90 Days and Over Total Delinquent Loans
--------------------------- ----------------------------- -----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One- to four-family ........... 12 $ 530 2.12% 4 $ 159 0.64% 16 $ 689 2.76%
Commercial .................... 2 56 1.20 1 656 14.02 3 712 15.21
Multi-family .................. 1 76 2.49 -- -- -- 1 76 2.49
Construction or
development ................. 1 86 2.76 1 875 28.04 2 961 30.79
Consumer ......................... -- -- -- 1 6 0.64 1 6 0.64
--- ------ --- ------ --- -----
Total ....................... 16 $ 748 2.02% 7 $1,696 4.58% 23 $2,444 6.60%
=== ====== ==== ====== === ======
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Loans are placed on
non-accrual status when the collection of principal and/or interest becomes
doubtful. For all years presented, we have had no foreclosed assets and no
troubled debt restructurings (which involve forgiving a portion of interest or
principal on any loans or making loans at a rate materially less than that of
market rates).
December 31,
April 30, -------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
One- to four-family ................... $ 132 $ -- $ --
Construction or development ........... 875 875 --
------ ------ ------
Total .............................. 1,007 875 --
------ ------ ------
Accruing loans delinquent
more than 90 days:
One- to four-family ................... 27 95 205
Multi-family .......................... -- -- 104
Commercial real estate ................ 656 653 662
Construction or development ........... -- 33 --
Consumer .............................. 6 6 3
Commercial business ................... -- -- --
------ ------ ------
Total .............................. 689 787 974
------ ------ ------
Total non-performing assets ............. $1,696 $1,662 $ 974
====== ====== ======
Total as a percentage of total
assets ................................. 2.33% 2.29% 1.37%
====== ====== ======
-53-
Nonperforming loans. At April 30, 1998, we had $1.7 million in
nonperforming loans, which constituted 4.3% of our gross loan portfolio. Except
as discussed below, there were no nonperforming loans to any one borrower or
group of related borrowers that exceeded either individually or in the aggregate
$500,000.
Included in the table above are three loans to a group of related
borrowers aggregating approximately $1.0 million at April 30, 1998. The largest
of the three loans is a commercial real estate loan with an outstanding balance
of $875,000 at April 30, 1998 for the development of 34 single-family lots and
23 condominium sites for the eventual construction of 56 condominium units. This
loan was originated in June 1994 for $1.0 million with a loan-to-value ratio of
approximately 79%. The development consists of three phases, the first being for
development of 34 single-family residential lots, with phase two for the
development of the 23 condominium sites. Phase three, for which we have not
granted any financing commitment, is for the development of 37 additional
single-family lots. The borrower initially projected that phase one would be
completed in early 1995, with sales occurring during 1995 and 1996. As a result
of construction delays, phases one and two were completed during the first
quarter of 1997. Lot sales have been significantly slower than projected with
only six single-family lots and four condominium sites having been sold as of
April 30, 1998.
Lot sales remain slow.
The two other nonperforming loans to this group of borrowers aggregated
$132,000 at April 30, 1998 and are secured by a condominium unit. The first of
these loans was originated to a local developer in December 1989 for $240,000
with a loan-to-value ratio of 80%. The local developer abandoned the project in
December 1991 with the current borrower assuming the loan with additional
financing from us in the amount of $140,000. We also have an agreement with the
borrower that calls for the borrower to split equally any loss sustained by us
after sale of the remaining unit. The property is currently on the market. This
group of related borrowers also has three other loans with us totaling
approximately $400,000 at April 30, 1998, each of which was current at that
date.
The only other nonperforming loan or group of loans in excess of
$500,000 at April 30, 1998, consisted of two commercial real estate loans
aggregating $675,000 secured by a retail/office complex. The largest of these
two loans was originated in July 1986 for $650,000 with a loan-to-value ratio of
81% and an outstanding balance at April 30, 1998 of $656,000. The property is
also subject to a second mortgage by a third party in the amount of
approximately $200,000. This loan has a history of delinquent payments and loan
modifications to provide relief to the borrower. The most recent modification
occurred in January 1997 to reduce the interest rate charged on the loan to 8%
for a period of 12 months. Foreclosure proceedings were instituted during June
1998.
For the four months ended April 30, 1998, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $31,000. The amounts that were included in
interest income on such loans were $2,000.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of April 30, 1998, there was also an aggregate of
$1.6 million in net book value of loans with respect to which known information
about the possible credit problems of the borrowers have caused management to
have doubts as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing
-54-
asset categories. These loans have been considered in management's determination
of the adequacy of our allowance for loan losses.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS and the FDIC, which may order the establishment of
additional general or specific loss allowances.
In connection with the filing of our periodic reports with the OTS and
in accordance with our classification of assets policy, we regularly review the
problem assets in our portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
management's review of our assets, at April 30, 1998, we had classified $1.7
million of our assets as substandard, none as doubtful and none as loss,
representing 13.9% of our retained earnings and 2.3% of our assets.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses which is based on management's evaluation of
past loss experience, current trends in the level of delinquent and specific
problem loans, loan concentration to single borrowers, 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 our
market area. A significant portion of our loan portfolio is concentrated in one-
to four-family mortgage loans which, historically, has not led to any
significant loan losses. Management prepares quarterly analyses of loans
classified as substandard and non-performing, and evaluates these loans in
connection with its determination of the appropriate provision for loan losses
to be recorded for the period. Management also analyzes borrowers with
significant outstanding balances to reevaluate credit risk, the quality of the
loan and factors that may affect the borrowers' ability to pay. Accordingly, the
allowance represents management's estimate of losses inherent in our loan
portfolio as of a specified date.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to our allowance will be the result of periodic
loan, property and collateral reviews and thus cannot be predicted in advance.
At April 30, 1998, we had a total allowance for loan losses of $853,000, or
50.3% of non-performing loans. See Notes A and D of the Notes to Consolidated
Financial Statements.
-55-
The following table sets forth an analysis of our allowance for loan
losses.
At and For
the Four At and For the
Months Years Ended
Ended December 31,
April 30, -----------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Balance at beginning of period .............. $854 $301 $261
Charge-offs: One- to four-family ............ 21 147 --
---- ---- ----
Total Charge-offs ....................... 21 147 --
Recoveries: ................................. -- -- --
---- ---- ----
Net charge-offs .......................... 21 147 --
Additions charged to operations ............. 20 700 40
---- ---- ----
Balance at end of period .................... $853 $854 $301
==== ==== ====
Ratio of net charge-offs during
the period to average loans
outstanding during the period .............. 0.06% 0.41% --%
==== ==== ====
Ratio of net charge-offs during
the period to average
non-performing assets ...................... 1.25% 11.51 % --%
==== ==== ====
At December 31, 1996, we increased the allowance for loan losses
$40,000 to $301,000 as a result of management's estimate of losses inherent in
the loan portfolio based on an increased amount of identified substandard loans.
During the year ended December 31, 1997, we recorded a provision for loan losses
of $700,000, increasing the allowance for loan losses to $854,000. We increased
the allowance to reflect the additional credit risk inherent in our portfolio as
a result of an increased amount of loans held in portfolio, an increased level
of nonperforming loans, a charge-off of $147,000 arising from the write-down of
a loan to estimated net realizable value, as well as management's continuing
reassessment of the portfolio. The allowance was increased to reflect the
deterioration of loans made to four separate borrowers where full collection of
loan principal had become uncertain, including three loans which had become
impaired. The increased allowance also reflected management's assessment of
additional credit risk resulting from a significant increase in loan
concentrations to several borrowers for financing one- to four-family rental
properties that are dependent on future rent collections. We recorded a $20,000
provision for loan losses for the four months ended April 30, 1998 to offset the
$21,000 charged-off during the four month period, as well as a result of
management's review of losses inherent in the loan portfolio at April 30, 1998.
-56-
The distribution of our allowance for loan losses at the dates
indicated is summarized as follows:
December 31,
----------------------------------------------------------------
April 30, 1998 1997 1996
------------------------------- --------------------------------- -----------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(Dollars in Thousands)
One- to four-family...... $ 26 $24,987 67.53% $115 $25,814 68.66% $129 22,410 66.93%
Multi-family,
commercial, real
estate, construction
or development.......... 504 10,858 29.34 592 10,519 27.98 160 9,731 29.06
Consumer and
commercial business..... 1 1,159 3.13 1 1,265 3.36 1 1,343 4.01
Unallocated.............. 322 -- -- 146 -- -- 11 -- --
Total............... $853 $37,004 100.00% $854 $37,598 100.00% $301 $33,484 100.00%
==== ======= ====== ==== ======= ====== ==== ======= ======
-57-
Investment Activities
Home Federal must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, we have maintained liquid
assets at levels above the minimum requirements imposed by the OTS regulations
and above levels believed adequate to meet the requirements of normal
operations, including potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
At March 31, 1998 (the latest available date), our liquidity ratio (liquid
assets as a percentage of net withdrawable savings deposits and current
borrowings) was 9.4%.
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in investment grade
commercial paper and corporate debt securities and mutual funds whose assets
conform to the investments that a federally chartered savings institution is
otherwise authorized to make directly. We generally invest in the foregoing
types of investments. See "Regulation - Federal Regulation of Savings
Associations" for a discussion of additional restrictions on our investment
activities.
President Stephens and Vice President Swift have the basic
responsibility for the management of the Association's investment portfolio,
subject to the direction and guidance of the Board of Directors. Such officers
consider various factors when making decisions, including the marketability,
maturity and tax consequences of the proposed investment. The maturity structure
of investments will be affected by various market conditions, including the
current and anticipated slope of the yield curve, the level of interest rates,
the trend of new deposit inflows, and the anticipated demand for funds via
deposit withdrawals and loans.
The general objectives of our investment portfolio are to: (i) provide
and maintain liquidity within the guidelines prescribed by OTS regulations; (ii)
provide liquidity when loan demand is high and to assist in maintaining earnings
when loan demand is low; and (iii) maximize earnings while satisfactorily
managing risk, including credit risk, reinvestment risk, liquidity risk and
interest rate risk. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset/Liability Management."
Our investment securities consist primarily of mutual funds the assets
of which conform to the investments that a federally chartered savings
institution is otherwise authorized to make directly. These funds offer
professional management, easy access to funds, continuous reinvestment and
relatively low historical price volatility. Currently, we are invested in three
different mutual funds.
Our mortgage-backed and related securities portfolio consists of
securities issued under government-sponsored agency programs. We hold primarily
collateralized mortgage obligations (CMOs). CMOs are special types of
pass-through debt securities in which the stream of principal and interest
payments on the underlying mortgages or mortgage-backed securities is used to
create classes
-58-
with different maturities and, in some cases, amortization schedules, as well as
a residual interest, with each such class possessing different risk
characteristics.
Our policy is to purchase only CMOs that are in the first or second
repayment tranche (investment class) and are AAA rated. The expected life of our
CMOs is typically under five years at the time of purchase. Premiums associated
with CMOs purchased are not significant; therefore, the risk of significant
yield adjustments because of accelerated prepayments is limited. Yield
adjustments are encountered as interest rates rise or decline, which in turn
slows or increases prepayment rates and affects the average lives of the CMOs.
The purpose of our CMO investment strategy is to: (i) assist in maintaining the
Association's Qualified Thrift Lender Status (see "Regulation - Qualified Thrift
Lender"); (ii) generate high cash flow so as to lessen liquidity and
reinvestment risk; (iii) preserve asset quality; and (iv) generate additional
interest income. At April 30, 1998, we held CMOs totaling $12.5 million, all of
which were secured by underlying collateral issued under government
agency-sponsored programs. All of our CMOs and mortgage-backed securities are
currently classified as held to maturity. At April 30, 1998, our CMOs did not
qualify as high risk mortgage securities as defined under OTS regulations.
While mortgage-backed and mortgage-related securities (such as CMOs)
carry a reduced credit risk as compared to whole loans, such securities remain
subject to the risk that a fluctuating interest rate environment, along with
other factors such as the geographic distribution of the underlying mortgage
loans, may alter the prepayment rate of such mortgage loans and so affect both
the prepayment speed, and value, of such securities.
-59-
The following table sets forth the composition of our investment and
mortgage-backed and related securities portfolio at the dates indicated. Our
investment securities portfolio at April 30, 1998, contained neither tax-exempt
securities nor securities of any issuer with an aggregate book value in excess
of 10% of our retained earnings, excluding those issued by the United States
Government or its agencies and excluding our mutual fund investments.
December 31,
--------------------------------------
April 30, 1998 1997 1996
---------------- ---------------- ----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ------ ------- ------ ------- ------
(Dollars in Thousands)
Investment securities:
Mutual funds(1) ..................... $15,315 87.60% $15,347 86.51% $19,437 87.96%
FHLMC stock.......................... 1,852 10.59 2,085 11.75 1,372 6.21
Federal agency obligations........... --- --- --- --- 1,000 4.52
FHLB stock........................... 301 1.72 294 1.66 274 1.24
Other................................ 15 0.09 15 0.08 15 0.07
------- ------ ------- ------ ------- ------
Total investment securities
and FHLB stock................... $17,483 100.00% $17,741 100.00% $22,098 100.00%
======= ====== ======= ====== ======= ======
Average remaining life of investment
securities........................... N/A N/A N/A
Other interest-earning assets:
Interest-bearing deposits with banks. $ 1,375 27.75% 727 17.92% $ 202 12.81%
Federal funds sold................... 3,580 72.25 3,330 82.08 1,375 87.19
------- ------ ------- ------ ------- ------
Total............................. $ 4,955 100.00% $ 4,057 100.00% $ 1,577 100.00%
======= ====== ======= ====== ======= ======
Mortgage-backed and related securities:
CMOs................................. $12,496 99.26% $12,238 99.02% $12,760 98.91%
FHLMC................................ 81 0.64 93 0.75 94 0.73
GNMA................................. 44 0.35 53 0.43 77 0.60
------- ------ ------- ------ ------- ------
12,621 100.25 12,384 100.20 12,931 100.24
Unamortized premium (discounts), net... (32) (0.25) (25) (0.20) (31) (0.24)
------- ------ ------- ------ ------- ------
Total mortgage-backed securities.. $12,589 100.00% $12,359 100.00% $12,900 100.00%
======= ====== ======= ====== ======= ======
(1) Mutual funds invest primarily in obligations of the U.S. Government and it
agencies.
The following table sets forth the contractual maturities of our
mortgage-backed securities at April 30, 1998.
Due in April 30,
------------------------------------------------------------------------- 1998
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Balance
or Less to 1 Year 3 Years Years Years Years Years Outstanding
------- --------- ------- ----- ----- ----- ----- -----------
(In Thousands)
CMOs............ $ 13 $209 $150 $ -- $852 $3,506 $7,737 $12,467
FHLMC........... 22 -- -- 59 -- -- -- 81
GNMA............ -- -- -- 41 -- -- -- 41
---- ---- ---- ---- ---- ------ ------ -------
Total...... $ 35 $209 $150 $100 $852 $3,506 $7,737 $12,589
==== ==== ==== ==== ==== ====== ====== =======
-60-
Sources of Funds
General. Our sources of funds are deposits, payment of principal and
interest on loans, interest earned on or maturation of other investment
securities and short-term investments, and funds provided from operations.
Deposits. We offer a variety of deposit accounts having a wide range of
interest rates and terms. Our deposits consist of passbook and statement savings
accounts, money market deposit accounts, NOW accounts, non-interest bearing
checking accounts and certificate of deposit accounts currently ranging in terms
from 91 days to three years. We only solicit deposits from our market area and
do not use brokers to obtain deposits. We primarily rely on competitive pricing
policies, advertising and customer service to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts we offer has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. We
endeavor to manage the pricing of our deposits in keeping with our
asset/liability management, liquidity and profitability objectives. Based on our
experience, we believe that our savings and checking accounts are relatively
stable sources of funds. However, our ability to attract and maintain
certificates of deposit and the rates paid on these deposits has been and will
continue to be significantly affected by market conditions.
The following table sets forth the deposit flows at the Association
during the periods indicated.
Four Months Ended
April 30, Years Ended December 31,
----------------- ------------------------
1998 1997 1997 1996
(Dollars in Thousands)
Opening balance............... $57,854 $57,673 $57,673 $57,774
Deposits...................... 13,721 12,958 35,880 34,255
Withdrawals................... (14,490) (13,599) (37,875) (36,521)
Interest credited............. 680 647 2,176 2,165
------- ------- ------- -------
Ending balance................ $57,765 $57,679 $57,854 $57,673
======= ======= ======= =======
Net increase (decrease)....... $ (89) $ 6 $ 181 $ (101)
======= ======= ======= ========
Percent increase (decrease)... (0.15)% 0.01% 0.31% (0.17)%
======= ======= ======= ========
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The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs we offered for the periods indicated.
December 31,
-----------------------------------------
April 30, 1998 1997 1996
------------------ ------------------ ------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------- ------ ------- ------ ------- ------
(Dollars in Thousands)
Transactions and Savings Deposits:
Passbook and statement savings
accounts (3.00%)(1)................ $21,861 37.84% $22,289 38.53% $22,463 38.95%
NOW accounts (3.00%)(1)............. 2,969 5.14 2,830 4.89 2,722 4.72
Money market accounts (3.05%)(1).... 3,985 6.90 4,145 7.16 4,732 8.20
------- ------ ------- ------ ------- ------
Total non-certificates.............. 28,815 49.88 29,264 50.58 29,917 51.87
------- ------ ------- ------ ------- ------
Certificates:
2.00 - 3.99%...................... 53 0.09 53 0.10 57 0.10
4.00 - 5.99%...................... 28,527 49.39 27,426 47.40 26,884 46.62
6.00 - 7.99%...................... 370 0.64 1,111 1.92 815 1.41
------- ------ -------- ------ ------- ------
Total certificates.................. 28,950 50.12 28,590 49.42 27,756 48.13
------- ------ ------- ------ ------- ------
Total deposits...................... $57,765 100.00% $57,854 100.00% $57,673 100.00%
======= ====== ======= ====== ======= ======
- -------------
(1) Interest rates stated apply to all dates presented.
The following table shows rate and maturity information for our
certificates of deposit as of April 30, 1998.
2.00- 4.00- 6.00- Percent
3.99% 5.99% 7.99% Total of Total
---- ----- ----- ----- --------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
June 30, 1998.................. $ 53 $4,818 $236 $ 5,107 17.64%
September 30, 1998............. --- 7,890 71 7,961 27.50
December 31, 1998.............. --- 4,289 63 4,352 15.03
March 31, 1999................. --- 5,309 --- 5,309 18.34
June 30, 1999.................. --- 2,347 --- 2,347 8.11
September 30, 1999............. --- 1,336 --- 1,336 4.62
December 31, 1999.............. --- 843 --- 843 2.91
March 31, 2000................. --- 305 --- 305 1.05
June 30, 2000.................. --- 453 --- 453 1.56
September 30, 2000............. --- 284 --- 284 0.98
December 31, 2000.............. --- 347 --- 347 1.20
March 31, 2001................. --- 196 --- 196 0.68
Thereafter..................... --- 110 --- 110 0.38
---- ------- ---- ------- ------
Total....................... $ 53 $28,527 $370 $28,950 100.00%
==== ======= ==== ======= ======
Percent of total............ 0.18% 98.54% 1.28%
==== ======= ====
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The following table indicates the amount of our certificates of deposit
and other deposits by time remaining until maturity as of April 30, 1998.
Maturity
-----------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------ ------- -------- ------
(In Thousands)
Certificates of deposit
less than $100,000....... $5,680 $8,329 $7,424 $4,246 $25,679
Certificates of deposit
of $100,000 or more...... 855 536 1,766 114 3,271
------ ------ ------ ------ -------
Total certificates
of deposit............ $6,535 $8,865 $9,190 $4,360 $28,950
====== ====== ====== ====== =======
Borrowings. Although deposits are our primary source of funds, we may
utilize borrowings when they are a less costly source of funds, and can be
invested at a positive interest rate spread or when we desire additional
capacity to fund loan demand. At December 31, 1997 and April 30, 1998, we had
borrowings totaling $400,000 and $400,000, respectively. The average balance of
our borrowings during such periods were $488,000 and $400,000, respectively. Our
current borrowings relate to a five-year term note payable to a third party by
the Association in connection with the Association's capital contribution to a
limited partnership formed to construct multi-family housing units. See
"-Subsidiary and Other Activities" and Note E of Notes to Consolidated Financial
Statements.
Subsidiary and Other Activities
As a federally chartered savings association, we are permitted by OTS
regulations to invest up to 2% of our assets, or $1.5 million at April 30, 1998,
in the stock of, or unsecured loans to, service corporation subsidiaries. We may
invest an additional 1% of our assets in service corporations where such
additional funds are used for inner-city or community development purposes. We
have no subsidiaries.
In 1996, we acquired a fractional interest (17.5%) in an Ohio limited
partnership formed to construct multi-family housing units. Under the terms of
the limited partnership agreement, we will make a total capital contribution to
the partnership of $500,000 and are allocated tax losses and affordable housing
federal income tax credits. See Note E of Notes to Consolidated Financial
Statements.
Competition
We face strong competition in originating real estate and other loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from other savings institutions, commercial banks, credit unions and
mortgage bankers. Other savings institutions, commercial banks, credit unions
and finance companies provide vigorous competition in consumer lending.
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We attract all of our deposits through the Association's one office in
Niles, Ohio. Competition for those deposits is principally from other savings
institutions, commercial banks and credit unions located in the same community,
as well as mutual funds. We compete for these deposits by offering a variety of
deposit accounts at competitive rates and superior service.
Employees
At April 30, 1998, we had a total of 13 employees, including one
part-time employee. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
Properties
We conduct our business through the Association's only office located
in Niles, Ohio, which is owned by the Association. We believe that our current
facilities are adequate to meet the present and foreseeable needs of the
Association and the Company. The total net book value of the Association's
premises and equipment (including land, building and leasehold improvements and
furniture, fixtures and equipment) at April 30, 1998 was $287,000. See Note F of
Notes to Consolidated Financial Statements.
We maintain an on-line data base with a service bureau servicing
financial institutions. The net book value of the data processing and computer
equipment utilized by the Association at April 30, 1998 was $49,000.
Legal Proceedings
From time to time Home Federal is involved as plaintiff or defendant in
various legal actions arising in the normal course of business. Presently, we
are not involved as a defendant in any legal proceedings.
REGULATION
General
Home Federal is a federally chartered savings association, the deposits
of which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, we are subject to broad federal
regulation and oversight extending to all our operations. We are a member of the
FHLB of Cincinnati and are subject to certain limited regulation by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). As the
savings and loan holding company of Home Federal, the Company also is subject to
federal regulation and oversight. The purpose of the regulation of the Company
and other holding companies is to protect subsidiary savings associations. We
are a member of the SAIF, which together with the BIF are the two deposit
insurance funds administered by the FDIC, and our deposits are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over us.
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Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, we are required to file periodic
reports with the OTS and are subject to periodic examinations by the OTS and the
FDIC. The last regular OTS examination of Home Federal was as of March 1997.
Under agency scheduling guidelines, it is likely that another examination will
be initiated in the near future. When these examinations are conducted by the
OTS and the FDIC, the examiners may require us to provide for higher general or
specific loan loss reserves. All savings associations are subject to a
semi-annual assessment, based upon the savings association's total assets, to
fund the operations of the OTS. Our OTS assessment for the fiscal year ended
December 31, 1997 was $24,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Home Federal and the
Company. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Association is prescribed by federal laws and it is prohibited from engaging in
any activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. We are in compliance with the noted restrictions.
Our general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
April 30, 1998, our lending limit under this restriction was $1.9 million.
Assuming the sale of the minimum number of shares in the Conversion at April 30,
1998, that limit would be increased to $2.9 million. We are in compliance with
the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan.
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Insurance of Accounts and Regulation by the FDIC
We are a member of the SAIF, which is administered by the FDIC. Our
deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the SAIF or the BIF.
The FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC semi-annually. At April 30, 1998, we were
classified as a well-capitalized institution.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
In order to equalize the deposit insurance premium schedules for BIF
and SAIF insured institutions, the FDIC imposed a one-time special assessment on
all SAIF-assessable deposits pursuant to federal legislation passed on September
30, 1996. Our special assessment, which was $378,000, was paid in November 1996,
and included in federal deposit insurance expense in the year ended December 31,
1996. Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to 6.48 basis points for each $100 in domestic deposits, while
BIF-insured institutions pay an assessment equal to 1.52 basis points for each
$100 in domestic deposits. The assessment is expected to be reduced to 2.43
basis points no later than January 1, 2000, when BIF insured institutions fully
participate in the assessment. These assessments, which may be revised based
upon the level of BIF and SAIF deposits, will continue until the bonds mature in
the year 2017.
We will continue to be insured by the SAIF following completion of the
Conversion.
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Regulatory Capital Requirements
Federally insured savings associations, such as Home Federal, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At April 30, 1998, we did not have any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. We do not have any non-includable subsidiaries.
At April 30, 1998, we had tangible capital of $12.2 million, or 17.1%
of total assets, which is approximately $11.1 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date. We
traditionally, and as of April 30, 1998, have a higher capital ratio than our
peers and are considered "well-capitalized" for regulatory purposes. On a pro
forma basis, after giving effect to the sale of the minimum, midpoint and
maximum number of shares of Common Stock offered in the Conversion and
investment of 50% of the net proceeds in assets not excluded for tangible
capital purposes, we would have had tangible capital equal to 23.6%, 24.7% and
25.8%, respectively, of adjusted total assets at April 30, 1998, which is $17.2
million, $18.3 million and $19.4 million, respectively, above the requirement.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At April 30, 1998, we had
no intangibles which were subject to these tests.
At April 30, 1998, we had core capital equal to $12.2 million, or 17.1%
of adjusted total assets, which is $10.0 million above the minimum leverage
ratio requirement of 3% as in effect on that date. On a pro forma basis, after
giving effect to the sale of the minimum, midpoint and maximum number of shares
of Common Stock offered in the Conversion and investment of 50% of the net
proceeds in assets not excluded from core capital, we would have had core
capital equal to
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23.6%, 24.7% and 25.8%, respectively, of adjusted total assets at April 30,
1998, which is $16.0 million, $17.1 million and $18.2 million, respectively,
above the requirement.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At April 30, 1998, we had $853,000
of general loss reserves, which was $364,000 more than 1.25% of risk-weighted
assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. We had no such exclusions
from capital and assets at April 30, 1998.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that savings associations with above
normal interest rate risk exposure deduct from their total capital, for purposes
of determining compliance with such requirement, an amount equal to 50% of its
interest-rate risk exposure multiplied by the present value of its assets. This
exposure is a measure of the potential decline in the net portfolio value of a
savings association, greater than 2% of the present value of its assets, based
upon a hypothetical 200 basis point increase or decrease in interest rates
(whichever results in a greater decline). Net portfolio value is the present
value of expected cash flows from assets, liabilities and off-balance sheet
contracts. The rule will not become effective until the OTS evaluates the
process by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may be completed. Any
savings association with less than $300 million in assets and a total risk-based
capital ratio in excess of 12% is exempt from this requirement unless the OTS
determines otherwise. At the present time, the proposal is not expected to have
a material impact on the Association.
On April 30, 1998, we had total risk-based capital of approximately
$12.7 million (including $12.2 million in core capital and $489,000 in
qualifying supplementary capital) and risk-weighted assets of $39.1 million, or
total capital of 32.4% of risk-weighted assets. This amount was $9.5 million
above the 8% requirement in effect on that date. On a pro forma basis, after
giving effect to the sale of the minimum, midpoint and maximum number of shares
of Common Stock offered in the Conversion, the infusion to the Association of
50% of the net Conversion proceeds and the
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investment of those proceeds in 55% risk-weighted assets (the average risk
weight of the Association's assets at April 30, 1998), we would have had total
risk-based capital of 44.3%, 46.3% and 48.2%, respectively, of risk-weighted
assets, which is above the current 8% requirement by $15.4 million, $16.5
million and $17.6 million, respectively.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and, until such plan is
approved by the OTS, may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Association may have a substantial adverse effect on its operations and
profitability.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to
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stock conversion. See "The Conversion - Effects of Conversion to Stock Form on
Depositors and Borrowers of the Association" and "- Restrictions on Repurchase
of Stock".
Generally, savings associations, such as Home Federal, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four-quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS. We
may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
All savings associations, including Home Federal, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
short-term borrowings (borrowings payable in one year or less). For a discussion
of what we include in liquid assets, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 4%.
Penalties may be imposed upon associations for violations of the liquid asset
ratio requirement. At March 31, 1998 (the latest available date), we were in
compliance with this requirement with an overall regulatory liquidity ratio of
9.4%.
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Qualified Thrift Lender Test
All savings associations, including Home Federal, are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At April 30, 1998, we met the test and have always met the test
since it became effective.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of Home
Federal, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by Home
Federal. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Association may be required to devote additional
funds for investment and lending in its local community. We were examined for
CRA compliance in March 1997 and received a rating of "satisfactory."
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Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of Home Federal include the Company and
any company which is under common control with the Association. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must generally be made on terms substantially the same as for loans to
unaffiliated individuals or as offered to all employees in a company-wide
benefit program.
Holding Company Regulation
The Company will be a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than Home Federal or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If we fail the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company.
See "- Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
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Federal Securities Law
The stock of the Company will be registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
will be subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain noninterest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At April 30, 1998, we were in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
We are a member of the FHLB of Cincinnati, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, we are required to purchase and maintain stock in the FHLB
of Cincinnati. At April 30, 1998, we had $301,000 in FHLB stock, which was in
compliance with this requirement. We receive dividends on our FHLB stock. Such
dividends averaged 7.07% for 1997.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate- income housing
projects. These contributions have affected adversely the level of FHLB
dividends
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paid and could continue to do so in the future. These contributions could also
have an adverse effect on the value of FHLB stock in the future. A reduction in
value of our FHLB stock may result in a corresponding reduction in our capital.
Federal and State Taxation
Federal Taxation. Savings associations such as Home Federal that meet
certain conditions prescribed by the Internal Revenue Code of 1986, as amended
(the "Code"), are permitted to establish reserves for bad debts and to make
annual additions thereto which may, within specified formula limits, be taken as
a deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction is computed under the experience
method. Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
In August 1996, legislation was enacted that repealed the percentage of
taxable income method used by many thrifts to calculate their bad debt reserve
for federal income tax purposes. As a result, small thrifts must recapture that
portion of the reserve that exceeds the amount that could have been taken under
the experience method for tax years beginning after December 31, 1987. Due to
certain limitations as to allowable additions to the bad debt reserve, Home
Federal has not made additions to its allowance since 1987 and will not be
subject to federal income tax recapture.
In addition to the regular income tax, corporations, including savings
associations such as Home Federal, generally are subject to a minimum tax. An
alternative minimum tax 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. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.
A portion of our reserves for losses on loans may not, without adverse
tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of April 30, 1998, the portion of our reserves subject to this
treatment for tax purposes totaled approximately $2.54 million.
We file federal income tax returns on a fiscal year basis using the
accrual method of accounting. The Company does not anticipate filing
consolidated federal income tax returns with Home Federal. Savings associations
that file federal income tax returns as part of a consolidated group are
required by applicable Treasury regulations to reduce their taxable income for
purposes of computing the percentage bad debt deduction for losses attributable
to activities of the non-savings association members of the consolidated group
that are functionally related to the activities of the savings association
member.
The federal income tax returns of the Association for the last three
years are open to possible audit by the Internal Revenue Service ("IRS"). No
returns are being audited by the IRS at the current time. In the opinion of
management, any examination of still open returns (including returns of
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predecessors or entities merged into the Association) would not result in a
deficiency which could have a material adverse effect on the financial condition
of the Association.
Ohio Taxation. We are subject to the Ohio corporate franchise tax. As a
financial institution, we compute our franchise tax based on our net worth.
Under this method, the Association will compute its Ohio corporate franchise tax
by multiplying its net worth (as determined under generally accepted accounting
principles) as specifically adjusted pursuant to Ohio law, by the applicable tax
rate, which is currently 1.5%. The Company will be subject to the Ohio franchise
tax on holding companies of financial institutions. The tax imposed is the
greater of the tax on net worth, as adjusted to include the portion attributable
to the Association, or the tax on net income. Home Federal may claim a credit
equal to the annual assessment paid to the State pursuant to the Ohio Revised
Code.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
MANAGEMENT OF THE HOLDING COMPANY
Directors and Executive Officers
The Board of Directors of the Company currently consists of five
members, each of whom is also a director of the Association. As discussed below,
upon consummation of the Conversion, the current directors of the Association
will become directors of the stock-chartered Association. See "Management of the
Association - Directors." Each director of the Company has served as such since
the Company's incorporation in July 1998. Directors of the Company will serve
three-year staggered terms so that approximately one-third of the directors will
be elected at each annual meeting of stockholders. One class of directors,
consisting of Horace L. McLean, has a term of office expiring at the Company's
first Annual Meeting of Stockholders, a second class, consisting of William L.
Stephens and George J. Swift, has a term of office expiring at the Company's
second Annual Meeting of Stockholders, and a third class, consisting of P. James
Kramer and Ralph A. Zuzolo, Sr., has a term expiring at the Company's third
Annual Meeting of Stockholders. For biographical information regarding each
director of the Company, see "Management of the Association - Directors."
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Company are as follows: William L. Stephens, President and Chief
Executive Officer; George J. Swift, Vice President and Secretary; and Lawrence
Safarek, Vice President and Treasurer. It is not currently anticipated that the
executive officers of the Company will receive any remuneration in their
capacity as Company executive officers. For information regarding compensation
of directors and executive officers of the Association, see "Management of the
Association--Meetings and Committees of the Board of Directors of the
Association" and "--Executive Compensation."
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Indemnification
The certificate of incorporation of the Company provides that a
director or officer of the Company shall be indemnified by the Company to the
fullest extent authorized by the General Corporation Law of the State of
Delaware against all expenses, liability and loss reasonably incurred or
suffered by such person in connection with his activities as a director or
officer or as a director or officer of another company, if the director or
officer held such position at the request of the Company. Delaware law requires
that such director, officer, employee or agent, in order to be indemnified, must
have acted in good faith and in a manner reasonably believed to be not opposed
to the best interests of the Company and, with respect to any criminal action or
proceeding, did not have reasonable cause to believe his conduct was unlawful.
The certificate of incorporation of the Company and Delaware law also
provide that the indemnification provisions of such certificate and the statute
are not exclusive of any other right which a person seeking indemnification may
have or later acquire under any statute, or provision of the certificate of
incorporation, bylaws of the Company, agreement, vote of shareholders or
disinterested directors or otherwise.
These provisions may have the effect of deterring shareholder
derivative actions, since the Company may ultimately be responsible for expenses
for both parties to the action.
In addition, the certificate of incorporation of the Company and
Delaware law also provide that the Company may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Company or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the Company
has the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law. The Company intends to obtain such
insurance.
MANAGEMENT OF THE ASSOCIATION
Directors
The direction and control of the Association, as a mutual savings
association, has been vested in its Board of Directors. Upon consummation of the
Conversion, each of the current directors of the Association will become
directors of the Association in stock form. The Board of Directors of the
converted Association will consist of five directors divided into three classes,
with approximately one-third of the directors elected at each annual meeting of
stockholders. Because the Company will own all of the issued and outstanding
shares of capital stock of the Association after the Conversion, the Company, as
sole stockholder, will elect the directors of the Association.
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The following table sets forth certain information regarding the
directors of the Association.
Term of
Director Office
Name Age Position(s) Held Since Expires
- ---- --- ---------------- -------- -------
William L. Stephens 66 Chairman of the Board, President 1969 2000
and Chief Executive Officer
George J. Swift 75 Director, Vice President and 1969 2000
Secretary
P. James Kramer 42 Director 1994 2001
Horace L. McLean 67 Director 1987 1999
Ralph A. Zuzolo, Sr. 56 Director 1979 2001
The business experience of each director for at least the past five
years is set forth below.
William L. Stephens. Mr. Stephens serves as Chairman of the Board,
President and Chief Executive Officer of the Association, positions he has held
since 1969.
George J. Swift. Mr. Swift is Vice President and Secretary of the
Association, positions he has held since 1969.
P. James Kramer. Since 1980, Mr. Kramer has served as President of
William Kramer & Son, a heating and air conditioning company, located in Niles,
Ohio.
Horace L. McLean. Since 1987, Mr. McLean has served as President of
McLean Engineering, Inc.
Ralph A. Zuzolo, Sr. Mr. Zuzolo is an attorney and a principal in the
law firm of Zuzolo, Zuzolo & Zuzolo, located in Niles, Ohio. Mr. Zuzolo has been
with his law firm since 1968.
Executive Officers Who are not Directors
Each of the executive officers of the Association will retain his
office following the Conversion. Officers are elected annually by the Board of
Directors of the Association. The business experience of the executive officers
who are not also directors is set forth below.
Lawrence Safarek. Mr. Safarek, age 49, currently serves as Vice
President and Treasurer of the Association. Mr. Safarek has been employed by the
Association since 1971.
Meetings and Committees of the Board of Directors
Our Board of Directors meets twice a month, or more frequently as
necessary. During the year ended December 31, 1997, the Board of Directors held
30 meetings. No director attended fewer than 75% of the total meetings of the
Board of Directors and committees on which such Board member served during this
period.
We currently have a standing Executive Committee. We do not have a
standing Compensation, Audit or Nominating Committee; rather, the entire Board
of Directors performs these functions. We have several other committees which
meet as needed to review various other functions
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of the Association. Following the Conversion, the Board of Directors of the
Association may revise the membership and structure of the current committees of
the Board of Directors.
The Executive Committee is comprised of President Stephens (Chairman),
Vice President Swift and Director Zuzolo. The Executive Committee meets on an as
needed basis and exercises the power of the Board of Directors between Board
meetings, to the extent permitted by applicable law.
The Executive Committee did not meet during 1997.
The entire Board of Directors of the Association is responsible for
determining salaries to be paid to officers and employees of the Association,
based on recommendations of President Stephens and Vice President Swift.
President Stephens and Vice President Swift excuse themselves from Board
discussions concerning their salaries as President and Vice President,
respectively. The Board of Directors met once during 1997 to discuss
compensation matters.
The entire Board of Directors acts as the Audit Committee. The Audit
Committee meets annually with the Association's accounting firm in order to
review the annual audit. This committee met once in fiscal 1997.
The entire Board of Directors acts as the Nominating Committee. The
Nominating Committee reviews the terms of the directors and makes nominations
for directors to be voted on by members. The committee generally meets once a
year to make nominations.
Director Compensation
During 1997, each director (employee and non-employee) of the
Association was paid a fee of $450 for each meeting of the Board of Directors
attended, with up to five excused absences paid per year.
In addition, Ralph A. Zuzolo, Sr., a director of the Association, is a
partner in the law firm of Zuzolo, Zuzolo & Zuzolo. From time to time, such firm
acts as counsel to the Association. The legal fees received by the law firm from
professional services rendered to the Association during the year ended December
31, 1997 did not exceed 5% of the firm's gross revenues.
Executive Compensation
The following table sets forth information concerning the compensation
paid or granted to the Association's Chief Executive Officer and each other
executive officer who made in excess of $100,000 during 1997.
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Summary Compensation Table
- --------------------------------------------------------------------------------
Annual Compensation(1)
---------------------- All Other
Name and Principal Position Year Salary($)(2) Bonus($) Compensation($)(3)
- --------------------------- ---- ----------- ------- ------------------
William L. Stephens 1997 $117,200 $39,400 $72,000
President and CEO
George J. Swift 1997 $117,200 $39,400 $72,000
Vice President and
Secretary
- ---------
(1) As a mutual institution, the Association does not have any stock options or
restricted stock plans. The Company does, however, intend to adopt such
plans following the Conversion. See "- Benefit Plans -- Other Stock Benefit
Plans." Messrs. Stephens and Swift did not receive any additional benefits
or perquisites from the Association which exceeded, in the aggregate, the
lesser of 10% of such individual's salary and bonus, or $50,000.
(2) Includes director fees of $13,400 for service on the Board of Directors and
inspection fees of $600 received for services rendered to the Association.
(3) Represents the amounts accrued by the Association for the benefit of
Messrs. Stephens and Swift under their supplemental retirement agreements.
Employment Agreements
Upon completion of the Conversion, Home Federal intends to enter into
employment agreements with President Stephens and Vice Presidents Swift and
Safarek. The employment agreements are designed to assist us in maintaining a
stable and competent management team after the Conversion. The continued success
of Home Federal depends to a significant degree on the skills and competence of
its officers. The form of agreement has been filed with, and been approved by,
the OTS as part of the application of the Company for approval to become a
thrift holding company. The employment agreements become effective upon
completion of the Conversion and provide for annual base salary in an amount not
less than such individual's current salary and an initial term of three years.
The agreements provide for extensions of one year, in addition to the
then-remaining term under the agreements, on each anniversary of the effective
date of the agreements, subject to a formal performance evaluation performed by
disinterested members of the Board of Directors of Home Federal. The agreements
provide for termination upon the employee's death, for cause or in certain
events specified by OTS regulations. The employment agreements are also
terminable by the employees upon 90 days notice to Home Federal.
The agreements grant participation in an equitable manner in employee
benefits applicable to executive personnel. The agreements do not contain a
change in control provision.
Benefit Plans
General. We currently provide health care benefits to our employees,
including hospitalization, major medical, dental, life and disability insurance,
subject to certain deductibles and copayments by employees. We also maintain a
defined benefit pension plan for our employees.
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Supplemental Executive Retirement Plan. Effective September 1, 1987,
the Board of Directors of the Association approved non-qualified deferred
compensation agreements ("DCA") for Messrs. Stephens and Swift. The DCAs are
subject to renewal annually (i.e., each September 1). During the term of the
agreements and as long as employment of the executives by the Association
continues, we will provide for monthly accruals of specified amounts for each
executive. Accrued deferred compensation amounts are payable in a lump sum upon
the executive's death, disability, voluntary resignation, or termination by the
Association without cause. Until disbursed, the amounts payable under the
agreements are subject to the claims of general creditors. As of December 31,
1997, Home Federal had accrued benefits to Messrs. Stephens and Swift under
their DCAs totaling $204,000 and $444,000, respectively.
As of June 30, 1998, the Board of Directors determined to make a lump
sum contribution of $144,000 to both Messrs. Stephens and Swift under their
DCAs, in addition to the $6,000 monthly contributions to be made to each of them
for the remaining two months (July and August 1998) of such agreements, and to
thereafter suspend and make no further contributions under such agreements.
These amounts, together with all other contributions previously made by the
Association, will be paid to such individuals in accordance with the terms of
their individual DCAs.
Employee Stock Ownership Plan. The Board of Directors has approved the
adoption of an ESOP for the benefit of our employees. The ESOP is designed to
meet the requirements of an employee stock ownership plan as described at
Section 4975(e)(7) of the Code and Section 407(d)(6) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). The ESOP may borrow in order
to finance purchases of the Common Stock.
It is anticipated that the ESOP will be funded with a loan from the
Company (not to exceed an amount equal to 8% of the gross conversion proceeds).
The Company intends to apply to the OTS to permit it to lend funds to the ESOP.
In the event the Company is not permitted to lend funds to the ESOP and the ESOP
is unable to obtain financing from an unrelated lender for its stock purchase,
the Company may contribute funds to the ESOP to enable it purchase up to 3% of
the shares of Common Stock in the Conversion; provided, however that in such
event the total contributions of the Company to the ESOP and restricted stock
plans for stock purchases in the Conversion may not exceed 4% of the Common
Stock sold in the Conversion.
GAAP generally requires that any borrowing by the ESOP from an
unaffiliated lender be reflected as a liability in the Company's consolidated
financial statements, whether or not such borrowing is guaranteed by, or
constitutes a legally binding contribution commitment of, the Company or the
Association. The funds used to acquire the ESOP shares are expected to be
borrowed from the Company. If the Company finances the ESOP debt, the ESOP debt
will be eliminated through consolidation and no liability will be reflected on
the Company's consolidated financial statements. In addition, shares purchased
with borrowed funds will, to the extent of the borrowings, be excluded from
stockholders' equity, representing unearned compensation to employees for future
services not yet performed. Consequently, if the ESOP purchases already-issued
shares in the open market, the Company's consolidated liabilities will increase
to the extent of the ESOP's borrowings, and total and per share stockholders'
equity will be reduced to reflect such borrowings. If the ESOP purchases newly
issued shares from the Company, total stockholders' equity would neither
increase nor decrease, but per share stockholders' equity and per share net
income would decrease because of the increase in the number of outstanding
shares. In either case, as the borrowings used to fund ESOP purchases are
repaid, total stockholders' equity will correspondingly increase.
All employees are eligible to participate in the ESOP after they attain
age 21 and complete one year of service. Employees will be credited for years of
service to the Association prior to the adoption of the ESOP for participation
and vesting purposes. Contributions to the ESOP are
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allocated among participants on the basis of compensation. Each participant's
account will be credited with cash and shares of Company Common Stock based upon
compensation earned during the year with respect to which the contribution is
made. Contributions credited to a participant's account are vested on a
graduated basis and become fully vested when such participant completes seven
years of service. ESOP participants are entitled to receive distributions from
their ESOP accounts only upon termination of service. Distributions will be made
in the form of a lump sum in cash and in whole shares of the Common Stock.
Fractional shares will be paid in cash. Participants will not incur a tax
liability until a distribution is made.
Each participating employee is entitled to instruct the trustee of the
ESOP as to how to vote the shares allocated to his or her account. With respect
to shares of common stock which have not yet been allocated to participants'
accounts, the trustee will vote all such shares in the same proportion as those
shares for which the trustee receives such voting instructions. The trustee will
not be affiliated with the Company or Home Federal.
The ESOP may be amended by the Board of Directors, except that no
amendment may be made which would reduce the interest of any participant in the
ESOP trust fund or divert any of the assets of the ESOP trust fund to purposes
other than the exclusive benefit of participants or their beneficiaries.
Other Stock Benefit Plans. In addition to the employment agreements, in
the future we may consider the implementation of a stock option and incentive
plan (the "Stock Option Plan") and a restricted stock plan for the benefit of
selected directors, officers and employees. We anticipate that the Stock Option
Plan and restricted stock plan will be comprised of 10% and 4%, respectively, of
the Company stock sold in the Conversion. Grants of common stock pursuant to the
restricted stock plan will be issued without cost to the recipient. If a
determination is made to implement a Stock Option Plan or restricted stock plan,
it is anticipated that any such plans will be submitted to stockholders for
their consideration at which time stockholders would be provided with detailed
information regarding such plan. If such plans are approved, and effected, they
will have a dilutive effect on the Company's stockholders as well as affect the
Company's net income and stockholders' equity, although the actual results
cannot be determined until such plans are implemented. Any such Stock Option
Plan or restricted stock plan will not be implemented within one year of the
date of the consummation of the Conversion, subject to continuing OTS
jurisdiction.
Certain Transactions
The Association has followed a policy of granting loans to officers and
directors. Loans to directors and executive officers are made in the ordinary
course of business and on the same terms and conditions as those of comparable
transactions with the general public prevailing at the time, in accordance with
our underwriting guidelines, and do not involve more than the normal risk of
collectibility or present other unfavorable features.
All loans we make to our directors and executive officers are subject
to OTS regulations restricting loan and other transactions with affiliated
persons of the Association. Loans to all directors and executive officers and
their associates totaled approximately $1.1 million at April 30,
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1998, which was 9.0% of our retained earnings at that date. All loans to
directors and executive officers were performing in accordance with their terms
at April 30, 1998.
THE CONVERSION
The Board of Directors of the Association and the OTS have approved the
Plan of Conversion. OTS approval is subject to approval of the Plan of
Conversion by the our members, and subject to the satisfaction of certain other
conditions imposed by the OTS. OTS approval does not constitute a recommendation
or endorsement of the Plan of Conversion.
General
On July 6, 1998, we adopted a Plan of Conversion, which was
subsequently amended, pursuant to which we will convert from a federally
chartered mutual savings institution to a federally chartered stock savings
institution and immediately thereafter become a wholly owned subsidiary of the
Company. The Conversion will include adoption of the proposed federal stock
charter and bylaws, which will authorize us to issue capital stock. Under the
Plan, our common stock is being sold to the Company and the Company Common Stock
is being offered to our eligible depositors and borrowers, the ESOP, directors,
officers and employees, and other members and then to the public. The Conversion
will be accounted for at historical cost in a manner similar to a pooling of
interests. The OTS has approved the Company's application to become a savings
and loan holding company and to acquire all of the Association's common stock to
be issued in the Conversion.
The shares of Company Common Stock are first being offered in a
subscription offering to holders of subscription rights. To the extent shares of
Company Common Stock remain available after the subscription offering shares of
Company Common Stock may be offered in a direct community offering on a best
efforts basis through Charles Webb in such a manner as to promote a wide
distribution of the shares and with a preference given, except for certain
shares which may be reserved for institutional investors, to natural persons
residing in a geographic area encompassing a radius of 35 miles from the
Association's headquarters. The direct community offering, if any, may commence
anytime subsequent to the commencement of the subscription offering. Shares not
subscribed for in the subscription offering and direct community offering may be
offered for sale by the Company on a best efforts basis in a public offering
conducted by Charles Webb. We have the right, in our sole discretion, to accept
or reject, in whole or in part, any orders to purchase shares of the Common
Stock received in the direct community offering and the public offering. See "-
Offering of Holding Company Common Stock."
Subscriptions for shares will be subject to the maximum and minimum
purchase limitations set forth in the Plan of Conversion.
The completion of the offering is subject to market conditions and
other factors beyond our control. No assurance can be given as to the length of
time following approval of the Plan at the meeting of our members that will be
required to complete the sale of shares being offered in the Conversion. If
delays are experienced, significant changes may occur in the Estimated Valuation
Range with corresponding changes in the offering price and the net proceeds to
be realized by us from the sale of the shares. In the event the Conversion is
terminated, we will charge all Conversion expenses against current income and
any funds collected by us in the offering will be promptly returned, with
interest, to each subscriber.
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Effects of Conversion to Stock Form on Depositors and Borrowers of the
Association
Voting Rights. Currently in our mutual form, our depositor and borrower
members have voting rights and may vote for election of directors. Subsequent to
Conversion, voting rights will be vested exclusively in the Company as the sole
stockholder of the Association. Voting rights as to the Company will be held
exclusively by its stockholders. Each purchaser of Company Common Stock shall be
entitled to vote on any matters to be considered by the Company stockholders. A
stockholder will be entitled to one vote for each share of Company Common Stock
owned, subject to certain limitations applicable to holders of 10% or more of
the shares of the Company Common Stock. See "Description of Capital Stock."
Deposit Accounts and Loans. The balance terms and FDIC insurance
coverage of deposit accounts will not be affected by the Conversion.
Furthermore, the amounts and terms of loans, and the obligations of the
borrowers under their individual contractual arrangements with us will not be
affected by the Conversion.
Tax Effects. We have received an opinion from Silver, Freedman & Taff,
L.L.P. with regard to federal income taxation, and an opinion from Anness,
Gerlach & Williams with regard to Ohio taxation, to the effect that the adoption
and implementation of the Plan of Conversion set forth herein will not be
taxable for federal or Ohio tax purposes to the Association or the Company. See
"- Income Tax Consequences."
Liquidation Rights. We have no plans to liquidate, either before or
subsequent to the completion of the Conversion. However, if there should ever be
a complete liquidation, either before or after Conversion, deposit account
holders would receive the protection of insurance by the FDIC up to applicable
limits. Subject thereto, liquidation rights before and after Conversion would be
as follows:
Liquidation Rights in Present Mutual Institution. In addition to the
protection of FDIC insurance up to applicable limits, in the event of
our complete liquidation, each holder of a deposit account would
receive his or her pro rata share of any assets of the Association
remaining after payment of claims of all creditors (including the
claims of all depositors in the amount of the withdrawal value of their
accounts). Such holder's pro rata share of such remaining assets, if
any, would be in the same proportion of such assets as the balance in
his or her deposit account was to the aggregate balance in all our
deposit accounts at the time of liquidation.
Liquidation Rights in Proposed Converted Institution. After Conversion,
each deposit account holder, in the event of our complete liquidation,
would have a claim of the same general priority as the claims of all
our other general creditors in addition to the protection of FDIC
insurance up to applicable limits. Therefore, except as described
below, the deposit account holder's claim would be solely in the amount
of the balance in his or her deposit account plus accrued interest. A
deposit account holder would have no interest in the assets of the
Association above that amount, if any.
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The Plan of Conversion provides for the establishment, upon the
completion of the Conversion, of a special "liquidation account" for the
benefit of Eligible Account Holders (i.e., eligible depositors at March
31, 1997) and Supplemental Account Holders (eligible depositors at June
30, 1998). Each Eligible Account Holder and Supplemental Eligible
Account Holder, if he or she continues to maintain his or her deposit
account with us, would be entitled upon our complete liquidation after
Conversion, to an interest in the liquidation account prior to any
payment to stockholders. Each Eligible Account Holder would have an
initial interest in such liquidation account for each deposit account
held with us on the qualifying date, March 31, 1997. Each Supplemental
Eligible Account Holder would have a similar interest as of the
qualifying date, June 30, 1998. The interest as to each deposit account
would be in the same proportion of the total liquidation account as the
balance of the deposit account on the qualifying dates was to the
aggregate balance in all the deposit accounts of Eligible Account
Holders and Supplemental Eligible Account Holders on such qualifying
dates. However, if the amount in the deposit account on any annual
closing date (December 31) is less than the amount in such account on
the respective qualifying dates, then the interest in this special
liquidation account would be reduced at that time by an amount
proportionate to any such reduction, and the interest would cease to
exist if such deposit account was closed. The interest in the special
liquidation account will never be increased despite any increase in the
related deposit account after the respective qualifying dates.
Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders were
satisfied would be distributed to the Company as the sole stockholder
of the Association.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether
the Association, as converted, or another SAIF-insured institution is
the surviving institution, is deemed to be a complete liquidation for
purposes of distribution of the liquidation account and, in any such
transaction, the liquidation account would be assumed to the full
extent authorized by regulations of the OTS as then in effect. The OTS
has stated that the consummation of a transaction of the type described
in the preceding sentence in which the surviving entity is not a
SAIF-insured institution would be reviewed on a case-by-case basis to
determine whether the transaction should constitute a "complete
liquidation" requiring distribution of any then remaining balance in
the liquidation account. While we believe that such a transaction
should not constitute a complete liquidation, there can be no assurance
that the OTS will not adopt a contrary position.
Common Stock. For information as to the characteristics of the Common
Stock to be issued under the Plan of Conversion, see "Dividends" and
"Description of Capital Stock." Common Stock issued under the Plan of Conversion
cannot, and will not, be insured by the FDIC or any other
governmental agency.
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We will continue, immediately after completion of the Conversion, to
provide our services to depositors and borrowers pursuant to our existing
policies and will maintain our existing management and employees. Other than for
payment of certain expenses incident to the Conversion, none of our assets will
be distributed in the Conversion. We will continue to be a member of the FHLB
System, and our deposit accounts will continue to be insured by the FDIC. Our
affairs will continue to be directed by our existing Board of Directors and
management.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities of a thrift institution sold in connection with its conversion must
be based on an appraised aggregate market value of the institution as converted
(i.e., taking into account the expected receipt of proceeds from the sale of the
securities in the conversion), as determined by an independent valuation. Keller
& Company, which is experienced in the valuation and appraisal of business
entities, including thrift institutions involved in the conversion process, was
retained by us to prepare an appraisal of the estimated pro forma market value
of the Association and the Company upon Conversion.
Keller & Company will receive a fee of approximately $19,000 for its
appraisal in addition to its reasonable out-of-pocket expenses incurred in
connection with the appraisal. Keller & Company has also agreed to assist us in
the preparation of our business plan and to perform certain records management
services for us for such fee. We have agreed to indemnify Keller & Company under
certain circumstances against liabilities and expenses (including legal fees)
arising out of, related to, or based upon the Conversion.
Keller & Company has prepared an appraisal of our estimated pro forma
market as converted. The Keller & Company appraisal concluded that, at April 30,
1998, the Estimated Valuation Range of the Common Stock was from a minimum of
$17,000,000 to a maximum of $23,000,000 with a midpoint of $20,000,000. Assuming
that the shares are sold at $10.00 per share in the Conversion, the estimated
number of shares to be issued in the Conversion is expected to be between
1,700,000 and 2,300,000. The purchase price of $10.00 per share was determined
by discussion between us and Keller & Company, taking into account, among other
factors, (i) the requirement under OTS regulations that the Common Stock be
offered in a manner that would achieve the widest distribution of shares and
(ii) liquidity in the Common Stock subsequent to the Conversion.
The appraisal involved a comparative evaluation of our operating and
financial statistics with those of other thrift institutions. The appraisal also
took into account such other factors as the market for thrift institution stocks
generally, prevailing economic conditions, both nationally and in Ohio, which
affect the operations of thrift institutions, the competitive environment within
which we operate and the effect of us becoming a subsidiary of the Company. No
detailed individual analysis of the separate components of our assets and
liabilities was performed in connection with the
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evaluation. The Plan of Conversion requires that all of the shares subscribed
for in the offering be sold at the same price per share. The Board of Directors
reviewed the appraisal, including the methodology and the appropriateness of the
assumptions utilized by Keller & Company and determined that in its opinion the
appraisal was not unreasonable. The Estimated Valuation Range may be amended
with the approval of the OTS in connection with changes in our financial
condition or operating results, or market conditions generally. As described
below, an amendment to the Estimated Valuation Range above $26,450,000 would not
be made without a resolicitation of subscriptions and/or proxies except in
limited circumstances.
If, upon completion of the offering, at least the minimum number of
shares are subscribed for, Keller & Company, after taking into account factors
similar to those involved in its prior appraisal, will determine its estimate of
our pro forma market value upon Conversion, as of the close of the offering.
If, based on the estimate of Keller & Company, our aggregate pro forma
market value is not within the Estimated Valuation Range, Keller & Company, upon
the consent of the OTS, will determine a new Estimated Valuation Range ("Amended
Valuation Range"). If the aggregate pro forma market value of the stock to be
sold in the offering has increased in the Amended Valuation Range to an amount
that does not exceed $26,450,000 (i.e., 15% above the maximum of the EVR), then
the number of shares to be issued may be increased to accommodate such increase
in value without a resolicitation of subscriptions and/or proxies. In such event
we do not intend to resolicit subscriptions and/or proxies unless we then
determine, after consultation with the OTS, that circumstances otherwise require
such a resolicitation. If, however, the aggregate pro forma market value of the
Common Stock to be sold of the Company, at that time is less than $17.0 million
or more than $26.45 million, a resolicitation of subscribers and/or proxies may
be made, the Plan of Conversion may be terminated or such other actions as the
OTS may permit may be taken. In the event that upon completion of the offering,
the pro forma market value of the Common Stock to be sold is below $17.0 million
or above $26.45 million (15% above the maximum of the EVR), the Company intends
to file the revised appraisal with the SEC by post-effective amendment to its
Registration Statement on Form SB-2. See "Additional Information." If the Plan
of Conversion is terminated, all funds would be returned promptly with interest
at our current passbook rate, and holds on funds authorized for withdrawal from
deposit accounts would be released. If there is a resolicitation of
subscriptions, subscribers will be given the opportunity to cancel or change
their subscriptions and to the extent subscriptions are so canceled or reduced,
funds will be returned with interest at our current passbook rate and holds on
funds authorized for withdrawal from deposit accounts will be released or
reduced. Stock subscriptions received by us may not be withdrawn by the
subscriber and, if accepted by us, are final. If the Conversion is not completed
prior to October 21, 2000 (two years after the date of the Special Meeting), the
Plan of Conversion will automatically terminate.
Any increase in the total number of shares of Common Stock to be
offered in the Conversion will dilute a subscriber's percentage ownership
interest and will reduce the pro forma net income and net worth on a per share
basis. A decrease in the number of shares to be issued in the Conversion will
increase a subscriber's proportionate ownership interest and will increase both
pro forma net income and net worth on a per share basis while decreasing that
amount on an aggregate basis.
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No sale of the shares will take place unless, prior thereto, Keller &
Company confirms to the OTS that, to the best of Keller &Company's knowledge and
judgment, nothing of a material nature has occurred which would cause Keller &
Company to conclude that the actual purchase price on an aggregate basis is
incompatible with its estimate of the aggregate pro forma market value of the
Company and the Association as converted at the time of the sale. If, however,
the facts do not justify such a statement, the offering or other sale may be
canceled, a new Estimated Valuation Range set and new offering held.
In preparing its valuation of our pro forma market value upon
Conversion, Keller & Company relied upon and assumed the accuracy and
completeness of all financial and statistical information provided by us. Keller
& Company also considered information based upon other publicly available
sources which it believes are reliable. However, Keller & Company does not
guarantee the accuracy and completeness of such information and did not
independently verify the financial statements and other data provided by us or
independently value our assets or liabilities. The appraisal is not intended to
be, and must not be interpreted as, a recommendation of any kind as to the
advisability of voting to approve the Conversion or of purchasing shares of
Common Stock. The appraisal considers us only as going concerns and should not
be considered as any indication of the liquidation value of Home Federal or the
Company. Moreover, the appraisal is necessarily based on many factors which
change from time to time. There can be no assurance that persons who purchase
shares in the Conversion will be able to sell such shares at prices at or above
the purchase price.
Offering of Holding Company Common Stock
Under the Plan of Conversion, up to 2,300,000 shares of Common Stock
will be offered for sale, subject to certain restrictions described below,
initially through the subscription offering. Federal conversion regulations
require, with certain exceptions, that all shares offered in a conversion be
sold in order for the conversion to become effective.
The subscription offering will expire at 12:00 noon, Niles, Ohio time,
on October 14, 1998 (the "Subscription Expiration Date") unless extended by us.
Depending on the availability of shares and market conditions at or near the
completion of the subscription offering, we may effect a direct community
offering and/or a public offering of shares to selected persons through Webb. To
order Common Stock in connection with the direct community offering and/or
public offering, if any, an executed stock order and account withdrawal
authorization and certification must be received by Webb prior to the
termination of the direct community offering and public offering. The date by
which orders must be received in the direct community offering and the public
offering, if any, will be set by us at the time of such offering. OTS
regulations require that all shares to be offered in the Conversion be sold
within a period ending not more than 45 days after the Subscription Expiration
Date (or such longer period as may be approved by the OTS) or, despite approval
of the Plan of Conversion by members, the Conversion will not be effected and we
will remain in mutual form. This period expires on November 28, 1998, unless
extended with the approval of the OTS. In addition, if the subscription offering
is extended beyond November 28, 1998, all subscribers will have the right to
modify or rescind their subscriptions and to have their subscription funds
returned promptly with interest. In the event that the Conversion is not
effected, all funds submitted and not previously refunded
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pursuant to the offering will be promptly refunded to subscribers with interest
at our current passbook rate, and all withdrawal authorizations will be
terminated.
Subscription Offering. In accordance with OTS regulations,
non-transferable subscription rights have been granted under the Plan of
Conversion to the following persons in the following order of priority: (1)
Eligible Account Holders (our deposit account holders maintaining an aggregate
balance of $50.00 or more as of March 31, 1997), (2) our Tax-Qualified Employee
Plans; provided, however, that the Tax-Qualified Employee Plans shall have first
priority subscription rights to the extent that the total number of shares of
Common Stock sold in the Conversion exceeds the maximum of the Estimated
Valuation Range; (3) Supplemental Eligible Accounts Holders (our deposit account
holders maintaining a balance of $50.00 or more as of June 30, 1998), (4) Other
Members (our depositors and borrowers at the close of business on September 4,
1998, the voting record date for the Special Meeting) and (5) our officers,
directors and employees. All subscriptions received will be subject to the
availability of Company Common Stock after satisfaction of all subscriptions of
all persons having prior rights in the subscription offering, and to the maximum
and minimum purchase limitations set forth in the Plan of Conversion.
Category No. 1 is reserved for the Eligible Account Holders.
Subscription rights to purchase shares under this category will be allocated
among Eligible Account Holders to permit each such depositor to purchase shares
in this Category in an amount equal to the greater of $150,000 of Common Stock,
one-tenth of one percent (.10%) of the total shares offered in the Conversion,
or 15 times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the qualifying deposits of the
Eligible Account Holder and the denominator is the total amount of the
qualifying deposit of all Eligible Account Holders, in each case on the
Eligibility Record Date. To the extent shares are oversubscribed in this
category, shares shall be allocated first to permit each subscribing Eligible
Account Holder to purchase, to the extent possible, 100 shares and thereafter
among each subscribing Eligible Account Holder pro rata in the same proportion
that his qualifying deposit bears to the total qualifying deposits of all
subscribing Eligible Account Holders whose subscriptions remain unsatisfied.
Category No. 2 provides for the issuance of subscription rights to
Tax-Qualified Employee Plans to purchase up to 10% of the total amount of shares
of Common Stock issued in the subscription offering on a second priority basis.
However, such plans shall not, in the aggregate, purchase more than 10% of the
Common Stock issued. The ESOP intends to purchase a total of 8.0% of the Common
Stock sold in the Conversion under this category. Subscription rights received
pursuant to this category shall be subordinated to all rights received by
Eligible Account Holders to purchase shares pursuant to Category No. 1;
provided, however, that notwithstanding any provision of the Plan of Conversion
to the contrary, the Tax-Qualified Employee Plans shall have first priority
subscription rights to the extent that the total number of shares of Common
Stock sold in the Conversion exceeds the maximum of the Estimated Valuation
Range.
Category No. 3 is reserved for the Supplemental Eligible Account
Holders. Subscription rights to purchase shares under this category will be
allocated among Supplemental Eligible Account Holders to permit each such
depositor to purchase shares in this category in an amount equal to the greater
of $150,000 of Common Stock, one-tenth of one percent (.10%) of the total shares
of
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Common Stock offered in the Conversion, or 15 times the product (rounded down to
the next whole number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction of which the numerator is the amount of
the qualifying deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of the qualifying deposits of all Supplemental
Eligible Account Holders in each case on June 30, 1998 (the "Supplemental
Eligibility Record Date"), subject to the overall purchase limitation after
satisfying the subscriptions of Eligible Account Holders and Tax Qualified
Employee Plans. Any non-transferable subscription rights received by an Eligible
Account Holder shall reduce, to the extent thereof, the subscription rights to
be distributed to such person as a Supplemental Eligible Account Holder. In the
event of an oversubscription for shares, the shares available shall be allocated
first to permit each subscribing Supplemental Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make his total
allocation (including the number of shares, if any, allocated in accordance with
Category No. 1) equal to 100 shares, and thereafter among each subscribing
Supplemental Eligible Account Holder pro rata in the same proportion that his
qualifying deposit bears to the total qualifying deposits of all subscribing
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied.
Category No. 4 provides, to the extent that shares are then available
after satisfying the subscriptions of Eligible Account Holders, Tax-Qualified
Employee Plans and Supplemental Eligible Account Holders, for the issuance of
subscription rights to Other Members to purchase in this category up to the
greater of $150,000 of Common Stock, or one-tenth of one percent (.10%) of the
Common Stock offered in the Conversion. In the event of an oversubscription, the
shares available shall be allocated among the subscribing Other Members pro rata
in the same proportion that his number of votes on the Voting Record Date bears
to the total number of votes on the Voting Record Date of all subscribing Other
Members on such date. Such number of votes shall be determined based on our
mutual charter and bylaws in effect on the date of approval by members of this
Plan of Conversion.
Category No. 5 provides for the issuance of subscription rights to our
officers, directors and employees, to purchase in this Category up to $150,000
of the Common Stock to the extent that shares are available after satisfying the
subscriptions of eligible subscribers in preference Categories 1, 2, 3 and 4.
The total number of shares which may be purchased under this category may not
exceed 24% of the number of shares of Common Stock. In the event of an
oversubscription, the available shares will be allocated pro rata among all
subscribers in this category based on the number of shares ordered by each
subscriber.
Direct Community Offering and Public Offering. To the extent that
shares remain available and subject to market conditions at or near the
completion of the subscription offering, we may offer shares of Common Stock
pursuant to the Plan to selected persons in a direct community offering and/or
public offering on a best-efforts basis through Webb in such a manner as to
promote a wide distribution of the Common Stock and with a preference given,
except for certain shares which may be reserved for institutional investors, to
natural persons residing in a geographic area encompassing a radius of 35 miles
from the Association's headquarters. Any orders received in connection with the
direct community offering and public offering, if any, will receive a lower
priority than orders properly made in the subscription offering by persons
properly exercising subscription rights. In addition depending on market
conditions, Webb may utilize selected broker-dealers ("Selected Dealers") in
connection with the sale of shares in the public offering, if any. Common Stock
sold in the direct community offering and public offering will be sold at $10.00
per share and hence will be sold at the same price as all
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other shares in the Conversion. We have the right to reject orders, in whole or
in part, in our sole discretion in the direct community offering and public
offering.
No person, together with any associate or group of persons acting in
concert, will be permitted to purchase more than $150,000 of Common Stock in the
direct community offering and public offering. To order Common Stock in
connection with the direct community offering or public offering, if any, an
executed stock order and account withdrawal authorization and certification must
be received by Webb prior to the termination of such offering. The date by which
orders must be received in the direct community offering and public offering
will be set by us at the time of commencement of such offering; provided
however, if the offering is extended beyond November 28, 1998, each subscriber
will have the opportunity to maintain, modify or rescind his or her
subscription. In such event, all subscription funds will be promptly returned
with interest to each subscriber unless he or she affirmatively indicates
otherwise.
It is estimated that the Selected Dealers will receive a negotiated
commission of up to 4.0% of the Common Stock sold by the Selected Dealers,
payable by us, and Webb will also receive a fee of 1.5% of Common Stock sold by
such firms. Such fees in the aggregate will not exceed 5.5%. See "- Marketing
Arrangements."
In the event we determine to conduct a direct community offering and/or
public offering, persons to whom a prospectus is delivered may subscribe for
shares of Common Stock by submitting a completed stock order and account
withdrawal authorization (provided by Webb) and an executed certification along
with immediately available funds to Webb by not later than the public offering
expiration date (as established by us). Promptly upon receipt of available
funds, together with a properly executed stock order and account withdrawal
authorization and certification, Webb will forward such funds to us to be
deposited in a subscription escrow account.
If a subscription in the direct community offering and/or public
offering is accepted, promptly after the completion of the Conversion, a
certificate for the appropriate amount of shares will be forwarded to Webb as
nominee for the beneficial owner. In the event that a subscription is not
accepted or the Conversion is not consummated, we will promptly refund with
interest the subscription funds to Webb which will then return the funds to
subscribers' accounts. If the aggregate pro forma market value of the Common
Stock to be sold in the offering is less than $17.0 million or more than $26.45
million, each subscriber will have the right to modify or rescind his or her
subscription.
The opportunity to subscribe for shares of Common Stock in the direct
community offering and/or public offering is subject to our right, in our sole
discretion, to accept or reject any such orders in whole or in part.
Additional Purchase Restrictions
The Plan also provides for certain additional limitations to be placed
upon the purchase of shares in the Conversion. Specifically, no person (other
than a Tax-Qualified Employee Plan) by himself or herself or with an associate,
and no group of persons acting in concert, may subscribe for or purchase more
than $300,000 of Common Stock. For purposes of this limitation, an associate of
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a person does not include a Tax-Qualified Employee Plan or Non-Tax Qualified
Employee Plan in which the person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity. Moreover, for purposes
of this paragraph, shares held by one or more Tax Qualified or Non-Tax Qualified
Employee Plans attributed to a person shall not be aggregated with shares
purchased directly by or otherwise attributable to that person. See "- Stock
Pricing and Number of Shares to be Issued" regarding potential changes in
subscription rights in the event of a decrease in the number of shares to be
issued in the Conversion. Officers and directors and their associates may not
purchase, in the aggregate, more than 34% of the shares to be sold in the
Conversion. For purposes of the Plan, the members of the Board of Directors are
not deemed to be acting in concert solely by reason of their Board membership.
For purposes of this paragraph, an associate of a person does not include a
Tax-Qualified Employee Plan. Moreover, any shares attributable to the officers
and directors and their associates, but held by one or more Tax-Qualified
Employee Plans shall not be included in calculating the number of shares which
may be purchased under the limitations in this paragraph. The term "associate"
is used above to indicate any of the following relationships with a person: (i)
any corporation or organization (other than the Company or the Association or a
majority-owned subsidiary of the Company or the Association) of which a person
is an officer or partner or is, directly or indirectly, the beneficial owner of
10% or more of any class of equity security; (ii) any trust or other estate in
which such person has a substantial beneficial interest or as to which such
person serves as trustee or in a similar fiduciary capacity; and (iii) any
relative or spouse of such person or any relative of such spouse who has the
same home as such person or who is a director or officer of the Company or the
Association or any subsidiary of the Company or the Association.
We, in our sole discretion, may increase the maximum purchase
limitations referred to above up to 9.99% of the total shares to be offered in
the offering, provided that orders for shares exceeding 5.0% of the shares being
offered in the offering shall not exceed, in the aggregate, 10% of the shares
being offered in the offering. Requests to purchase additional shares of Common
Stock under this provision will be allocated by us on a pro rata basis giving
priority in accordance with the priority rights set forth above. Depending on
market and financial conditions, we, with the approval of the OTS and without
further approval of our members, may increase or decrease any of the above
purchase limitations.
To the extent that shares are available, each subscriber must subscribe
for a minimum of 25 shares. In computing the number of shares to be allocated,
all numbers will be rounded down to the next whole number.
Common Stock purchased in the Conversion will be freely transferable
except for shares purchased by our executive officers and directors. See "-
Restrictions on Transfer of Subscription Rights and Shares."
Marketing Arrangements
We have retained Webb to consult with and advise us and to assist us in
the distribution of shares in the offering on a best-efforts basis. Among the
services Webb will perform are (i) training and educating our employees, who
will be performing certain ministerial functions in the offering, regarding the
mechanics and regulatory requirements of the stock sale process, (ii) keeping
records
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of orders for shares of Common Stock, (iii) targeting our sales efforts
including preparation of marketing materials, (iv) assisting in the collection
of proxies from our members for use at the Special Meeting, and (v) providing
its registered stock representatives to staff the Stock Center and meeting with
and assisting potential subscribers. For its services, Webb will receive a
success fee of 1.5% of the aggregate purchase price of Common Stock sold in the
offering, excluding Common Stock purchased by our directors, officers and
employees, or members of their immediate families and purchases by tax-qualified
plans. A management fee of $25,000, is being applied against this fee. If the
offering is terminated before completion, Webb will be entitled to retain such
payments already accrued or received.
To the extent registered broker-dealers are utilized, we will pay a fee
(to be negotiated, but not to exceed 4.0% of the aggregate purchase price of
shares of Common Stock sold in the direct community offering and/or public
offering) to such Selected Dealers, including any sponsoring dealer fees. We
will also pay Webb a fee of 1.5% of the aggregate purchase price of shares of
Common Stock sold in the offering by Selected Dealers, which together with the
fee to be paid to Selected Dealers will result in an aggregate fee not to exceed
5.5% of the Common Stock sold in the offering. Fees paid to Webb and to any
other broker-dealer may be deemed to be underwriting fees, and Webb and such
other broker-dealers may be deemed to be underwriters. We have agreed to
reimburse Webb for its reasonable out-of-pocket expenses (not to exceed
$10,000), and its legal fees and expenses (not to exceed $35,000) and to
indemnify Webb against certain claims or liabilities, including certain
liabilities under the Securities Act.
In the event there is a direct community offering or public offering,
procedures may be implemented to permit a purchaser to pay for his or her shares
with funds held by or deposited with Webb or a Selected Dealer. See "- Direct
Community Offering and Public Offering."
Our directors and executive officers may, to a limited extent,
participate in the solicitation of offers to purchase Common Stock. Sales will
be made from a Stock Center located away from the publicly accessible areas
(including teller windows) of the Association's offices. Our other employees may
participate in the offering in administrative capacities, providing clerical
work in effecting a sales transaction or answering questions of a potential
purchaser provided that the content of the employee's responses is limited to
information contained in this Prospectus or other offering document. Other
questions of prospective purchasers will be directed to executive officers or
registered representatives of Webb. Such other employees have been instructed
not to solicit offers to purchase Common Stock or provide advice regarding the
purchase of Common Stock. We will rely on Rule 3a4-1 under the Exchange Act and
sales of Common Stock will be conducted within the requirements of Rule 3a4-1,
so as to permit officers, directors and employees to participate in the sale of
Common Stock. Our officers, directors and employees will not be compensated in
connection with their participation by the payment of commissions or other
remuneration based either directly or indirectly on the transactions in the
Common Stock.
We will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons entitled to subscribe for
shares, pursuant to the Plan of Conversion, reside. However, no shares will be
offered or sold under the Plan of Conversion to any such person who (1) resides
in a foreign country or (2) resides in a state of the United States in which a
small number of persons otherwise eligible to subscribe for shares under the
Plan of Conversion reside or as to which
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we determine that compliance with the securities law of such state would be
impracticable for reasons of cost or otherwise, including, but not limited to, a
requirement that we or any of our officers, directors or employees register,
under the securities laws of such state, as a broker, dealer, salesmen or agent.
No payments will be made in lieu of the granting of subscription rights to any
such person.
Method of Payment for Subscriptions
To purchase shares in the subscription offering, an executed order form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from your deposit account with us (which may be
given by completing the appropriate blanks in the order form), must be received
by us by 12:00 noon, Niles, Ohio time, on October 14, 1998. Order forms which
are not received by such time or are executed defectively or are received
without full payment (or appropriate withdrawal instructions) are not required
to be accepted.
To order Common Stock in connection with the direct community offering
and/or the public offering, if any, an executed stock order and account
withdrawal authorization must be received by Webb prior to the termination of
such offering. The date by which orders must be received in the direct community
offering and the public offering will be set by us at the time of commencement
of such offerings, if any; provided however, if the offering is extended beyond
November 28, 1998, each subscriber will have the opportunity to maintain, modify
or rescind his or her subscription. In such event, all subscription funds will
be promptly returned with interest to each subscriber unless he or she
affirmatively indicates otherwise. In addition, we are not obligated to accept
orders submitted on photocopies or facsimile order forms.
We have the right to waive or permit the correction of incomplete or
improperly executed forms, but do not represent that we will do so. Once
received, an executed order form or stock order and account withdrawal
authorization may not be modified, amended or rescinded without our consent
unless the Conversion has not been completed by November 28, 1998.
Payment for subscriptions in the subscription offering, may be made (i)
in cash if delivered to us in person at our office, (ii) by check or money order
or (iii) by authorization of withdrawal from deposit accounts maintained with
us. Interest will be paid on payments made by cash, check, bank draft or money
order, whether or not the Conversion is complete or terminated, at our current
passbook rate from the date payment is received until the completion or
termination of the Conversion. If payment is made by authorization of withdrawal
from deposit or certificate accounts, the funds authorized to be withdrawn from
such account will continue to accrue interest at the contractual rates until
completion or termination of the Conversion. Such funds will be unavailable to
the depositor until completion or termination of the Conversion.
If a subscriber authorizes us to withdraw the amount of the purchase
price from his certificate account, we will do so as of the effective date of
Conversion. We will waive any applicable penalties for early withdrawal from
certificate accounts at Home Federal for the purpose of purchasing Common Stock.
If the remaining balance in a certificate account is reduced below the
applicable minimum balance requirement at the time that the funds actually are
transferred under the
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authorization, the rate paid on the remaining balance of the certificate will
earn interest at the then-current passbook rate.
A depositor interested in using his or her IRA funds to purchase Common
Stock must do so through a self-directed IRA. Since we do not offer such
accounts, we will allow a depositor to make a trustee-to-trustee transfer of the
IRA funds to a trustee offering a self-directed IRA program with the agreement
that such funds will be used to purchase the Common Stock in the offering. There
will be no early withdrawal or IRS interest penalties for such transfers. The
new trustee would hold the Common Stock in a self-directed account in the same
manner as we now hold the depositor's IRA funds. An annual administrative fee
may be payable to the new trustee. Depositors interested in using funds in a
Home Federal IRA to purchase Common Stock should contact the Stock Center as
soon as possible so that the necessary forms may be forwarded for execution and
returned prior to the Subscription Expiration Date.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather, may pay for such shares of Common Stock
subscribed for the purchase price upon consummation of the Conversion, provided
that there is in force from the time of its subscription until such time, a loan
commitment to lend to the ESOP, at such time, the aggregate purchase price of
the shares for which it subscribed.
For information regarding the submission of orders in connection with
the direct community offering and the public offering, see "- Direct Community
Offering and Public Offering."
All refunds and any interest due will be paid after completion of the
Conversion. Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the last address of such persons appearing on the
records of the Association, or to such other address as may be specified in
properly completed order forms, as soon as practicable following consummation of
the sale of all shares of Common Stock. Any certificates returned as
undeliverable will be disposed of in accordance with applicable law.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Subscription Expiration Date in accordance with Rule 15c2-8 under
the Exchange Act, no prospectus will be mailed any later than five days prior to
such date or hand delivered any later than two days prior to such date.
Execution of the order form will confirm receipt or delivery in accordance with
Rule 15c2-8. Order forms will only be distributed with a prospectus. We will
accept for processing only orders submitted on original order forms. Photocopies
or facsimile copies of order forms will not be accepted. Payment by cash, check,
money order, bank draft or debit authorization to an existing account at the
Association must accompany the order form. No wire transfers will be accepted.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (March 31,
1997), Supplemental Eligibility Record Date (June 30, 1998) and/or the Voting
Record Date (September 4, 1998) must list all accounts on the order form giving
all names on each account and the account number as of the applicable record
date.
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In addition to the foregoing, if shares are offered through Selected
Dealers, a purchaser may pay for his shares with funds held by or deposited with
a Selected Dealer. If an order form is executed and forwarded to the Selected
Dealer or if the Selected Dealer is authorized to execute the order form on
behalf of a purchaser, the Selected Dealer is required to forward the order form
and funds to us for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the Selected Dealer. Alternatively, Selected Dealers may solicit indications
of interest from their customers who indicated an interest and seek their
confirmation as to their intent to purchase. Those indicating an intent to
purchase shall forward executed order forms to their Selected Dealer or
authorize the Selected Dealer to execute such forms. The Selected Dealer will
acknowledge receipt of the order to its customer in writing on the following
business day and will debit such customer's account on the third business day
after the customer has confirmed his intent to purchase (the "debit date") and
on or before noon of the next business day following the debit date will send
order forms and funds to us for deposit in a segregated account. If such
alternative procedure is employed, purchasers' funds are not required to be in
their accounts with Selected Dealers until the debit date.
Restrictions on Transfer of Subscription Rights and Shares
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights, including Eligible
Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account
Holders, Other Members and employees, officers and directors, from transferring
or entering into any agreement or understanding to transfer the legal or
beneficial ownership of the subscription rights issued under the Plan or the
shares of Common Stock to be issued upon their exercise. Such rights may be
executed only by the person to whom they are granted and only for his account.
Each person exercising such subscription rights will be required to certify that
he is purchasing shares solely for his own account and that he has no agreement
or understanding regarding the sale or transfer of such shares. The OTS
regulations also prohibit any person from offering or making an announcement of
an offer or intent to make an offer to purchase such subscription rights or
shares of Common Stock prior to the completion of the Conversion.
We may pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
known by us to involve the transfer of such rights.
Except as to our directors and executive officers, the shares of Common
Stock sold in the Conversion will be freely transferable. Shares purchased by
our directors, executive officers or their associates in the Conversion shall be
subject to the restrictions that said shares shall not be sold during the period
of one year following the date of purchase, except in the event of the death of
the stockholder. Accordingly, stock certificates issued by the Company to
directors, executive officers and their associates shall bear a legend giving
appropriate notice of such restriction and, in addition, the Company will give
appropriate instructions to the transfer agent for the Common Stock with respect
to the applicable restriction upon transfer of any restricted shares. Any shares
issued at a later date as a stock dividend, stock split or otherwise, to holders
of restricted stock, shall be subject to the same restrictions that may apply to
such restricted stock. Company stock (like the stock of most companies) is
subject to the requirements of the Securities Act. Accordingly, Company stock
may
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be offered and sold only in compliance with registration requirements or
pursuant to an applicable exemption from registration.
Common Stock received in the Conversion by persons who are not
"affiliates" of the Company may be resold without registration. Shares received
by affiliates of the Company (primarily the directors, officers and principal
stockholders of the Company) will be subject to the resale restrictions of Rule
144 under the Securities Act, which are discussed below.
Rule 144 generally requires that there be publicly available certain
information concerning the Company, and that sales thereunder 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 Common Stock, or (ii) if the
stock is admitted to trading on a national securities exchange or reported
through the automated quotation system of a registered securities bank, the
average weekly reported volume of trading during the four weeks preceding the
sale.
Participation by the Board and Executive Officers
Our directors and executive officers have indicated their intention to
purchase in the Conversion an aggregate of $1.5 million of Common Stock, equal
to 8.82%, 7.50%, 6.52% or 5.67% of the number of shares to be issued in the
offering, at the minimum, midpoint, maximum and adjusted maximum of the
Estimated Valuation Range, respectively. The following table sets forth
information regarding subscription rights to Common Stock intended to be
exercised by each of our directors, including members of their immediate family
and their IRAs, and by all directors and executive officers as a group. The
following table assumes that 2,000,000 shares, the midpoint of the Estimated
Valuation Range, of Common Stock are issued at the purchase price of $10.00 per
share. The table does not include shares to be purchased through the proposed
ESOP or awarded under the proposed restricted stock plan or proposed Stock
Option Plan.
Number of
Aggregate Shares at Percent of
Purchase $10.00 per Shares at
Name Title Price Share Midpoint
- ---- ----- --------- --------- ----------
William L. Stephens Director, President and $300,000 30,000 1.50%
Chief Executive Officer
George J. Swift Director, Vice President 300,000 30,000 1.50
and Secretary
Ralph A. Zuzolo, Sr. Director 300,000 30,000 1.50
Horace L. McLean Director 150,000 15,000 .75
P. James Kramer Director 300,000 30,000 1.50
Lawrence Safarek Vice President and
Treasurer 150,000 15,000 .75
-------- -------
$1,500,000 150,000 7.50
========== =======
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Risk of Delay in Completion of the Offering
The completion of the sale of all unsubscribed shares in the offering
will be dependent, in part, upon our operating results and market conditions at
the time of the offering. Under the Plan of Conversion, all shares offered in
the Conversion must be sold within a period ending 24 months from the date of
the Special Meeting. While we anticipate completing the sale of shares offered
in the Conversion within this period, if our Board of Directors is of the
opinion that economic conditions generally or the market for publicly traded
thrift institution stocks make undesirable a sale of the Common Stock, then the
offering may be delayed until such conditions improve. If the offering is
extended beyond November 28, 1998, all subscribers will have the right to modify
or rescind their subscriptions and to have their subscription funds returned
with interest. There can be no assurance that the offering will not be extended
as set forth above.
A material delay in the completion of the sale of all unsubscribed
shares in the offering or otherwise may result in a significant increase in the
costs of completing the Conversion. Significant changes in our operations and
financial condition, the aggregate market value of the shares to be issued in
the Conversion and general market conditions may occur during such material
delay. In the event the Conversion is not consummated within 24 months after the
date of the Special Meeting of Members, we would charge accrued Conversion costs
to then current period operations.
Approval, Interpretation, Amendment and Termination
All interpretations of the Plan of Conversion, as well as the
completeness and validity of order forms and stock order and account withdrawal
authorizations, will be made by us and will be final, subject to the authority
of the OTS and the requirements of applicable law. The Plan of Conversion
provides that, if deemed necessary or desirable by the Boards of Directors of
the Association and the Company, the Plan of Conversion may be substantively
amended by the Boards of Directors of the Association and the Company, as a
result of comments from regulatory authorities or otherwise, at any time with
the concurrence of the OTS. In the event the Plan of Conversion is substantially
amended, other than a change in the maximum purchase limits set forth herein, we
intend to notify subscribers of the change and to refund subscription funds with
interest unless subscribers affirmatively elect to increase, decrease or
maintain their subscriptions. The Plan of Conversion will terminate if the sale
of all shares is not completed within 24 months after the date of the Special
Meeting of Members. The Plan of Conversion may be terminated by a two-thirds
vote of the our Board of Directors at any time prior to the Special Meeting of
Members, and at any time following such Special Meeting with the concurrence of
the OTS. A specific resolution approved by a majority vote of our Board of
Directors would be required to terminate the Plan of Conversion prior to the end
of such 24-month period.
Restrictions on Repurchase of Stock
Generally, during the first year following the conversion, the Company
may not repurchase its shares and during each of the second and third years
following the conversion, the Company may repurchase up to five percent of the
outstanding shares provided they are purchased in open-market transactions.
Repurchases must not cause us to become undercapitalized and at least 10 days
prior notice of the repurchase must be provided to the OTS. The OTS may
disapprove a repurchase
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program upon a determination that (1) the repurchase program would adversely
affect our financial condition, (2) the information submitted is insufficient
upon which to base a conclusion as to whether the financial condition would be
adversely affected, or (3) a valid business purpose was not demonstrated.
However, the OTS may grant special permission to repurchase shares after six
months following the conversion and to repurchase more than five percent during
each of the second and third years. In addition, SEC rules also govern the
method, time, price, and number of shares of common stock that may be
repurchased by the Company and affiliated purchasers. If, in the future, the
rules and regulations regarding the repurchase of stock are liberalized, the
Company may utilize the rules and regulations then in effect.
Income Tax Consequences
Consummation of the Conversion is expressly conditioned upon our prior
receipt of either a ruling from the IRS or an opinion of Silver, Freedman &
Taff, L.L.P. with respect to federal taxation, and an opinion of Anness, Gerlach
& Williams with respect to Ohio taxation, to the effect that consummation of the
Conversion will not be taxable to the converted Association or the Company. The
full text of the Silver, Freedman & Taff, L.L.P. opinion, the Keller Letter
(hereinafter defined) and the Anness, Gerlach & Williams opinion, which opinions
are summarized herein, were filed with the SEC as exhibits to the Company's
Registration Statement on Form SB-2. See "Additional Information."
An opinion which is summarized below has been received from Silver,
Freedman & Taff, L.L.P. with respect to our proposed Conversion to the stock
form. The Silver, Freedman Taff, L.L.P. opinion states that (i) the Conversion
will qualify as a reorganization under Section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended, no gain or loss will be recognized to the
Association in either its mutual form or its stock form by reason of the
proposed Conversion and the Association in both its mutual and stock form will
be a party to the reorganization, (ii) no gain or loss will be recognized to the
Association in its stock form upon the receipt of money and other property, if
any, from the Company for the stock of the Association; and no gain or loss will
be recognized to the Company upon the receipt of money for Common Stock of the
Company; (iii) the assets of the Association in either its mutual or its stock
form will have the same basis before and after the Conversion; (iv) the holding
period of the assets of the Association in its stock form will include the
period during which the assets were held by the Association in its mutual form
prior to Conversion; (v) gain, if any, will be realized by the depositors of the
Association upon the constructive issuance to them of withdrawable deposit
accounts of the Association in its stock form, nontransferable subscription
rights to purchase Common Stock and/or interests in the Liquidation Account (any
such gain will be recognized by such depositors, but only in an amount not in
excess of the fair market value of the subscription rights and Liquidation
Account interests received); (vi) the basis of the account holder's savings
accounts in the Association after the Conversion will be the same as the basis
of his or her savings accounts in the Association prior to the Conversion; (vii)
the basis of each account holder's interest in the Liquidation Account is
assumed to be zero; (viii) based on the Keller Letter, as hereinafter defined,
the basis of the subscription rights will be zero; (ix) the basis of the Common
Stock to its stockholders will be the purchase price thereof; (x) a
stockholder's holding period for Common Stock acquired through the exercise of
subscription rights shall begin on the date on which the subscription rights are
exercised and the holding period for the Common Stock purchased in the offering
will commence on the date following the date on which such stock is purchased;
(xi) the Association in its stock form will succeed to and take into account the
earnings
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and profits or deficit in earnings and profits, of the Association, in its
mutual form, as of the date of Conversion; and (xii) the creation of the
Liquidation Account will have no effect on the Association's taxable income,
deductions or addition to reserve for bad debts either in its mutual or stock
form.
The opinion from Silver, Freedman & Taff, L.L.P. is based on, among
other things, certain assumptions, including the assumptions that the exercise
price of the subscription rights to purchase Common Stock will be approximately
equal to the fair market value of that stock at the time of the completion of
the proposed Conversion. With respect to the subscription rights, we have
received a letter from Keller & Company (the "Keller Letter") which concludes,
based on certain assumptions, that the subscription rights to be received by
Eligible Account Holders, Supplemental Eligible Account Holders and other
eligible subscribers do not have any economic value at the time of distribution
or at the time the subscription rights are exercised, whether or not an offering
takes place.
We have also received an opinion of Silver, Freedman & Taff, L.L.P. to
the effect that, based in part on the Keller Letter: (i) no taxable income will
be realized by depositors as a result of the exercise of non-transferable
subscription rights to purchase shares of Common Stock at fair market value;
(ii) no taxable income will be recognized by borrowers, directors, officers and
employees of the Association on the receipt or exercise of subscription rights
to purchase shares of Common Stock at fair market value; and (iii) no taxable
income will be realized by the Association or Company on the issuance of
subscription rights to eligible subscribers to purchase shares of Common Stock
at fair market value.
Notwithstanding the Keller Letter, if the subscription rights are
subsequently found to have a fair market value and are deemed a distribution of
property, it is Silver, Freedman & Taff, L.L.P.'s opinion that gain or income
will be recognized by various recipients of the subscription rights (in certain
cases, whether or not the rights are exercised) and that we may be taxable on
the distribution of the subscription rights.
With respect to Ohio taxation, we have received an opinion from Anness,
Gerlach & Williams to the effect that the Ohio tax consequences to the
Association, in its mutual or stock form, the Company, eligible account holders,
parties receiving subscription rights, parties purchasing conversion stock, and
other parties participating in the Conversion will be the same as the federal
income tax consequences described above.
Unlike a private letter ruling, the opinions of Silver, Freedman &
Taff, L.L.P. and Anness, Gerlach & Williams, as well as the Keller Letter, have
no binding effect or official status, and no assurance can be given that the
conclusions reached in any of those opinions would be sustained by a court if
contested by the IRS or the Delaware or Ohio tax authorities.
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RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although we are not aware of any effort that might be made to obtain
control of the Company after Conversion, we, as discussed below, believe that it
is appropriate to include certain provisions as part of the Company's
certificate of incorporation to protect the interests of the Company and its
stockholders from takeovers which the Board of Directors of the Company might
conclude are not in the best interests of Home Federal, the Company or the
Company's stockholders.
The following discussion is a general summary of material provisions of
the Company's certificate of incorporation and bylaws and certain other
regulatory provisions which may be deemed to have an "anti-takeover" effect. The
following description of certain of these provisions is necessarily general and,
with respect to provisions contained in the Company's certificate of
incorporation and bylaws and the Association's proposed stock charter and
bylaws, reference should be made in each case to the document in question, each
of which is part of our Conversion Application filed with the OTS and the
Company's Registration Statement filed with the SEC. See "Additional
Information."
Provisions of the Company's Certificate of Incorporation and Bylaws
Directors. Certain provisions of the Company's certificate of
incorporation and bylaws will impede changes in majority control of the Board of
Directors. The Company's certificate of incorporation provides that the Board of
Directors of the Company will be divided into three classes, with directors in
each class elected for three-year staggered terms except for the initial
directors. Thus, assuming a Board of three directors or more, it would take two
annual elections to replace a majority of the Company's Board. The Company's
certificate of incorporation also provides that the size of the Board of
Directors may be increased or decreased only by a majority vote of the whole
Board or by a vote of 80% of the shares eligible to be voted at a duly
constituted meeting of stockholders called for such purpose. The bylaws also
provide that any vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the number of directors, shall be filled for
the remainder of the unexpired term by a majority vote of the directors then in
office. Final ly, the bylaws impose certain notice and information requirements
in connection with the nomination by stockholders of candidates for election to
the Board of Directors or the proposal by stockholders of business to be acted
upon at an annual meeting of stockholders.
The certificate of incorporation provides that a director may only be
removed for cause by the affirmative vote of 80% of the shares eligible to vote.
Restrictions on Call of Special Meetings. The certificate of
incorporation of the Company provides that a special meeting of stockholders may
be called only pursuant to a resolution of the Board of Directors and for only
such business as directed by the Board. Stockholders are not authorized to call
a special meeting.
Absence of Cumulative Voting. The Company's certificate of
incorporation does not provide for cumulative voting rights in the election of
directors.
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Authorization of Preferred Stock. The certificate of incorporation of
the Company authorizes 500,000 shares of serial preferred stock, $.01 par value.
The Company is authorized to issue preferred stock from time to time in one or
more series subject to applicable provisions of law, and the Board of Directors
is authorized to fix the designations, powers, preferences and relative
participating, optional and other special rights of such shares, including
voting rights (which could be multiple or as a separate class) and conversion
rights. In the event of a proposed merger, tender offer or other attempt to gain
control of the Company that the Board of Directors does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede the completion of
such a transaction. If the Company issued any preferred stock which disparately
reduced the voting rights of the Common Stock within the meaning of Rule 19c-4
under the Exchange Act, the Common Stock could be required to be delisted from
the Nasdaq System. An effect of the possible issuance of preferred stock,
therefore, may be to deter a future takeover attempt. The Board of Directors has
no present plans or understandings for the issuance of any preferred stock and
does not intend to issue any preferred stock except on terms which the Board
deems to be in the best interests of the Company and its stockholders.
Limitation on Voting Rights. The certificate of incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit"), be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. This limitation would not inhibit any person
from soliciting (or voting) proxies from other beneficial owners for more than
10% of the Common Stock or from voting such proxies. Beneficial ownership is to
be determined pursuant to Rule 13d-3 of the General Rules and Regulations of the
Exchange Act, and in any event includes shares beneficially owned by any
affiliate of such person, shares which such person or his affiliates (as defined
in the certificate of incorporation) have the right to acquire upon the exercise
of conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by directors, officers and employees of the
Association or the Company. This provision will be enforced by the Board of
Directors to limit the voting rights of persons beneficially owning more than
10% of the stock and thus could be utilized in a proxy contest or other
solicitation to defeat a proposal that is desired by a majority of the
stockholders.
Procedures for Certain Business Combinations. The Company's certificate
of incorporation requires that certain business combinations (including
transactions initiated by management) between the Company (or any majority-owned
subsidiary thereof) and a 10% or more stockholder either (i) be approved by at
least 80% of the total number of outstanding voting shares, voting as a single
class, of the Company, (ii) be approved by two-thirds of the continuing Board of
Directors (i.e., persons serving prior to the 10% stockholder becoming such) or
(iii) involve consideration per share generally equal to that paid by such 10%
stockholder when it acquired its block of stock.
It should be noted that, since the Board and management (6 persons)
intend to purchase approximately $1.5 million of the shares offered in the
Conversion and may control the voting of additional shares through the ESOP and
proposed restricted stock plan and Stock Option Plan, the Board and management
may be able to block the approval of combinations requiring an 80% vote even
where a majority of the stockholders vote to approve such combinations.
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Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Company's certificate of incorporation must be approved by the Company's Board
of Directors and also by a majority of the outstanding shares of the Company's
voting stock, provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to number, classification, election and removal of
directors; amendment of bylaws; call of special stockholder meetings; offers to
acquire and acquisitions of control; director liability; certain business
combinations; power of indemnification; and amendments to provisions relating to
the foregoing in the certificate of incorporation).
The bylaws may be amended by a majority vote of the Board of Directors
or the affirmative vote of at least 80% of the total votes eligible to be voted
at a duly constituted meeting of stockholders.
Purpose and Takeover Defensive Effects of the Company's Certificate of
Incorporation and Bylaws. We believe that the provisions described above are
prudent and will reduce the Company's vulnerability to takeover attempts and
certain other transactions which have not been negotiated with and approved by
its Board of Directors. These provisions will also assist us in the orderly
deployment of the conversion proceeds into productive assets during the initial
period after the Conversion. We believe these provisions are in the best
interest of the Association and of the Company and its stockholders. In our
judgment, the Company's Board will be in the best position to determine the true
value of the Company and to negotiate more effectively for what may be in the
best interests of its stockholders. Accordingly, we believe that it is in the
best interests of the Company and its stockholders to encourage potential
acquirors to negotiate directly with the Board of Directors of the Company and
that these provisions will encourage such negotiations and discourage hostile
takeover attempts. It is also our view that these provisions should not
discourage persons from proposing a merger or other transaction at prices
reflective of the true value of the Company and which is in the best interests
of all stockholders.
Attempts to take over financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the Company
and its stockholders, with due consideration given to matters such as the
management and business of the acquiring corporation and maximum strategic
development of the Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Company's remaining stockholders of the benefits of certain protective
provisions of the Exchange
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Act, if the number of beneficial owners becomes less than the 300 required for
Exchange Act registration.
Despite our belief as to the benefits to stockholders of these
provisions of the Company's certificate of incorporation and bylaws, these
provisions may also have the effect of discouraging a future takeover attempt
which would not be approved by the Company's Board, but pursuant to which
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have any opportunity to do so. Such provisions
will also render the removal of the Company's Board of Directors and of
management more difficult. The Company will enforce the voting limitation
provisions of the certificate of incorporation in proxy solicitations and
accordingly could utilize these provisions to defeat proposals that are favored
by a majority of the stockholders. We, however, have concluded that the
potential benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Company may adopt additional charter
provisions regarding the acquisition of its equity securities that would be
permitted to a Delaware corporation. The Company does not presently intend to
propose the adoption of further restrictions on the acquisition of the Company's
equity securities.
Other Restrictions on Acquisitions of Stock
Delaware Anti-Takeover Statute. The Delaware General Corporation Law
(the "DGCL") provides that buyers who acquire more than 15% of the outstanding
stock of a Delaware corporation, such as the Company, are prohibited from
completing a hostile takeover of such corporation for three years. However, the
takeover can be completed if (i) the buyer, while acquiring the 15% interest,
acquires at least 85% of the corporation's outstanding stock (the 85%
requirement excludes shares held by directors who are also officers and certain
shares held under employee stock plans), or (ii) the takeover is approved by the
target corporation's board of directors and two-thirds of the shares of
outstanding stock of the corporation (excluding shares held by the bidder).
However, these provisions of the DGCL do not apply to Delaware
corporations with less than 2,000 stockholders or which do not have voting stock
listed on a national exchange or listed for quotation with a registered national
securities association. No prediction can be made as to whether the Company will
be listed on the Nasdaq Stock Market or have 2,000 stockholders. The Company may
exempt itself from the requirements of the statute by adopting an amendment to
its Certificate of Incorporation or Bylaws electing not to be governed by this
provision. At the present time, the Board of Directors does not intend to
propose any such amendment.
Federal Regulation. A federal regulation prohibits any person prior to
the completion of a conversion from transferring, or entering into any agreement
or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, this regulation prohibits any person, without
the prior approval of the OTS, from acquiring or making an offer to
-103-
acquire (if the offer is opposed by the savings association) more than 10% of
the stock of any converted savings institution if such person is, or after
consummation of such acquisition would be, the beneficial owner of more than 10%
of such stock. In the event that any person, directly or indirectly, violates
this regulation, the securities beneficially owned by such person in excess of
10% may not be counted as shares entitled to vote and may not be voted by any
person or counted as voting shares in connection with any matter submitted to a
vote of stockholders. Like the charter provisions outlined above, these federal
regulations can make a change in control more difficult, even if desired by the
holders of the majority of the shares of the stock. We reserve the right to ask
the OTS or other federal regulators to enforce these restrictions against
persons seeking to obtain control of the Company, whether in a proxy
solicitation or otherwise. Our policy is that these legal restrictions must be
observed in every case, including instances in which an acquisition of control
of the Company is favored by a majority of the stockholders.
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition,
federal regulations require that, prior to obtaining control of a savings
association, a person, other than a company, must give 60 days' prior notice to
the OTS and have received no OTS objection to such acquisition of control. Any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Under federal law (as well as the regulations referred to
below) the term "savings association" includes state and federally chartered
SAIF-insured institutions and federally chartered savings banks whose accounts
are insured by the FDIC's BIF and holding companies thereof.
Control, as defined under federal law, in general means ownership,
control of or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a majority of a
savings association's directors, or a determination by the OTS that the acquiror
has the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of any class of a savings association's voting stock, if the
acquiror also is subject to any one of eight "control factors," constitutes a
rebuttable determination of control under the OTS regulations. Such control
factors include the acquiror being one of the two largest stockholders. The
determination of control may be rebutted by submission to the OTS, prior to the
acquisition of stock or the occurrence of any other circumstances giving rise to
such determination, of a statement setting forth facts and circumstances which
would support a finding that no control relationship will exist and containing
certain undertakings. The OTS regulations provide that persons or companies
which acquire beneficial ownership exceeding 10% or more of any class of a
savings association's stock must file with the OTS a certification that the
holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
-104-
DESCRIPTION OF CAPITAL STOCK
The 6,500,000 shares of capital stock authorized by the Company's
certificate of incorporation are divided into two classes, consisting of
6,000,000 shares of Common Stock (par value $.01 per share) and 500,000 shares
of serial preferred stock (par value $.01 per share). The Company currently
expects to issue between 1,700,000 and 2,300,000 shares (subject to increase to
2,645,000) of Common Stock in the Conversion and no shares of serial preferred
stock. The aggregate par value of the issued shares will constitute the capital
account of the Company on a consolidated basis. Upon payment of the purchase
price, all shares issued in the Conversion will be duly authorized, fully paid
and nonassessable. The balance of the purchase price of Common Stock, less
expenses of Conversion, will be reflected as paid-in capital on a consolidated
basis. See "Capitalization."
Common Stock
Each share of the Common Stock will have the same relative rights and
will be identical in all respects with each other share of the Common Stock. The
Common Stock will represent non-withdrawable capital, will not be of an
insurable type and will not be insured by the FDIC.
Voting Rights. Under Delaware law, the holders of the Common Stock will
possess exclusive voting power in the Company. Each stockholder will be entitled
to one vote for each share held on all matters voted upon by stockholders,
subject to the limitation discussed under "Restrictions on Acquisitions of Stock
and Related Takeover Defensive Provisions - Provisions of the Company's
Certificate of Incorporation and Bylaws - Limitation on Voting Rights." If the
Company issues preferred stock subsequent to the Conversion, holders of the
preferred stock may also possess voting powers.
Liquidation or Dissolution. In the event of any liquidation,
dissolution or winding up of the Association, the Company, as the sole holder of
the Association's capital stock would be entitled to receive, after payment or
provision for payment of all debts and liabilities of the Association (including
all deposit accounts and accrued interest thereon) and after distribution of the
balance in the special liquidation account to Eligible and Supplemental Account
Holders, all assets of the Association available for distribution. In the event
of liquidation, dissolution or winding up of the Company, the holders of its
Common Stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of the Company
available for distribution. See "The Conversion - Effects of Conversion to Stock
Form on Depositors and Borrowers of the Association." If preferred stock is
issued subsequent to the Conversion, the holders thereof may have a priority
over the holders of Common Stock in the event of liquidation or dissolution.
No Preemptive Rights. Holders of the Common Stock will not be entitled
to preemptive rights with respect to any shares which may be issued. The Common
Stock will not be subject to call for redemption, and, upon receipt by the
Company of the full purchase price therefor, each share of the Common Stock will
be fully paid and nonassessable.
Preferred Stock. After Conversion, the Board of Directors of the
Company will be authorized to issue preferred stock in series and to fix and
state the voting powers, designations,
-105-
preferences and relative, participating, optional or other special rights of the
shares of each such series and the qualifications, limitations and restrictions
thereof. Preferred stock may rank prior to the Common Stock as to dividend
rights, liquidation preferences, or both, and may have full or limited voting
rights. The holders of preferred stock will be entitled to vote as a separate
class or series under certain circumstances, regardless of any other voting
rights which such holders may have.
Except as discussed above, the Company has no present plans for the
issuance of the additional authorized shares of Common Stock or for the issuance
of any shares of preferred stock. In the future, the authorized but unissued and
unreserved shares of Common Stock will be available for general corporate
purposes, including but not limited to possible issuance as stock dividends or
stock splits, in future mergers or acquisitions, under a cash dividend
reinvestment and stock purchase plan, in a future underwritten or other public
offering, or under a stock based employee plan. The authorized but unissued
shares of preferred stock will similarly be available for issuance in future
mergers or acquisitions, in a future underwritten public offering or private
placement or for other general corporate purposes. Except as described herein or
as otherwise required to approve the transaction in which the additional
authorized shares of common stock or authorized shares of preferred stock would
be issued, no stockholder approval will be required for the issuance of these
shares. Accordingly, the Board of Directors of the Company, without stockholder
approval, can issue preferred stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock.
LEGAL AND TAX MATTERS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for us by the firm of Silver,
Freedman & Taff, L.L.P. (a limited liability partnership including professional
corporations), 7th Floor, East Tower, 1100 New York Avenue, NW, Washington, DC
20005. Silver, Freedman & Taff, L.L.P. has consented to the references herein to
its opinions. The Ohio income tax consequences of the Conversion will be passed
upon by Anness, Gerlach & Williams. Anness, Gerlach & Williams has consented to
the references herein to its opinion. Certain legal matters are being passed
upon for Webb by its legal counsel, Vorys, Sater, Seymour and Pease LLP,
Cincinnati, Ohio.
EXPERTS
The consolidated financial statements of Home Federal as of December
31, 1997 and 1996 and for the three-year period ended December 31, 1997 included
in this Prospectus have been audited by Anness, Gerlach & Williams, independent
auditors, as indicated in their report which is included herein and has been so
included in reliance upon such report, given the authority of that firm as
experts in accounting and auditing.
Keller & Company has consented to the inclusion herein of the summary
of the Keller Letter setting forth its opinion as to the estimated pro forma
market value of the Company and the Association as converted and to the
reference to its opinion that subscription rights received by Eligible Account
Holders, Supplemental Eligible Account Holders and other eligible subscribers do
not have any economic value.
-106-
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the Registration Statement. However, the Prospectus
does contain a description of the material provisions of the documents contained
therein. Such information can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, NW, Washington, DC 20549, and
copies of such material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a Web site. The address of the SEC's Web site is
"http://www.sec.gov." The statements contained herein as to the contents of any
contract or other document filed as an exhibit to the Registration Statement
are, of necessity, brief descriptions thereof which describe only the material
provisions of such documents; each such statement is qualified by reference to
such contract or document.
We have filed an Application for Conversion with the OTS with respect
to the Conversion. Pursuant to the rules and regulations of the OTS, this
Prospectus omits certain information contained in those Applications. The
Applications may be examined at the principal offices of the OTS, 1700 G Street,
NW, Washington, DC 20552 and at the Central Regional Office of the OTS, Suite
1300, 200 West Madison Street, Chicago, Illinois 60606, without charge.
In connection with the Conversion, the Company will register the Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its Common Stock will become
subject to the proxy solicitation rules, reporting requirements and restrictions
on stock purchases and sales by directors, officers and greater than 10%
stockholders, the annual and periodic reporting and certain other requirements
of the Exchange Act. Under the Plan, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion.
A copy of the Certificate of Incorporation and Bylaws of the Company
are available without charge from the Association.
-107-
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NILES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................................................... F-2
Consolidated Statements of Financial Position as of April 30, 1998 (unaudited),
and December 31, 1997 and 1996........................................................................... F-3
Consolidated Statements of Income for the Four Months Ended April 30, 1998
and 1997 (unaudited) and the Years Ended December 31, 1997, 1996 and 1995................................ F-4
Consolidated Statements of Equity for the Four Months Ended April 30, 1998
(unaudited) and the Years Ended December 31, 1997, 1996 and 1995......................................... F-5
Consolidated Statements of Cash Flows for the Four Months Ended April 30, 1998
and 1997 (unaudited) and the Years Ended
December 31, 1997, 1996 and 1995......................................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-9
All schedules are omitted because the required information is not
applicable or is included in the Consolidated Financial Statements and related
Notes.
The financial statements of the Company have been omitted because the
Company has not yet issued any stock, has no assets, no liabilities and has not
conducted any business other than that of an organizational nature.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Home Federal Savings and Loan
Association of Niles
Niles, Ohio
We have audited the consolidated statements of financial position of Home
Federal Savings and Loan Association of Niles and Subsidiary as of December 31,
1997 and 1996, and the related consolidated statements of income, equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Association'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 consolidated financial position of Home Federal
Savings and Loan Association of Niles and Subsidiary as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/Anness Gerlach & Williams
Youngstown, Ohio
February 2, 1998, except for
Note N as to which the date is July 6, 1998
F-2
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
(In Thousands)
December 31
April 30, -----------------
1998 1997 1996
----------- ------- -------
(Unaudited)
ASSETS
Cash and cash equivalents:
Noninterest bearing ............................... $ 545 $ 819 $ 656
Interest bearing .................................. 4,955 4,057 1,577
------- ------- -------
TOTAL CASH AND CASH EQUIVALENTS ............... 5,500 4,876 2,233
Securities available for sale - at market ........... 17,184 17,447 20,824
Securities to be held to maturity - at cost ......... 12,589 12,359 13,900
Loans receivable .................................... 36,151 36,744 33,183
Accrued interest receivable ......................... 3 1 30
Federal Home Loan Bank stock, at cost ............... 301 294 274
Real estate investment-limited partnership, at equity 412 426 464
Prepaid expenses and other assets ................... 112 36 25
Prepaid federal income taxes ........................ -- 20 24
Premises and equipment, at cost less
accumulated depreciation .......................... 287 294 256
------- ------- -------
TOTAL ASSETS .................................. $72,539 $72,497 $71,213
======= ======= =======
LIABILITIES
Deposits ............................................ $57,765 $57,854 $57,673
Accrued interest payable ............................ 185 127 114
Accounts payable and other liabilities .............. 823 798 656
Note payable ........................................ 400 400 500
Federal income tax payable .......................... 30 -- --
Deferred federal income tax liability ............... 54 155 107
------- ------- -------
TOTAL LIABILITIES ............................. 59,257 59,334 59,050
EQUITY
Retained earnings substantially restricted .......... 12,186 11,899 11,513
Net unrealized gain on securities available
for sale, net of related tax effects of $564
in 1998, $651 in 1997 and $335 in 1996 ............ 1,096 1,264 650
------- ------- -------
TOTAL EQUITY .................................. 13,282 13,163 12,163
------- ------- -------
TOTAL LIABILITIES AND EQUITY .................. $72,539 $72,497 $71,213
======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
CONSOLIDATED STATEMENTS OF INCOME
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
(In Thousands)
Four Months Ended
April 30 Year Ended December 31
----------------- ------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
(Unaudited)
Interest income:
Loans receivable:
First mortgage loans ............... $ 983 $ 900 $2,851 $2,415 $2,205
Consumer and other loans ........... 33 36 108 95 77
Mortgage-backed and related securities 250 237 665 845 760
Investments .......................... 328 441 1,170 1,284 1,382
Interest-bearing deposits ............ 77 38 208 141 225
------ ------ ------ ------ ------
TOTAL INTEREST INCOME ............ 1,671 1,652 5,002 4,780 4,649
Interest expense:
Deposits ............................. 812 778 2,433 2,397 2,290
Borrowings ........................... 12 15 43 5 --
------ ------ ------ ------ ------
TOTAL INTEREST EXPENSE ........... 824 793 2,476 2,402 2,290
------ ------ ------ ------ ------
NET INTEREST INCOME .............. 847 859 2,526 2,378 2,359
Provision for loan losses .............. 20 -- 700 40 60
------ ------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ........ 827 859 1,826 2,338 2,299
Noninterest income:
Gain on sale of investments .......... 461 -- -- -- --
Service fees and other ............... 8 8 27 23 26
------ ------ ------ ------ ------
TOTAL NONINTEREST INCOME ......... 469 8 27 23 26
Noninterest expense:
Equity in loss of limited partnership 14 13 38 36 --
General and administrative:
Compensation and benefits .......... 745 297 869 822 747
Occupancy and equipment ............ 38 35 81 81 62
Federal deposit insurance premiums . 12 5 30 510 134
Other operating expense ............ 81 107 362 302 270
------ ------ ------ ------ ------
TOTAL NONINTEREST EXPENSE ........ 890 457 1,380 1,751 1,213
------ ------ ------ ------ ------
INCOME BEFORE INCOME TAXES ....... 406 410 473 610 1,112
Federal income taxes ................... 119 112 87 184 378
------ ------ ------ ------ ------
NET INCOME ....................... $ 287 $ 298 $ 386 $ 426 $ 734
====== ====== ====== ====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
CONSOLIDATED STATEMENTS OF EQUITY
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
For the four months ended April 30, 1998 (Unaudited) and
years ended December 31, 1997, 1996 and 1995
(In Thousands)
Accumulated Other
Retained Comprehensive Total
Earnings Income (Loss) Equity
-------- ----------------- -------
Balance at January 1, 1995 ............. $10,353 ($ 328) $10,025
Comprehensive income:
Net income for the year .............. 734 -- 734
Other comprehensive income:
Unrealized gains on securities
available for sale, net of
related tax effects of $463 ........ -- 899 899
------- ------- -------
COMPREHENSIVE INCOME ............. 734 899 1,633
------- ------- -------
BALANCE AT
DECEMBER 31, 1995 ................ 11,087 571 11,658
Comprehensive income:
Net income for the year .............. 426 -- 426
Other comprehensive income:
Unrealized gains on securities
available for sale, net of
related tax effects of $41 ......... -- 79 79
------- ------- -------
COMPREHENSIVE INCOME ............. 426 79 505
------- ------- -------
BALANCE AT
DECEMBER 31, 1996 ................ 11,513 650 12,163
Comprehensive income:
Net income for the year .............. 386 -- 386
Other comprehensive income:
Unrealized gains on securities
available for sale, net of
related tax effects of $316 ........ -- 614 614
------- ------- -------
COMPREHENSIVE INCOME ............. 386 614 1,000
------- ------- -------
BALANCE AT
DECEMBER 31, 1997 ................ 11,899 1,264 13,163
F-5
CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
For the four months ended April 30, 1998 (unaudited) and
years ended December 31, 1997, 1996 and 1995
(In Thousands)
Accumulated Other
Retained Comprehensive Total
Earnings Income (Loss) Equity
-------- ----------------- -------
Comprehensive income:
Net income for the four months ended
April 30, 1998 (unaudited) ......... 287 -- 287
Other comprehensive income:
Unrealized gains on securities
available for sale, net of
related tax effects of $70
(unaudited) ........................ -- 136 136
Less reclassification adjustment,
net of related tax effects of
$157 (unaudited) ................... -- (304) (304)
------- ------- -------
COMPREHENSIVE INCOME ............. 287 (168) 119
------- ------- -------
BALANCE AT APRIL 30,
1998 (UNAUDITED) ................. $12,186 $ 1,096 $13,282
======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
(In Thousands)
Four Months Ended
April 30 Year Ended December 31
------------------ -----------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................... $ 287 $ 298 $ 386 $ 426 $ 734
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes credit ..................... (14) (2) (268) (52) (34)
Depreciation ..................................... 17 12 50 46 23
Amortization of discounts on investments and
mortgage-backed and related securities ......... (7) (15) (32) (86) (155)
Gain on sale of securities available for sale .... (461) -- (4) -- --
Equity in loss of limited partnership ............ 14 13 38 36 --
Provision for loan losses ........................ 20 -- 700 40 60
Income reinvested from liquid asset mutual funds . -- (408) (510) (1,160) (1,147)
Federal Home Loan Bank stock dividends ........... (7) (4) (20) (18) (17)
Net (increase) decrease in accrued interest
receivable and prepaid expenses and other assets (80) (33) 22 47 (6)
Net increase in accrued interest, accounts payable
and other liabilities .......................... 133 182 154 99 88
------- ------- ------- ------- -------
NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES ................. (98) 43 516 (622) (454)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale .. 471 -- 4,821 -- --
Proceeds from maturities of held to maturity
securities ......................................... -- -- 1,000 4,000 4,000
Purchase of securities to be held to maturity ........ -- -- -- (1,000) (3,893)
Proceeds from principal payments on mortgage-backed
and related securities ............................. 3,338 2,686 8,445 8,491 8,526
Purchase of mortgage-backed and related securities ... (3,561) -- (7,872) (7,432) (4,976)
Net (increase) decrease in interest-bearing deposits
with banks ......................................... (898) (823) (2,480) 270 1,675
Net increase in loans ................................ 573 (1,964) (4,260) (3,710) (3,288)
Additions to premises and equipment .................. (10) (10) (88) (76) (71)
------- ------- ------- ------- -------
NET CASH PROVIDED BY
(USED IN) INVESTING ACTIVITIES ................. (87) (111) (434) 543 1,973
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
(In Thousands)
Four Months Ended
April 30 Year Ended December 31
------------------ -----------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in savings accounts ...................... (449) (684) (653) (932) (4,058)
Net increase in certificates of deposit ............... 360 690 834 831 2,640
Scheduled payment on note payable ..................... -- -- (100) -- --
----- ----- ------- ------- -------
NET CASH PROVIDED BY
(USED IN) FINANCING ACTIVITIES .................. (89) 6 81 (101) (1,418)
----- ----- ------- ------- -------
NET INCREASE (DECREASE) IN CASH ................. (274) (62) 163 (180) 101
CASH AT BEGINNING OF PERIOD ............................. 819 656 656 836 735
----- ----- ------- ------- -------
CASH AT END OF PERIOD ........................... $ 545 $ 594 $ 819 $ 656 $ 836
===== ===== ======= ======= =======
Cash paid during the period for:
Interest on deposits .................................. $ 764 $ 729 $ 2,419 $ 2,403 $ 2,264
Income taxes .......................................... $ 88 $ 33 $ 351 $ 231 $ 426
NONCASH INVESTING AND FINANCING ACTIVITY
During 1996, the Association acquired an interest in a real estate limited
partnership through the issuance of a note payable of $500,000.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Home Federal Savings and Loan Association of Niles (the "Association") is a
federally chartered association conducting a general banking business in Niles,
Ohio (Trumbull County) which consists of attracting deposits from the general
public and applying those funds to the origination of loans for commercial,
consumer, and residential purposes. The Association's profitability is
significantly dependent on its net interest income, which is the difference
between interest income generated from interest-earning assets (i.e., loans and
investments) and the interest expense paid on interest-bearing liabilities
(i.e., customer deposits). Net interest income is affected by the relative
amount of interest-earnings assets and interest-bearing liabilities and the
interest received or paid on these balances. The level of interest rates paid or
received by the Association can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are outside of
management's control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general accounting
practices within the financial services industry. In preparing financial
statements in accordance with GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from such estimates.
The following is a summary of significant accounting policies which have
been consistently applied in the preparation of the accompanying financial
statements.
Investment Securities and Mortgage-Backed and Related Securities:
The Association accounts for investment securities and mortgage-backed and
related securities in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." SFAS No. 115 requires that investments be categorized
as held-to-maturity, trading, or available for sale. Securities classified
as held-to-maturity are carried at cost only if the Association has the
positive intent and ability to hold these securities to maturity. Trading
securities and securities designated as available for sale are carried at
fair value with resulting unrealized gains or losses recorded to operations
or equity, respectively. At April 30, 1998 and December 31, 1997 and 1996,
the Association's equity accounts reflected net unrealized gains of
$1,096,000, $1,264,000 and $650,000, respectively, on securities designated
as available for sale. Realized gains or losses on sales of securities are
recognized using the specific identification method.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans Receivable:
Loans held in portfolio are stated at the principal amount
outstanding, adjusted for the allowance for loan losses and unearned
income. Interest is accrued as earned unless the collectibility of the loan
is in doubt. Uncollectible interest on loans that are contractually past
due is charged off, or an allowance is established based on management's
periodic evaluation. The allowance is established by a charge to interest
income equal to all interest previously accrued, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments has returned to normal, in which case the loan is
returned to accrual status. If the ultimate collectibility of the loan is
in doubt, in whole or in part, all payments received on nonaccrual loans
are applied to reduce principal until such doubt is eliminated.
Loans held for sale are identified at origination and are carried at
the lower of cost or market, determined in the aggregate. In computing
cost, deferred loan origination fees are deducted from the principal
balance of the related loan. At April 30, 1998, December 31, 1997 and 1996,
there were no loans identified as held for sale.
Loan Origination Fees and Costs:
The Association accounts for loan origination fees and costs in
accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." Pursuant to the provisions of SFAS No. 91, all loan origination
fees received, net of direct origination costs, are deferred and amortized
to interest income over the contractual lives of the loans using the
level-yield method, giving effect to actual loan prepayments. Additionally,
SFAS No. 91 generally limits the definition of loan origination costs to
the direct costs attributable to originating a loan.
Allowance for Loan Losses:
It is the Association's policy to provide valuation allowances for
estimated losses on loans based upon past loss experience, current trends
in the level of delinquent and specific problem loans, loan concentrations
to single borrowers, 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 market area.
When the collection of a loan becomes doubtful, or otherwise troubled, the
Association records a loan loss provision equal to the difference between
the fair value of the property securing the loan and the loan's carrying
value. Major loans and major lending areas are reviewed periodically to
determine potential problems at an early date. The allowance for loan
losses is increased by charges to earnings and decreased by charge-offs
(net of recoveries).
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Loan Losses (Continued):
The Association accounts for impaired loans in accordance with SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114
requires that impaired loans be measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate
or, as an alternative, at the loans observable market price or fair value
of the collateral.
A loan is defined under SFAS No. 114 as impaired when, based on
current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. In applying the provisions of SFAS No. 114, the Association
considers its investment in one-to-four family residential loans, consumer
installment loans, and credit card loans to be homogeneous and, therefore,
excluded from separate identification for evaluation of impairment. With
respect to the Association's investment in commercial real estate loans,
and its evaluation of impairment thereof, such loans are collateral
dependent and as a result are carried as a practical expedient at the lower
of cost or fair value.
Loans which are more than ninety days delinquent are considered to
constitute more than a minimum delay in repayment and are evaluated for
impairment under SFAS No. 114 at that time.
At April 30, 1998 and December 31, 1997, the Association identified
three loans with a carrying value, net of a $200,000 allowance for loan
loss, of $806,000 and $862,000, respectively, which were considered
impaired due to delinquent payments. Accrual of interest on these loans has
been discontinued as of December 31, 1997.
At December 31, 1996, the Association had no loans that would be
defined as impaired under SFAS No. 114.
Premises and Equipment:
Premises and equipment are recorded at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation is provided on the straight-line and accelerated methods over
the estimated useful lives of the assets, estimated to be forty to fifty
years for buildings and three to ten years for furniture and equipment.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Federal Income Taxes:
The Association accounts for federal income taxes pursuant to SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 established financial
accounting and reporting standards for the effects of income taxes that
result from the Association's activities within the current and previous
years. In accordance with SFAS No. 109, a deferred tax liability or
deferred tax asset is computed by applying the current statutory tax rates
to net taxable or deductible temporary differences between the tax basis of
an asset or liability and its reported amount in the financial statements
that will result in net taxable or deductible amounts in future periods.
Deferred tax assets are recorded only to the extent that the amount of net
deductible temporary differences or carryforward attributes may be utilized
against current period earnings, carried back against prior years'
earnings, offset against taxable temporary differences reversing in future
periods, or utilized to the extent of management's estimate of future
taxable income. A valuation allowance is provided for deferred tax assets
to the extent that the value of net deductible temporary differences and
carryforward attributes exceeds management's estimates of taxes payable on
future taxable income. Deferred tax liabilities are provided on the total
amount of net temporary differences taxable in the future.
Deferral of income taxes results primarily from deferred compensation
accruals, Federal Home Loan Bank stock dividends and book/tax differences
in the allowance for loan losses.
Cash and Cash Equivalents:
For purposes of reporting cash flows, cash includes noninterest
bearing cash which includes cash on hand and amounts due from correspondent
banks.
New Accounting Standard:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred
to as derivatives) and for hedging activities. It requires that any entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment, (b) a hedge of the
exposure of variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security,
or a foreign-currency-denominated forecasted transaction.
This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of this Statement should
be as of the beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the
provisions of this Statement. This Statement should not be applied
retroactively to financial statements of prior periods. Management does not
intend to elect early adoption of this accounting standard. Management does
not believe the adoption of this statement will have a material impact on
the Company's financial condition and results on operations.
Basis of Presentation:
The financial statements as of April 30, 1998 and for the four month
periods ended April 30, 1998 and 1997 are unaudited. However, in the
opinion of management, all adjustments, (consisting only of normal
recurring accruals) necessary for a fair presentation of financial position
and results of operations have been made.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE B - COMPREHENSIVE INCOME
The Association adopted SFAS No. 130 "Reporting Comprehensive Income" for
reporting periods beginning in 1998. The Statement establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
the same prominence as other financial statements. SFAS No. 130 requires that
companies (i) classify terms of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial position. Financial
statements for earlier periods have been reclassified as required for
comparative purposes.
NOTE C - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair values of investment securities are
summarized as follows:
December 31
April 30, 1998 -----------------------------------------------
(Unaudited) 1997 1996
---------------------- ---------------------- ----------------------
Amortized Estimated Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value Cost Fair Value
--------- ---------- --------- ---------- --------- ----------
(In Thousands)
Available for sale securities
FHLMC common stock ............... $ 39 $ 1,853 $ 48 $ 2,085 $ 48 $ 1,372
Asset management funds:
Income Trust ................... 5,668 5,592 5,668 5,602 5,517 5,343
ARMS ........................... 4,006 3,912 4,006 3,928 3,908 3,826
Short-Term Government Trust .... -- -- -- -- 4,712 4,715
GNMA Trust ..................... 5,795 5,812 5,795 5,817 5,639 5,553
Other .......................... 15 15 15 15 15 15
------- ------- ------- ------- ------- -------
TOTAL AVAILABLE FOR SALE
SECURITIES.................. $15,523 $17,184 $15,532 $17,447 $19,839 $20,824
======= ======= ======= ======= ======= =======
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE C - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (CONTINUED)
The amortized cost, gross unrelated gains, gross unrealized losses and
estimated fair values for mortgage-backed and other held to maturity securities
are summarized as follows:
April 30, 1998 (Unaudited)
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Held to Maturity Securities: (In Thousands)
Mortgage-backed
Government National Mortgage
Association participation
certificates .................. $ 41 $ -- $ -- $ 41
Federal National Mortgage
Association collateralized
mortgage obligations .......... 6,203 10 16 6,197
Federal Home Loan Mortgage
Corporation:
Participation certificates .. 81 -- 1 80
Collateralized mortgage
obligations ............... 6,264 12 18 6,258
------- ---- ---- -------
TOTALS ...................... $12,589 $ 22 $ 35 $12,576
======= ==== ==== =======
December 31
---------------------------------------------------------------------------------------------
1997 1996
--------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
--------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Held to Maturity Securities: (In Thousands) (In Thousands)
Mortgage-backed
Government National Mortgage
Association participation
certificates .................. $ 48 $ -- $ -- $ 48 $ 71 $ 7 $ -- $ 78
Federal National Mortgage
Association collateralized
mortgage obligations .......... 8,482 6 12 8,476 6,054 3 37 6,020
Federal Home Loan Mortgage
Corporation:
Participation certificates .. 92 -- 2 90 545 -- 1 544
Collateralized mortgage
obligations ............... 3,737 9 25 3,721 6,230 5 79 6,156
------- ---- ---- ------- ------- ---- ---- -------
TOTAL MORTGAGE-BACKED........ 12,359 15 39 12,335 12,900 15 117 12,798
Federal Home Loan Bank Bond...... -- -- -- -- 1,000 5 -- 1,005
------- ---- ---- ------- ------- ---- ---- -------
TOTALS....................... $12,359 $ 15 $ 39 $12,335 $13,900 $ 20 $117 $13,803
======= ==== ==== ======= ======= ==== ==== =======
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE D - LOANS RECEIVABLE
The composition of the loan portfolio is as follows:
December 31
April 30, 1998 ---------------------
(Unaudited) 1997 1996
-------------- -------- --------
(In Thousands)
Real estate mortgage (primarily
one-to-four family residential) ....... $ 28,111 $ 29,777 $ 25,609
Construction and development ............ 5,310 4,231 3,681
Commercial real estate .................. 4,680 4,603 4,746
Consumer and other ...................... 1,141 1,181 1,187
Loans on deposits ....................... 63 84 197
Loans in process ........................ (2,301) (2,278) (1,936)
-------- -------- --------
37,004 37,598 33,484
Less allowance for loan losses .......... 853 854 301
-------- -------- --------
TOTALS ............................ $ 36,151 $ 36,744 $ 33,183
======== ======== ========
In the ordinary course of business, the Association has granted loans to
some of the officers, directors and their related interests. Related party loans
are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility.
The aggregate dollar amount of these loans was approximately $1.1 million, $1.1
million and $1.3 million at April 30, 1998, December 31, 1997 and 1996,
respectively. During the year ended December 31, 1997, no loans were made to
officers, directors and their related interests while principal repayments of
approximately $200,000 were received from related parties.
The Association's lending efforts have historically focused on one-to-four
family residential real estate loans and construction loans which comprise
approximately $29.9 million, or 81%, of the total loan portfolio at December 31,
1997, and $26.0 million, or 78%, of the total loan portfolio at December 31,
1996. Historically, such loans have been conservatively underwritten with cash
down payments sufficient to provide the Association with adequate collateral
coverage in the event of default. Nevertheless, the Association, as with any
lending institution, is subject to the risk that real estate values or economic
conditions could deteriorate in its primary lending areas within Ohio, thereby
impairing collateral values. However, management is of the belief that real
estate values and economic conditions in the Association's primary lending areas
are presently stable.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE D - LOANS RECEIVABLE (CONTINUED)
The activity in the allowance for loan losses is summarized as follows:
Four Months Ended
April 30
(Unaudited) Year Ended December 31
----------------- ----------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Balance at beginning of period ....... $ 854 $301 $ 301 $261 $201
Provision charged to operations ...... 20 -- 700 40 60
Less loans charged off ............... (21) -- (147) -- --
----- ---- ----- ---- ----
BALANCE AT END OF PERIOD ......... $ 853 $301 $ 854 $301 $261
===== ==== ===== ==== ====
NOTE E - REAL ESTATE INVESTMENT - LIMITED PARTNERSHIP
In 1996, the Association acquired an interest in a limited partnership
formed to construct and operate multi-family housing units. The Association
accounts for the investment in the limited partnership using the equity method.
The Association as an investor is able to exercise influence over operating and
financial policies of the management through provisions of the partnership
agreement that require the general partner to obtain approval of the limited
partner for twenty-nine issues, including refinancing, replacement of project
managers and acquisition or disposal of assets. At such time the project is
sold, the limited partners will participate in the net proceeds. Under the terms
of the limited partnership agreement, the Association has a total contribution
of capital of $500,000 and is allocated tax losses and affordable housing
federal income tax credits.
In connection with the Association funding its contributed capital to the
partnership, it has issued a $500,000 term note payable to a bank in annual
installments of $100,000 beginning November 15, 1997 and maturing November 15,
2001. The interest is payable semiannually beginning May 15, 1997 and ending
November 15, 2001 at a fixed rate of 8.875%. The note payable is collateralized
by ten membership shares of the limited partnership.
Condensed financial information for the investee partnership is summarized
as of and for the years ended December 31, 1997 and 1996 as follows (in
thousands):
1997 1996
------ ------
Balance Sheet:
Investment in real estate......................... $5,154 $5,364
Total assets...................................... $5,274 $5,532
Mortgage payable.................................. $2,891 $2,900
Partners' equity.................................. $2,149 $2,384
Operations:
Rental income..................................... $ 502 $ 195
Net loss.......................................... $ 235 $ 205
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
April 30, December 31
1998 ---------------
(Unaudited) 1997 1996
----------- ---- ----
(In Thousands)
Land .......................................... $ 32 $ 32 $ 32
Buildings ..................................... 359 359 359
Furniture, equipment and vehicles ............. 380 370 307
---- ---- ----
771 761 698
Less accumulated depreciation ................. 484 467 442
---- ---- ----
TOTALS .................................. $287 $294 $256
==== ==== ====
NOTE G - DEPOSITS
A comparative summary of deposits is as follows:
December 31
April 30, 1998 ------------------------------------
Weighted Average (Unaudited) 1997 1996
Rate at ----------------- ----------------- -----------------
December 31, 1997 Amount Percent Amount Percent Amount Percent
----------------- ------- ------- ------- ------- ------- -------
(In Thousands)
Savings:
Statement savings accounts ...... 3.00% $ 230 --% $ 303 1% $ 295 1%
Passbook savings accounts ....... 3.00 21,613 38 21,980 38 22,163 38
Christmas clubs ................. -- 18 -- 6 -- 5 --
Negotiable order of
withdrawal accounts ........... 3.00 2,969 5 2,830 5 2,722 5
Money market demand
accounts ...................... 3.05 3,985 7 4,145 7 4,732 8
------- --- ------- --- ------- ---
TOTAL SAVINGS ............... 28,815 50 29,264 51 29,917 52
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE G - DEPOSITS (CONTINUED)
December 31
April 30, 1998 ------------------------------------
Weighted Average (Unaudited) 1997 1996
Rate at ----------------- ----------------- -----------------
December 31, 1997 Amount Percent Amount Percent Amount Percent
----------------- ------- ------- ------- ------- ------- -------
(In Thousands)
Certificates of deposit:
Less than 1 year,
3.05% to 5.00% ................ 4.90 8,632 15 8,784 15 9,392 16
One to two years,
5.15% to 5.91% ................ 5.55 12,477 22 12,877 22 12,160 21
Over two years,
5.40% to 6.75% ................ 5.83 2,676 5 2,767 5 2,790 5
Jumbo - over $100,000 ........... 5.92 2,040 3 1,049 2 428 1
IRA accounts, six months
to three years, 4.75%
to 6.15% ...................... 5.62 3,125 5 3,113 5 2,986 5
------- --- ------- --- ------- ---
TOTAL CERTIFICATES OF DEPOSIT 28,950 50 28,590 49 27,756 48
------- --- ------- --- ------- ---
GRAND TOTALS ................ $57,765 100% $57,854 100% $57,673 100%
======= === ======= === ======= ===
Deposits in excess of $100,000 are not federally insured.
Scheduled maturities of certificates of deposit are as follows:
December 31
April 30, 1998 -----------------------
(Unaudited) 1997 1996
-------------- ------- -------
Within one year ................ $22,729 $24,276 $22,896
One to two years ............... 4,831 2,941 4,077
Two to three years ............. 1,280 1,373 783
Over three years ............... 110 -- --
------- ------- -------
TOTALS ................... $28,950 $28,590 $27,756
======= ======= =======
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE G - DEPOSITS (CONTINUED)
Interest expense on deposits is summarized as follows:
Four Months Ended
April 30
(Unaudited) December 31
----------------- ------------------------
1998 1997 1997 1996 1995
---- ---- ------ ------ ------
(In Thousands)
Passbook savings accounts .......... $216 $223 $ 663 $ 679 $ 709
Statement savings .................. 3 3 10 11 14
Negotiable order of
withdrawal accounts .............. 30 28 88 86 80
Money market demand accounts ....... 40 41 133 146 160
Certificates of deposit ............ 523 483 1,539 1,475 1,327
---- ---- ------ ------ ------
TOTALS ....................... $812 $778 $2,433 $2,397 $2,290
==== ==== ====== ====== ======
NOTE H - FEDERAL INCOME TAXES
Income tax expense is summarized as follows:
Four Months Ended
April 30
(Unaudited) December 31
----------------- ------------------------
1998 1997 1997 1996 1995
---- ---- ------ ------ ------
(In Thousands)
Federal:
Current ......................... $ 133 $ 114 $ 355 $ 236 $ 412
Deferred ........................ (14) (2) (268) (52) (34)
----- ----- ----- ----- -----
TOTALS ...................... $ 119 $ 112 $ 87 $ 184 $ 378
===== ===== ===== ===== =====
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE H - FEDERAL INCOME TAXES (CONTINUED)
The provision for federal income taxes on earnings differ from that
computed at the statutory rate of 34% as follows:
Four Months Ended
April 30
(Unaudited) December 31
----------------- ------------------------
1998 1997 1997 1996 1995
---- ---- ------ ------ ------
(In Thousands)
Federal taxes computed at
statutory rate ................... $ 138 $ 139 $ 161 $ 208 $ 383
Decrease resulting from:
Limited partnership tax
credits ........................ (18) (26) (70) (20) --
Dividends received
deduction ...................... (1) (1) (4) (4) (5)
----- ----- ----- ----- -----
FEDERAL INCOME TAX PROVISION . $ 119 $ 112 $ 87 $ 184 $ 378
===== ===== ===== ===== =====
Effective federal income tax rate .. 29.2% 27.3% 23.1% 30.2% 34.0%
===== ===== ===== ===== =====
The composition of the Association's net deferred tax liability is as
follows:
April 30 December 31
1998 -----------------
(Unaudited) 1997 1996
----------- ------ ------
(In Thousands)
Taxes (payable) refundable on temporary
differences at the expected statutory
rate:
Deferred tax liabilities:
Federal Home Loan Bank stock
dividends ............................. $ (66) $ (64) $ (58)
Unrealized gains on securities
available for sale .................... (564) (651) (335)
----- ----- -----
TOTAL DEFERRED TAX LIABILITIES ........ (630) (715) (393)
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE H - FEDERAL INCOME TAXES (CONTINUED)
April 30 December 31
1998 -----------------
(Unaudited) 1997 1996
----------- ------ ------
(In Thousands)
Deferred tax assets:
Deferred compensation ....................... 236 220 171
Allowance for loan losses ................... 340 340 102
Losses on limited partnership ............... -- -- 6
Other ....................................... -- -- 7
----- ----- -----
TOTAL DEFERRED TAX ASSETS ............. 576 560 286
----- ----- -----
NET DEFERRED FEDERAL
INCOME TAX LIABILITY .................. $ (54) $(155) $(107)
===== ===== =====
Prior to 1996, the Association was allowed a special bad debt deduction
based on a percentage of earnings, generally limited to 8% of otherwise taxable
income, or the amount of qualifying and nonqualifying loans outstanding and
subject to certain limitations based on aggregate loans and savings account
balances at the end of the calendar year. The Association was subject to such
limitations during the year ended December 31, 1995, and, therefore, was
precluded from utilizing the percentage of earnings bad debt deduction. If the
amounts that qualified as deductions for federal income tax purposes are later
used for purposes other than for bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at the
then current corporate income tax rate. Retained earnings at December 31, 1997,
includes approximately $2.54 million for which federal income taxes have not
been provided. The amount of the unrecognized deferred tax liability relating to
the cumulative percentage of earnings bad debt deduction totaled approximately
$863,000 at December 31, 1997. See Note M for additional information regarding
the Association's future bad debt deductions.
NOTE I - PENSION AND DEFERRED COMPENSATION PLANS
The Association has a noncontributory defined benefit pension plan covering
all eligible employees. Benefits are based on years of service and the highest
consecutive five-year average earnings preceding normal retirement date. Plan
assets consist of fully-insured retirement income life insurance policies and at
plan years ended August 31, 1997 and 1996, the cash value of the policies were
$953,694 and $860,818, respectively, which approximates the actuarially computed
value of vested and nonvested benefits. The Association's policy is to fund
pension costs accrued. Pension costs totaled approximately $11,000 for the four
months ended April 30, 1998 and 1997 and $33,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE I - PENSION AND DEFERRED COMPENSATION PLANS (CONTINUED)
Effective September 1, 1987, the directors of the Association approved a
non-qualified deferred compensation plan for certain officers. The agreements
are subject to renewal annually. During the term of the agreements and as long
as employment of the executives by the Association continues, the Association
will provide for monthly accruals of specified amounts for each executive.
Accrued deferred compensation amounts are payable in a lump sum upon the
executive's death, disability, voluntary resignation, or termination by the
Association without cause. Deferred compensation expense amounted to $48,000 for
the four months ended April 30, 1998 and 1997, and $144,000, $96,000 and $56,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE J - COMMITMENTS AND CONTINGENCIES
The Association is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the statement of financial position. The contract or
notional amounts of the commitments reflect the extent of the Association's
involvement in such financial instruments.
The Association's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Association uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At April 30, 1998 (unaudited) and December 31, 1997, the Association had
outstanding commitments of approximately $843,000 and $218,000 to originate
fixed rate consumer and residential real estate loans. The average interest rate
of loan commitments was 7.31% at December 31, 1997. In the opinion of
management, the outstanding loan commitments equaled or exceeded prevalent
market interest rates and such loans were underwritten in accordance with normal
underwriting policies, and all commitments will be funded via cash flow from
operations and existing excess liquidity.
From time to time, and in the ordinary course of business, the Association
becomes a party of matters of litigation. In the opinion of the Association's
counsel, there are no claims, asserted or unasserted, the resolution of which
would have a material affect on the Association's consolidated financial
statements.
NOTE K - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows carrying values and the related estimated fair
values of financial instruments at December 31, 1997 and 1996. Items which are
not financial instruments are not included.
December 31
---------------------------------------------
1997 1996
--------------------- ----------------------
Carrying Estimated Carrying Estimated
Amounts Fair Value Amounts Fair Value
------- ---------- ------- ----------
(In Thousands)
Cash and equivalents ........... $ 4,876 $ 4,876 $ 2,233 $ 2,233
Securities:
Available for sale ............. 17,447 17,447 20,824 20,824
Held to maturity ............... 12,359 12,335 13,900 13,803
Federal Home Loan Bank
stock ........................ 294 294 274 274
Loans .......................... 36,744 36,957 33,183 33,095
Accrued interest receivable .... 1 1 30 30
Deposits:
Checking, savings and
money market ................. (29,264) (29,264) (29,917) (29,917)
Certificates of deposit ........ (28,590) (28,984) (27,756) (27,925)
Accrued interest payable ....... (127) (127) (114) (114)
Note payable ................... (400) (400) (500) (500)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used: the estimated fair value for cash and
equivalents, accrued interest and note payable was considered to approximate
cost; the estimated fair value for securities was based on quoted market values
for the individual securities or for equivalent securities; the estimated fair
value for loans was based on estimates of the rate the Association would charge
for similar loans at December 31, 1997 and 1996, respectively, applied over
estimated payment periods; the estimated fair value for demand and savings
deposits was based on their carrying value; the estimated fair value for
certificates of deposit was based on estimated of the rate the Association would
pay on such obligations at December 31, 1997 and 1996, respectively, applied for
the time period until maturity; and the estimated fair value of commitments was
not material. It was not practicable to estimate the fair value of a 17%
partnership interest in a non-traded real estate investment; that investment is
carried at equity of $426 and $464 at December 31, 1997 and 1996, respectively.
While these estimates of fair values are based on management's judgment of
appropriate factors, there is no assurance that, if the Association had disposed
of such items at December 31, 1997 or 1996, the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December 31,
1997 and 1996 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Association that are not
defined as financial instruments were not included in the above disclosures,
such as property and equipment. Also, non-financial instruments typically not
recognized in financial statements (but which may have value) were not included
in the above disclosures. These include, among other items, the estimated
earning power of core deposit accounts, the value of a trained work force,
customer goodwill, and similar items.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE L - REGULATORY CAPITAL
The Association is subject to the regulatory capital requirements
promulgated by the Office of Thrift Supervision (OTS). Failure to meet minimum
capital requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
The OTS has adopted risk-based capital ratio guidelines to which the
Association is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk-weighting categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier ("Tier
I") includes common equity, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan losses, subject to certain
limitations, less required deductions. Savings associations are required to
maintain a total risk-based capital ratio of 8%, of which 4% must be Tier I
capital. The OTS may, however, set higher capital requirements when particular
circumstances warrant. Savings associations experiencing or anticipating
significant growth are expected to maintain capital ratios, including tangible
OTS capital positions, well above the minimum levels.
In addition, the OTS established guidelines prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3%
for savings associations that meet certain specified criteria, including that
they have the highest regulatory rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points.
As of December 31, 1997 and 1996, management believes that the Association
met all capital adequacy requirements to which the Association was subject.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE L - REGULATORY CAPITAL (CONTINUED)
As of April 30, 1998 (Unaudited)
-------------------------------------------------------
To be "Well-
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
(Dollars in Thousands)
Total capital
(to risk-weighted assets) .... $12,675 32.4% >$3,129 >8.0% >$3,911 >10.0%
- - - -
Tier I capital
(to risk-weighted assets) .... 12,186 31.2 * * >2,347 >6.0
- -
Core (Tier I) capital
(to adjusted total assets) ... 12,186 16.9 >2,163 >3.0 >3,605 >5.0
- - - -
Tangible capital
(to adjusted total assets) ... 12,186 16.9 >1,082 >1.5 * *
- -
- ----------
* Ratio not required under regulations.
As of December 31, 1997
-------------------------------------------------------
To be "Well-
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
(Dollars in Thousands)
Total capital
(to risk-weighted assets) .... $12,392 31.4% >$3,158 >8.0% >$3,948 >10.0%
- - - -
Tier I capital
(to risk-weighted assets) .... 11,899 30.1 * * >2,369 >6.0
- -
Core (Tier I) capital
(to adjusted total assets) ... 11,899 16.7 >2,137 >3.0 >3,561 >5.0
- - - -
Tangible capital
(to adjusted total assets) ... 11,899 16.7 >1,068 >1.5 * *
- -
- ----------
* Ratio not required under regulations.
As of December 31, 1996
-------------------------------------------------------
To be "Well-
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
(Dollars in Thousands)
Total capital
(to risk-weighted assets) .... $11,714 33.0% >$2,837 >8.0% >$3,547 >10.0%
- - - -
Tier I capital
(to risk-weighted assets) .... 11,510 32.5 * * >2,128 >6.0
- -
Core (Tier I) capital
(to adjusted total assets) ... 11,510 16.3 >2,124 >3.0 >3,539 >5.0
- - - -
Tangible capital
(to adjusted total assets) ... 11,510 16.3 >1,062 >1.5 * *
- -
- ----------
* Ratio not required under regulations.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE L - REGULATORY CAPITAL (CONTINUED)
The following is a reconcilation of the Company's equity reported in the
financial statements under generally accepted accounting principles to OTS
regulatory capital requirements.
Core
Tangible (Tier I) Risk-based
Capital Capital Capital
------- ------- -------
(In Thousands)
April 30, 1998 (Unaudited)
Total equity as reported in
the financial statements .............. $ 13,282 $ 13,282 $ 13,282
General allowance for loan losses ....... -- -- 489
Net unrealized gain on available
for sale securities .................... (1,096) (1,096) (1,096)
-------- -------- --------
Regulatory Capital ...................... $ 12,186 $ 12,186 $ 12,675
======== ======== ========
December 31, 1997
Total equity as reported in the
financial statements ................... $ 13,163 $ 13,163 $ 13,163
General allowance for loan losses ....... -- -- 493
Net unrealized gain on available
for sale securities .................... (1,264) (1,264) (1,264)
-------- -------- --------
Regulatory Capital ...................... $ 11,899 $ 11,899 $ 12,392
======== ======== ========
NOTE M - LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Association and of other savings associations
are insured by the FDIC through the Savings Association Insurance Fund ("SAIF").
The reserves of the SAIF were below the level required by law, because a
significant portion of the assessments paid into the fund are used to pay the
cost of prior thrift failures. The deposit accounts of commercial banks are
insured by the FDIC through the Bank Insurance Fund ("BIF"), except to the
extent such banks have acquired SAIF deposits. The reserves of the BIF met the
level required by law in May, 1995. As a result of the respective reserve levels
of the funds, deposit insurance assessments paid by healthy savings associations
exceeded those paid by healthy commercial banks by approximately $.19 per $100
in deposits in 1995. In 1996, no BIF assessments were required for healthy
commercial banks except for a $2,000 minimum fee.
During 1996, legislation was enacted to recapitalize the SAIF that provided
for a special assessment of $.657 per $100 of SAIF deposits held at March 31,
1995. The Association had $58.0 million in deposits at March 31, 1995, resulting
in an assessment of $378,000 or $249,000 after tax, which was recorded during
1996.
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 2000, assuming the elimination of the thrift charter
or of the separate federal regulation of thrifts prior to the merger of the
deposit insurance funds. This legislation would require the Association to be
regulated as a bank under federal laws which would subject it to the more
restrictive activity limits imposed on national banks. In the opinion of
management, such restrictions would not materially affect the Association's
operations.
Under separate legislation related to the recapitalization plan, the
Association would have been required to recapture as taxable income any
additions to its bad debt reserve which were added after 1987 and will be unable
to utilize the percentage of earnings method to compute its reserve in the
future. However, the Association has not made any additions to its bad debt
reserve post-1987.
NOTE N - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
On July 6, 1998, the Association's Board of Directors adopted an overall
plan of conversion and reorganization (the Plan) whereby the Association will
convert to the stock form of ownership, followed by the issuance of all the
Association's outstanding stock to a newly formed holding company, First Niles
Financial, Inc. Pursuant to the Plan, as amended, First Niles Financial, Inc.
will offer for sale between 1,670,000 and 2,270,000 common shares at $10.00 per
share to the Association's depositors, members of the community, and a newly
formed Employee Stock Ownership Plan (ESOP). The costs of issuing the common
stock will be deferred and deducted from the sale proceeds of the offering. If
the conversion is unsuccessful, all deferred costs will be charged to
operations. At April 30, 1998, the Association had not incurred any conversion
costs. The transaction is subject to approval by regulatory authorities and
members of the Association. At the completion of the conversion to stock form,
the Association will establish a liquidation account in the amount of retained
earnings contained in the final offering circular. The liquidation account will
be maintained for the benefit of eligible savings account holders who maintain
deposit accounts in the Association after conversion.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE N. CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM (CONTINUED)
In the event of a complete liquidation (and only in such event), each
eligible member will be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted balance of
deposit accounts held, before any liquidation distribution may be made with
respect to common stock. Except for the repurchase of stock and payment of
dividends by the Association, the existence of the liquidation account will not
restrict the use or application of such retained earnings.
The Association may not declare, pay a cash dividend on, or repurchase any
of its common stock, if the effect thereof would cause retained earnings to be
reduced below either the amount required for the liquidation account or the
regulatory capital requirements for SAIF insured institutions.
F-26
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus in connection with the
offering made hereby, and, if given or made, such other information or
representation must not be relied upon as having been authorized by the Company
or the Association. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so, or to any person to whom it is unlawful to make such offer or solicita tion
in such jurisdiction. Neither the delivery of this Prospectus nor any sale
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company or the Association since any of the
dates as of which information is furnished herein or since the date hereof.
--------------
TABLE OF CONTENTS
Page
----
Prospectus Summary...................................................... 1
Selected Consolidated Financial Information............................. 7
Recent Fincial Data..................................................... 9
Management's Discussion and Analysis of Recent Results.................. 11
Risk Factors............................................................ 13
Home Federal Savings and Loan Association of Niles...................... 19
First Niles Financial, Inc.............................................. 20
Use of Proceeds......................................................... 21
Dividends............................................................... 23
Market for the Common Stock............................................. 23
Pro Forma Data.......................................................... 24
Pro Forma Regulatory Capital Analysis................................... 29
Capitalization.......................................................... 30
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 31
Business of Home Federal................................................ 43
Regulation.............................................................. 65
Management of the Holding Company....................................... 76
Management of the Association........................................... 77
The Conversion.......................................................... 83
Restrictions on Acquisitions of Stock and Related
Takeover Defensive Provisions........................................ 101
Description of Capital Stock............................................ 105
Legal and Tax Matters................................................... 106
Experts................................................................. 106
Additional Information ................................................. 107
Index to Consolidated Financial Statements.............................. F-1
Until the later of October 6, 1998 or 25 days after commencement of the
offering of Common Stock, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
================================================================================
UP TO
2,645,000 SHARES
FIRST NILES FINANCIAL, INC.
(Proposed Holding Company for Home Federal
Savings and Loan Association of Niles)
COMMON STOCK
--------------
PROSPECTUS
--------------
CHARLES WEBB & COMPANY, a
Division of Keefe, Bruyette &
Woods, Inc.
September 11, 1998