EXHIBIT 99.3
--------------------------------------------
PRO FORMA VALUATION REPORT
OC FINANCIAL, INC.
PROPOSED HOLDING COMPANY FOR
OHIO CENTRAL SAVINGS
DUBLIN, OHIO
DATED AS OF:
NOVEMBER 26, 2004
--------------------------------------------
PREPARED BY:
RP(R) FINANCIAL, LC.
1700 NORTH MOORE STREET
SUITE 2210
ARLINGTON, VIRGINIA 22209
RP(R) FINANCIAL, LC.
- ------------------------------------------------
Financial Services Industry Consultants
November 26, 2004
Board of Directors
OC Financial, Inc.
Ohio Central Savings
6033 Perimeter Drive
Dublin, Ohio 43017
Members of the Boards:
At your request, RP(R) Financial, LC. ("RP Financial") has completed and
hereby provides an independent appraisal ("Appraisal") of the estimated pro
forma market value of the Common Stock which is to be offered in connection with
the mutual-to-stock conversion ("Conversion") and corporate reorganization
described below.
This Appraisal has been prepared in accordance with the written
valuation guidelines promulgated by the Office of Thrift Supervision ("OTS"),
most recently updated as of October 21, 1994. Such valuation guidelines are
relied upon by the previously referenced agencies in evaluating conversion
appraisals in the absence of such specific written valuation guidelines
separately issued by the respective agencies.
DESCRIPTION OF CONVERSION TRANSACTION AND REORGANIZATION
In September 2001, Ohio Central Savings, Dublin, Ohio ("OCS" or the
"Bank") became a wholly-owned subsidiary of TFS Financial Corporation ("TFS"),
which is a wholly-owned subsidiary of Third Federal Savings and Loan Association
of Cleveland, MHC, Cleveland, Ohio. The OCS Board of Directors has adopted a
Plan of Conversion, incorporated herein by reference, pursuant to which the Bank
will reorganize from a subsidiary of TFS to a subsidiary of OC Financial, Inc.
("OC Financial" or the "Company"), a Maryland corporation, as part of Ohio
Central Savings' conversion to stock form. Following the stock conversion and
reorganization, OC Financial will no longer be affiliated with TFS or Third
Federal Savings and Loan Association of Cleveland, MHC. In conjunction with
reorganization, among other things, the Bank will make a cash payment to TFS of
$792,000. The Company will sell, in the Subscription and Community Offerings,
Company common stock in the amount equal to the appraised value of the Bank.
The Company will infuse capital into the Bank sufficient to increase the
core capital ratio to 10% of assets, and will retain the balance of the offering
proceeds to cover holding company expenses, to potentially pay cash dividends to
shareholders and/or to repurchase shares of
- --------------------------------------------------------------------------------
WASHINGTON HEADQUARTERS
Rosslyn Center Telephone: (703) 528-1700
1700 North Moore Street, Suite 2210 Fax No.: (703) 528-1788
Arlington, VA 22209 Toll Free No.: (866) 723-0594
www.rpfinancial.com E-Mail: mail@rpfinancial.com
BOARDS OF DIRECTORS
NOVEMBER 26, 2004
PAGE 2
common stock. Furthermore, the Company intends to use a portion of the proceeds
to make a loan directly to the Employee Stock Ownership Plan ("ESOP") to enable
the ESOP to purchase up to 8.0% of the shares of common stock sold in the
offering.
RP(R) FINANCIAL, LC.
RP Financial is a financial consulting firm serving the financial
services industry nationwide that, among other things, specializes in financial
valuations and analyses of business enterprises and securities, including the
pro forma valuation for savings institutions converting from mutual-to-stock
form. The background and experience of RP Financial is detailed in Exhibit V-1.
We believe that, except for the fee we will receive for our appraisal, we are
independent of the Company, the Bank, and the other parties engaged by the Bank
or the Company to assist in the stock conversion process.
VALUATION METHODOLOGY
In preparing our appraisal, we have reviewed the Bank's and the
Company's regulatory applications, including the prospectus as filed with the
OTS and the Securities and Exchange Commission ("SEC"). We have conducted a
financial analysis of the Bank that has included a review of its audited and
unaudited financial information for fiscal years ended September 30, 2000
through 2004, and due diligence related discussions with the Bank's management;
Crowe Chizek and Company LLC, the Bank's independent auditor; Luse, Gorman
Pomerenk and Schick, the Company's legal counsel for the stock conversion, and
Keefe, Bruyette & Woods, Inc., the Bank's financial and marketing advisors in
connection with the Company's stock offering. All conclusions set forth in the
Appraisal were reached independently from such discussions. In addition, where
appropriate, we have considered information based on other available published
sources that we believe are reliable. While we believe the information and data
gathered from all these sources are reliable, we cannot guarantee the accuracy
and completeness of such information.
We have investigated the competitive environment within which the Bank
operates and have assessed the Bank's relative strengths and weaknesses. We have
kept abreast of the changing regulatory and legislative environment and analyzed
the potential impact on the Bank and the industry as a whole. We have analyzed
the potential effects of conversion on the Bank's operating characteristics and
financial performance as they relate to the pro forma market value of the
Company. We have reviewed the economy in the Bank's primary market area and have
compared the Bank's financial performance and condition with selected
publicly-traded savings institutions with similar characteristics as the Bank,
as well as all publicly-traded savings institutions. We have reviewed conditions
in the securities markets in general and in the market for thrift stocks in
particular, including the market for existing thrift issues and the market for
initial public offerings by thrifts.
BOARDS OF DIRECTORS
NOVEMBER 26, 2004
PAGE 3
Our Appraisal is based on the Bank's representation that the information
contained in the regulatory applications and additional information furnished to
us by the Bank and its independent auditors are truthful, accurate and complete.
We did not independently verify the financial statements and other information
provided by the Bank and its independent auditors, nor did we independently
value the assets or liabilities, on or off balance sheet, of the Bank. The
valuation considers the Bank only as a going concern and should not be
considered as an indication of the liquidation value of the Bank.
Our appraised value is predicated on a continuation of the current
operating environment for the Bank and for all thrifts. Changes in the local,
state and national economy, the legislative and regulatory environment, the
stock market, interest rates, and other external forces (such as natural
disasters or significant world events) may occur from time to time, often with
great unpredictability and may materially impact the value of thrift stocks as a
whole or the Bank's value alone. It is our understanding that the Bank intends
to remain an independent institution and there are no current plans for selling
control of the Bank as a converted institution. To the extent that such factors
can be foreseen, they have been factored into our analysis.
Pro forma market value is defined as the price at which the Bank's
stock, immediately upon completion of the conversion offering, would change
hands between a willing buyer and a willing seller, neither being under any
compulsion to buy or sell and both having reasonable knowledge of relevant
facts.
VALUATION CONCLUSION
It is our opinion that, as of November 26, 2004, the pro forma market
value of the Bank's common stock immediately following the offering is
$6,000,000 at the midpoint, equal to 600,000 shares offered at a per share value
of $10.00. Pursuant to conversion guidelines, the 15% offering range provides
for a minimum value of $5,100,000 and a maximum value of $6,900,000. Based on
the $10.00 per share offering price, this valuation range equates to total
shares outstanding of 510,000 at the minimum and 690,000 at the maximum. In the
event the appraised value is subject to an increase, up to 793,500 shares may be
issued at an issue price of $10.00 per share for an aggregate market value of
$7,935,000 without requiring a resolicitation.
LIMITING FACTORS AND CONSIDERATIONS
Our valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of the
common stock. Moreover, because such valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons who purchase
shares of common stock in the conversion will thereafter be able to buy or sell
such shares at prices related to the foregoing valuation of the pro forma market
value thereof.
BOARDS OF DIRECTORS
NOVEMBER 26, 2004
PAGE 4
RP Financial's valuation was determined based on the financial condition
and operations of the Bank as of September 30, 2004, the date of the financial
data included in the regulatory applications and prospectus.
RP Financial is not a seller of securities within the meaning of any
federal and state securities laws and any report prepared by RP Financial shall
not be used as an offer or solicitation with respect to the purchase or sale of
any securities. RP Financial maintains a policy which prohibits the company, its
principals or employees from purchasing stock of its client institutions.
The valuation will be updated as provided for in the conversion
regulations and guidelines. These updates will consider, among other things, any
developments or changes in the Bank's financial performance and condition,
management policies, and current conditions in the equity markets for thrift
shares. These updates may also consider changes in other external factors which
impact value including, but not limited to: various changes in the legislative
and regulatory environment, the stock market and the market for thrift stocks,
and interest rates. Should any such new developments or changes be material, in
our opinion, to the valuation of the shares, appropriate adjustments to the
estimated pro forma market value will be made. The reasons for any such
adjustments will be explained in the update at the date of the release of the
update.
Our valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of the
common stock. Moreover, because such valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons who purchase
shares of common stock in the conversion will thereafter be able to buy or sell
such shares at prices related to the foregoing valuation of the estimated pro
forma market value thereof. The appraisal does not take into account any trading
activity with respect to the purchase and sale of common stock in the secondary
market and reflects only a valuation range as of this date for the pro forma
market value of the Company immediately upon issuance of the stock.
Respectfully submitted,
RP(R) FINANCIAL, LC.
/s/ Ronald S. Riggins
---------------------
Ronald S. Riggins
President and Managing Director
/s/ James P. Hennessey
----------------------
James P. Hennessey
Senior Vice President
RP(R) FINANCIAL, LC.
TABLE OF CONTENTS
OC FINANCIAL, INC.
DUBLIN, OHIO
PAGE
DESCRIPTION NUMBER
- ----------- ------
CHAPTER ONE OVERVIEW AND FINANCIAL ANALYSIS
- -----------
Introduction 1.1
Affiliation With TFS Financial Corporation 1.2
Description of Plan of Conversion 1.3
Strategic Overview 1.4
Balance Sheet Trends 1.6
Income and Expense Trends 1.9
Interest Rate Risk Management 1.12
Lending Activities and Strategy 1.13
Asset Quality 1.16
Funding Composition and Strategy 1.17
Subsidiary Activities 1.17
Legal Proceedings 1.18
CHAPTER TWO MARKET AREA
- -----------
Introduction 2.1
Market Area Demographics 2.2
Summary of Local Economy and Workforce 2.4
Unemployment Trends 2.6
Market Area Deposit Characteristics 2.6
CHAPTER THREE PEER GROUP ANALYSIS
- -------------
Peer Group Selection 3.1
Financial Condition 3.4
Income and Expense Components 3.7
Loan Composition 3.10
Credit Risk 3.10
Interest Rate Risk 3.13
Summary 3.13
RP(R) FINANCIAL, LC.
TABLE OF CONTENTS
OC FINANCIAL, INC.
DUBLIN, OHIO
(CONTINUED)
PAGE
DESCRIPTION NUMBER
- ----------- ------
CHAPTER FOUR VALUATION ANALYSIS
- ------------
Introduction 4.1
Appraisal Guidelines 4.1
RP Financial Approach to the Valuation 4.1
Valuation Analysis 4.2
1. Financial Condition 4.3
2. Profitability, Growth and Viability of Earnings 4.4
3. Asset Growth 4.5
4. Primary Market Area 4.5
5. Dividends 4.7
6. Liquidity of the Shares 4.7
7. Marketing of the Issue 4.8
A. The Public Market 4.8
B. The New Issue Market 4.12
C. The Acquisition Market 4.13
8. Management 4.15
9. Effect of Government Regulation and Regulatory Reform 4.15
Summary of Adjustments 4.16
Valuation Approaches 4.16
Comparison to Recent Conversions 4.19
Valuation Conclusion 4.19
RP(R) FINANCIAL, LC.
LIST OF TABLES
OC FINANCIAL, INC.
DUBLIN, OHIO
TABLE
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
1.1 Historical Balance Sheets 1.7
1.2 Historical Income Statements 1.10
2.1 Map of Branch Locations 2.1
2.2 Summary Demographic Data 2.3
2.3 Major Employers in Cuyahoga and Franklin Counties 2.5
2.4 Unemployment Trends 2.6
2.6 Deposit Detail for Cuyahoga and Franklin County 2.8
3.1 Peer Group of Publicly-Traded Thrifts 3.3
3.2 Balance Sheet Composition and Growth Rates 3.5
3.3 Income as a Percent of Average Assets and Yields,
Costs, Spreads 3.8
3.4 Loan Portfolio Composition and Related Information 3.11
3.5 Credit Risk Measures and Related Information 3.12
3.6 Interest Rate Risk Measures and Net Interest
Income Volatility 3.14
4.1 Peer Group Market Area Comparative Analysis 4.6
4.2 Pricing Characteristics and After-Market Trends 4.14
4.3 Public Market Pricing 4.21
RP(R) FINANCIAL, LC.
PAGE 1.1
I. OVERVIEW AND FINANCIAL ANALYSIS
INTRODUCTION
Ohio Central Savings ("OCS" or the "Bank") is a federally-chartered
stock savings association. As explained more fully below, none of the shares of
the Bank have been publicly issued, as the Bank is a subsidiary of a "no stock"
mutual holding company, TFS Financial Corporation ("TFS"), which is a
wholly-owned subsidiary of Third Federal Savings and Loan Association of
Cleveland, MHC, Cleveland, Ohio.
The Bank conducts operations through its main office in Dublin, Ohio,
and a branch office in Cleveland, Ohio. Each office location has a 24 hour ATM
machine and there is a drive-through window in Dublin. In addition, the Bank
also has a remote ATM inside the Cleveland Clinic. The Bank also employs a
variety of alternative delivery channels, including online banking and telephone
banking.
OCS was originally chartered as a credit union in 1949. The Bank's
geographically distant locations (the branch is approximately 140 miles from the
main office) reflect its credit union roots. As a credit union, OCS was
affiliated with as many as 200 employee groups and operated five locations in
Columbus and Cleveland in the 1980s. OCS converted its charter to a federal
mutual savings association in 1998 (the "Charter Conversion"), at which time it
adopted its current name and became subject to income taxation.
Since the Charter Conversion, the Bank has been regulated by the Office
of Thrift Supervision ("OTS"). The Bank is currently a member of the Federal
Home Loan Bank ("FHLB") system. The Bank's deposits are insured up to the
regulatory maximums by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC").
As of September 30, 2004, the Bank maintained $55.6 million in assets,
$32.3 million in deposits and $3.8 million in equity, equal to 6.8% of assets.
For the 12 months ended September 30, 2004, the Bank reported net income of
$25,000, equal to 0.05% of average assets.
RP(R) FINANCIAL, LC.
PAGE 1.2
AFFILIATION WITH TFS FINANCIAL CORPORATION
The Bank operated as an independent entity until September 2001, when
OCS became a wholly-owned subsidiary of TFS ("TFS affiliation"). Since that
time, OCS has operated as a subsidiary of TFS, along with a sister subsidiary,
Third Federal Savings and Loan of Cleveland ("Third Federal"), with $8.4 billion
in assets. The objective of the TFS affiliation was to become part of a larger
organization with greater resources to facilitate the Bank's ability to grow and
to reduce certain overhead expenses, and to address the Bank's shortfall with
the qualified thrift lender ("QTL") threshold. At the time of the TFS
affiliation, TFS made a $275,000 capital contribution to the Bank. In addition,
OCS relied on TFS staff to provide operational support including administration
of the 401(k) and marketing. Furthermore, TFS purchased the majority of the
automobile loans originated and sold by the Bank over the prior three years,
which has been a historical niche for the Bank.
The Bank expected to increase its portfolio of mortgage loans with
purchases from Third Federal. However, the balance of mortgage loans has
diminished since 2001 as high loan refinancings exceeded purchases, particularly
since the Bank largely ceased originating residential mortgage loans and
forwarded mortgage applications to TFS for origination. Thus, the Bank has been
required to invest in mortgage-backed securities ("MBS") and other qualifying
thrift investments in order to attain QTL compliance. As will be discussed in
greater detail, the declining loan balance since 2001 coupled with the increase
in lower yielding investments and MBS and low interest rate environment resulted
in spread compression and diminished earnings and profitability.
The Board of OCS recently determined to terminate its TFS affiliation,
and the resulting divestiture agreement stipulates that the following major
conditions be met:
o OCS will pay a cash dividend to TFS equal to $792,000,
immediately prior to the closing of the reorganization and
Conversion;
o TFS will cease allowing OCS to use branch offices for loan
closings;
o TFS will cease purchasing automobile loans from OCS;
o OCS will terminate participation in the TFS pension plan as of
December 31, 2004; and
RP(R) FINANCIAL, LC.
PAGE 1.3
o OCS will terminate participation in the TFS 401(k) plan at the
closing date and the funds currently in such plan will be
transferred to a new plan administered by OCS with substantially
the same benefits.
The $792,000 cash payment will be in the form of a dividend and, thus,
will not be deductible for income tax purposes. This payment represents
approximately 21.1% of the Bank's equity at September 30, 2004. Additionally,
the Bank estimates that its post-termination operating costs will increase in
the range of $50,000 to $60,000 annually, reflecting higher directors' fees and
fees for auditing and tax work. In addition, the Bank expects its expenses to
increase due to normal public company costs and stock benefit plans costs.
DESCRIPTION OF PLAN OF CONVERSION
On December 9, 2004, the Board of Directors of OCS adopted a Plan of
Conversion ("Conversion"), whereby the Bank will reorganize from a subsidiary of
TFS to a subsidiary of OC Financial, Inc. ("OC Financial" or the "Company"), a
Maryland Corporation. Following the Conversion and reorganization, OCS will no
longer be affiliated with TFS or Third Federal. Concurrently, the Company will
sell in the Subscription and Community Offerings common stock in the amount
equal to the appraised value of the Bank.
Concurrent with the Conversion, the Company will retain a portion of the
net proceeds, and the balance will be downstreamed to the Bank in an amount
sufficient to achieve a pro forma 10% equity/assets ratio. It is not currently
anticipated that the Company will engage in any significant business activity
other than ownership of the Bank and management of the net proceeds retained at
the Company level.
The near term deployment of the net offering proceeds is anticipated to
be as follows.
o OC FINANCIAL. The Company is expected to retain up to 50% of the
net offering proceeds, provided that the pro forma equity/assets
ratio of the Bank is at least 10%. The proceeds retained by the
Company will be utilized to fund the loan for stock purchased by
the newly-formed Employee Stock Ownership Plan ("ESOP"). The
remaining funds at the Company will be deposited in the Bank.
Over time, the Company's funds are anticipated to be utilized
for various corporate purposes, including the possible payment
of regular and/or special cash dividends, acquisitions of
RP(R) FINANCIAL, LC.
PAGE 1.4
other financial institutions or financial services companies,
infusing additional equity into the Bank and/or repurchases of
common stock.
o OHIO CENTRAL SAVINGS. The greater of 50% of the net proceeds or
an amount sufficient to increase the core capital ratio to 10%
of pro forma assets will be infused into the Bank. The net
investable cash is expected to be lower than the paid-in
capital, based on expectations of deposit withdrawals to fund
stock purchases. Cash proceeds infused into the Bank will
initially become part of general funds, which are expected to be
initially invested into cash and short-term investments pending
longer-term reinvestment into loans and investments.
On a post-conversion basis, the Bank expects to continue to pursue
controlled growth, leveraging its strengthened pro forma capital, and shift the
lending focus from automobile lending to the residential, construction and
commercial mortgage lending activity conducted by OCS prior to the TFS
affiliation.
STRATEGIC OVERVIEW
OCS operated as an occupational-based credit union from its inception in
1949 through the 1998 Charter Conversion. Over the years, the Bank acquired many
small credit unions, which resulted in a wide array of employer groups,
including many in the health care and educational arenas. Asset quality problems
and high overhead levels resulting from costly leases at its five office
facilities contributed to operating losses and a weakening capital position in
the late 1980s. New management implemented strategies to improve asset quality
and earnings, which resulted in strengthened profitability and capital ratios
leading up to the Charter Conversion.
Historically, the Bank's lending operations were focused on consumer
lending funded by deposits from members. In this regard, the Bank developed its
current specialty niche in automobile lending.
The Bank pursued the Charter Conversion due to pending litigation
challenging the diverse array of affiliated employer groups and the perceived
benefits of the mutual thrift charter, including the ability to serve the
community at large and more actively promote residential mortgage lending.
Between 1998 and 2001, the Bank pursued relatively strong growth but
RP(R) FINANCIAL, LC.
PAGE 1.5
became constrained by its fully leveraged capital position.
Moreover, the Bank was required to increase the level of
qualifying thrift assets in order to achieve compliance with QTL
within the regulator-agreed phase-in period. The TFS affiliation
addressed these issues as well as provided the Bank with greater
financial and other resources to foster the Bank's growth,
profitability and capital strength.
Since the TFS affiliation, the Bank's lending has principally focused on
originating automobile loans, both locally and nationally. In-market automobile
loan originations consist of both new and used automobiles, while loans
originated nationally (primarily through Internet-generated applications) are
secured by new automobiles purchased through dealerships. In this regard, the
focus is on high quality borrowers and the yield on automobile loans originated
by the Bank is comparatively modest relative to competitive rates (current rates
largely fall in the 4% to 5% range). The credit quality of the automobile loan
portfolio has historically been strong and losses have been modest. Since the
Bank is limited by regulation as to the amount of consumer loans (primarily
automobile) that can be held in portfolio, the Bank sold the majority of
newly-originated automobile loans to TFS over the last two fiscal years
(representing approximately $63.0 million of the $84.5 million of automobile
loans originated during this period).
Concurrent with the TFS affiliation, the Bank largely ceased mortgage
lending and referred such applications to TFS for underwriting, processing and
origination. In turn, it was the Bank's intent to repurchase such mortgage loan
referrals or other mortgage loans from TFS, although this did not materialize.
As a result, the Bank primarily purchased investments and MBS to deploy
available liquidity and meet the QTL requirement.
The Bank expects to reengage in mortgage lending following the
Conversion. In this regard, in order to limit overhead pressures, OCS will
utilize the services of a regional mortgage banking company to process the
permanent real estate mortgage loan applications. This is similar to the Bank's
practice prior to the TFS affiliation, and gives the Bank the ability to retain
the loans or sell the loans to the mortgage banking company. Once the Bank's
loan volume has increased, certain of these functions may be brought in-house if
they are cost effective.
RP(R) FINANCIAL, LC.
PAGE 1.6
For reasons already described, the Bank maintains a high proportion of
MBS, both Fannie Mae and Ginnie Mae securities, consisting of fixed rate with
maturities of fifteen years or less, or convert to a one year adjustable rate
loan after the first five years.
BALANCE SHEET TRENDS
GROWTH TRENDS
Since September 30, 2000, OCS exhibited annual asset growth of 8.4% (see
Table 1.1 for details; the detailed audited and unaudited financial statements
are incorporated herein by reference as noted in Exhibit I-1, and key operating
ratios are set forth in Exhibit I-2). The positive impact of the Charter
Conversion and the subsequent negative impact of the TFS affiliation are
reflected in the asset mix as the loans receivable balance increased by 15% from
fiscal 2000 to 2001, but subsequently diminished by 34%. The recent strong
growth in investments, principally MBS, reflects the loan portfolio decline
since the TFS affiliation commenced.
Equity increased 7.5% annually since the end of fiscal 2000, but was
nominal in the most recent fiscal year owing to the Bank's reduced
profitability. OCS' post-offering equity growth rate is expected to remain
modest on a pro forma basis until the Bank can implement a growth strategy and
increase the overall mix of loans to assets on a post-conversion basis.
LOANS RECEIVABLE
Loans receivable totaled $26.2 million, or 47.1% of total assets, as of
September 30, 2004. The Bank's automobile lending has comprised more than 99% of
loan originations over the last two fiscal years. The Bank currently has modest
balances of residential mortgage and home equity loans, as these were primarily
originated prior to the Bank's TFS affiliation and as the portfolio has been
subject to a decline due to a high level of refinancing.
As of September 30, 2004, automobile loans totaled $17.5 million, equal
to 66.3% of total loans, while other consumer loans amounted to $0.7 million,
equal to 2.8% of total loans. Residential, home equity, and commercial real
estate mortgage loans totaled $8.1 million, which together represented 30.7% of
the loan portfolio at this same date.
RP(R) FINANCIAL, LC.
PAGE 1.7
Table 1.1
Ohio Central Savings
Historical Balance Sheets
(Amount and Percent of Assets)
As of the Fiscal Year Ended September 30,
----------------------------------------------------------------
2000 2001 2002
------------------ ------------------ ------------------
Amount Pct Amount Pct Amount Pct
------ --- ------ --- ------ ---
($000) (%) ($000) (%) ($000) (%)
Total Amount of:
Assets $40,415 100.00% $48,586 100.00% $48,526 100.00%
Loans receivable (net) 34,406 85.13% 39,709 81.73% 33,058 68.12%
Cash and Investments 9,426 23.32% 7,112 14.64% 13,640 28.11%
Deposits 31,627 78.26% 31,900 65.66% 31,136 64.16%
Borrowings 5,700 14.10% 11,350 23.36% 9,950 20.50%
Retained earnings 2,810 6.95% 3,268 6.73% 3,473 7.16%
Loans/Deposits 108.79% 124.48% 106.17%
(CONTINUED)
As of the Fiscal Year Ended September 30, Compounded
----------------------------------------- Annual
2003 2004 Growth Rate
------------------ ------------------ ------------------
Amount Pct Amount Pct Pct
------ --- ------ --- ---
($000) (%) ($000) (%) (%)
Total Amount of:
Assets $50,192 100.00% $55,567 100.00% 8.29%
Loans receivable (net) 26,700 53.20% 26,197 47.14% -6.59%
Cash and Investments 21,404 42.64% 27,651 49.76% 30.87%
Deposits 29,887 59.55% 32,261 58.06% 0.50%
Borrowings 12,450 24.80% 16,450 29.60% 30.34%
Retained earnings 3,730 7.43% 3,754 6.76% 7.51%
Loans/Deposits 89.34% 81.20%
Source: Ohio Central Savings' prospectus and audited and unaudited financial reports.
RP(R) FINANCIAL, LC.
PAGE 1.8
CASH, INVESTMENTS AND MORTGAGE-BACKED SECURITIES
As of September 30, 2004, investments totaled $27.7 million, or 49.8% of
total assets, and cash balances totaled $0.7 million, or 1.2% of total assets.
At this date, the investment portfolio was comprised of MBS ($20.4 million),
U.S. agency obligations ($2.6 million), federal funds ($3.8 million) and
miscellaneous other investment primarily including FHLB stock ($0.8 million).
All of the Bank's MBS and agency securities are classified as held-to-maturity
("HTM") and are thus held for long-term investment purposes. As noted
previously, the Bank has been reinvesting cash flows primarily into MBS in
recent periods in the absence of an ability to expand the loan portfolio
balance.
FUNDING STRUCTURE
Over the past five years, OCS' funding needs have been substantially met
through retail deposits, borrowings, internal cash flows and retained earnings.
Since fiscal year end 2000, the Bank's deposits realized less than 1% annual
growth. As of September 30, 2004, savings, NOW and money market accounts
comprised 42.4%, 21.2% and 9.3% of total deposits, respectively. By comparison,
certificates of deposit ("CDs") comprised 27.1% of the deposit base. The Bank
had no brokered CDs and has not actively sought public unit deposits.
The Bank has increasingly employed borrowed funds over the last three
fiscal years as it has been seeking to lock-in longer term funds in the low
interest rate environment. As of September 30, 2004, borrowed funds totaled
$16.5 million, equal to 29.6% of assets.
EQUITY
Equity has grown 7.5% annually since the end of fiscal year 2000, but
the year-to-year growth rate has been trending downward in response to the
Bank's diminishing profitability, particularly in the most recent fiscal year.
As of September 30, 2003, OCS' equity totaled $3.8 million, or 6.76% of total
assets. The Bank maintained capital surpluses relative to its regulatory capital
requirements at September 30, 2004, and thus qualified as a "well capitalized"
institution. The offering proceeds, net of the $792,000 capital distribution to
TFS, will serve to further strengthen OCS' regulatory capital position.
RP(R) FINANCIAL, LC.
PAGE 1.9
INCOME AND EXPENSE TRENDS
While the Bank has been moderately profitable historically, recent
earnings and profitability have been adversely impacted by a couple of notable
trends. First, the Bank's assets/liabilities mix has changed, reflecting a
higher proportion of lower yielding investments funded primarily with
borrowings, thus compressing the yield-cost spread. Second, operating expenses
increased in fiscal 2002 as the Bank increased the compensation and overhead
structure to be more consistent with TFS. Thus, despite the earnings and
profitability improvement through fiscal 2003, there was a sharp reversal in
fiscal 2004 during which earnings and profitability were nominal. These trends
are reflected in Table 1.2 and are described more fully below.
NET INTEREST INCOME
Net interest income increased from $1.1 million (2.74% of average
assets) in fiscal 2000, to a peak level of $1.5 million (3.16% of average
assets) in fiscal 2002. The expanding net interest income during this time
period primarily reflected the impact of balance sheet growth. Subsequently, the
Bank's net interest income declined in fiscal 2004 to $1.4 million, or 2.76% of
average assets, reflecting the changes in the asset/liability ("A/L") mix
previously discussed and recent low interest rates.
The foregoing asset/liability trends are reflected in the Bank's
declining interest rate spreads. Specifically, the Bank's interest rate spread
decreased from 2.82% in fiscal 2003, to 2.31% in fiscal 2004, and equaled only
2.01% as of September 30, 2004 (see Exhibit I-4). Near-term improvement in
spreads may be affected by continuing mortgage loan refinancing, while the
longer term spread will be primarily impacted by the Bank's ability to invest in
whole loans. The initial reinvestment of the offering proceeds should increase
net interest income, however, the initial reinvestment yields are expected to
depress overall asset yields, interest spreads and the interest income ratio.
LOAN LOSS PROVISIONS
Provisions for loan losses have been limited over recent periods,
reflecting the Bank's relatively strong asset quality, low level of chargeoffs
and high ratio of low credit risk
RP(R) FINANCIAL, LC.
PAGE 1.10
Table 1.2
Ohio Central Savings
Historical Income Statements
As of the Fiscal Year Ended September 30,
----------------------------------------------------------------------
2000 2001 2002
---------------------- ---------------------- ----------------------
Amount Pct(1) Amount Pct(1) Amount Pct(1)
------ ------ ------ ------ ------ ------
($000) (%) ($000) (%) ($000) (%)
Interest Income $2,171 5.37% $2,564 5.76% $2,977 6.13%
Interest Expense (1,066) -2.64% (1,231) -2.77% (1,444) -2.97%
------- ------ ------- ------ ------- ------
Net Interest Income $1,105 2.74% $1,333 3.00% $1,533 3.16%
Provision for Loan Losses (40) -0.10% (45) -0.10% (60) -0.12%
------- ------ ------- ------ ------- ------
Net Interest Income after Provisions $1,065 2.64% $1,288 2.89% $1,473 3.03%
Other Operating Income 527 1.30% 541 1.22% 737 1.52%
Gains on the Sale of Auto Loans - 0.00% - 0.00% 308 0.63%
Operating Expense (1,414) -3.50% (1,579) -3.55% (2,162) -4.45%
------- ------ ------- ------ ------- ------
Net Operating Income $ 179 0.44% $ 250 0.56% $ 356 0.73%
Total Non-Operating Income/(Expense) $ - 0.00% $ - 0.00% $ - 0.00%
Net Income Before Tax $ 179 0.44% $ 250 0.56% $ 356 0.73%
Income Taxes (67) -0.17% (99) -0.22% (150) -0.31%
------- ------ ------- ------ ------- ------
Net Income (Loss) Before Extraord. Items $ 112 0.28% $ 151 0.34% $ 205 0.42%
Estimated Core Net Income
- -------------------------
Net Income $ 112 0.28% $ 151 0.34% $ 205 0.42%
Addback(Deduct): Non-Recurring (Inc)/Exp - 0.00% - 0.00% - 0.00%
Tax Effect (1) - 0.00% - 0.00% - 0.00%
------- ------ ------- ------ ------- ------
Estimated Core Net Income $ 112 0.28% $ 151 0.34% $ 205 0.42%
Memo:
Expense Coverage Ratio (1) 78.20% 84.42% 70.90%
Efficiency Ratio (2) 86.58% 84.24% 95.24%
Effective Tax Rate 37.24% 39.50% 42.24%
(CONTINUED)
As of the Fiscal Year Ended September 30,
----------------------------------------------
2003 2004
---------------------- ----------------------
Amount Pct(1) Amount Pct(1)
------ ------ ------ ------
($000) (%) ($000) (%)
Interest Income $2,673 5.41% $2,673 5.35%
Interest Expense (1,196) -2.42% (1,294) -2.59%
------- ------ ------- ------
Net Interest Income $1,477 2.99% $1,379 2.76%
Provision for Loan Losses (60) -0.12% (35) -0.07%
------- ------ ------- ------
Net Interest Income after Provisions $1,417 2.87% $1,344 2.69%
Other Operating Income 525 1.06% 510 1.02%
Gains on the Sale of Auto Loans 620 1.25% 449 0.90%
Operating Expense (2,238) -4.53% (2,264) -4.53%
------- ------ ------- ------
Net Operating Income $ 324 0.66% $ 39 0.08%
Total Non-Operating Income/(Expense) $ - 0.00% $ - 0.00%
Net Income Before Tax $ 324 0.66% $ 39 0.08%
Income Taxes (110) -0.22% (14) -0.03%
------- ------ ------- ------
Net Income (Loss) Before Extraord. Items $ 214 0.43% $ 25 0.05%
Estimated Core Net Income
- -------------------------
Net Income $ 214 0.43% $ 25 0.05%
Addback(Deduct): Non-Recurring (Inc)/Exp - 0.00% - 0.00%
Tax Effect (1) - 0.00% - 0.00%
------- ------ ------- ------
Estimated Core Net Income $ 214 0.43% $ 25 0.05%
Memo:
Expense Coverage Ratio (1) 66.00% 60.91%
Efficiency Ratio (2) 111.79% 119.85%
Effective Tax Rate 33.95% 35.90%
(1) Net interest income divided by operating expenses.
(2) Operating expenses as a percent of the sum of net interest income and other operating income (excluding gains on sale).
Source: Ohio Central Savings' prospectus and audited and unaudited financial statements.
RP(R) FINANCIAL, LC.
PAGE 1.11
investment securities. Going forward, the Bank will continue to evaluate the
adequacy of the level of general valuation allowances ("GVAs") on a regular
basis, and establish additional loan loss provisions in accordance with the
asset classification and loss reserve policies. For fiscal 2004, loan loss
provisions totaled $35,000, or 0.07% of average assets, which is relatively
consistent with the level reported for the four prior fiscal years.
NON-INTEREST INCOME
Non-interest income for fiscal 2004 totaled $510,000, or 1.02% of
average assets, primarily reflecting fee income generated through various
service and non-sufficient fund ("NSF") charges, interchange fees and ATM
related fees, reflecting foreign transactions.
The Bank has recognized gains on the sale of automobile loans sold to
TFS over the last three fiscal years, who has been the sole purchaser of
automobile loans from the Bank over this period. Gains on sale totaled $308,000
(0.63% of average assets) in fiscal 2002 and increased to $620,000 (1.25% of
average assets) in fiscal 2003, before diminishing to $449,000 (0.90% of average
assets) in fiscal 2004. The recent reduction in gains on sale reflects the lower
volume of originations and sales, as TFS diminished its support with respect to
the marketing of automobile loans to its customers. Since TFS will not be
purchasing automobile loans from OCS on a post-conversion basis, OCS is
currently seeking to identify other financial institution purchasers. In the
short-run, this may have a negative impact on the Bank's ability to maintain its
strong origination volume of this loan product.
OPERATING EXPENSES
The Bank has typically maintained a relatively high operating expense
ratio, reflecting a comparatively greater number of labor intensive transaction
accounts, smaller automobile loans and typical inefficiencies as a small
institution. Moreover, operating expenses grew in fiscal 2002 as the Bank
increased its personnel and overhead structure and costs to be consistent with
TFS. As a result, operating expenses increased from $1.4 million in fiscal 2000,
to $2.2 million for fiscal 2004, which resulted in an increase to the Bank's
operating expense ratio from 3.50% of average assets to 4.53% of average assets
over the corresponding time frame.
RP(R) FINANCIAL, LC.
PAGE 1.12
Operating expenses are expected to increase on a post-offering basis as
a result of the expense of the stock-related benefit plans and the costs related
to operating as a public Bank. Additionally, the Bank estimates that its annual
operating costs will increase in the range of $50,000 to $60,000, reflecting
higher directors fees and fees for auditing and tax work currently rendered by
TFS. At the same time, reinvestment of the net conversion proceeds and
subsequent growth may offset the anticipated expense increase.
TAXES
The Bank's average tax rate has fluctuated in a range over the last five
fiscal years, from a low of 29.97% in fiscal 2003, to a high of 42.24% in fiscal
2003 and equaled 35.90% in fiscal 2004. On a normalized basis, the Bank expects
its tax rate to be in the range of 30% to 40%.
EFFICIENCY RATIO
The efficiency ratio has deteriorated since fiscal 2000 to 119.9% in
fiscal 2004, as gains on sale became a more significant component of the Bank's
earnings and as OCS has realized spread compression. On a post-offering basis,
the efficiency ratio may show some slight improvement as the Bank reinvests the
offering proceeds. At the same time, significant improvement in the efficiency
ratio will be dependent on the Bank's ability to successfully restructure its
balance sheet to include a higher proportion of loans and realize growth to
leverage its overhead infrastructure.
INTEREST RATE RISK MANAGEMENT
The primary aspects of the Bank's interest rate risk management include:
>> Emphasizing the origination of shorter term automobile loans
with maturities of up to six years;
>> Emphasizing the origination and mortgage loans including fixed
rate loans with maturities of up to 15 years while seeking to
emphasize adjustable rate and balloon loans;
>> Maintaining a balance of cash or short-term investments
including mortgage-backed securities with maturities not
exceeding 15 years;
RP(R) FINANCIAL, LC.
PAGE 1.13
>> Maintaining a large base of core deposits which are less
interest sensitive to changes in market interest rates;
>> Seeking to lock in longer term borrowed funds when such funds
are attractively priced; and
>> Maintaining an acceptable level of capital which provides a
favorable level of interest-earning assets relative to
interest-bearing liabilities.
The rate shock analysis as of September 30, 2004 (see Exhibit I-5)
reflects a modest liability sensitive position with the net portfolio value
("NPV") declining by a 45 basis points pursuant to a positive 200 basis point
instantaneous and permanent rate shock, resulting in a post-shock NPV ratio
equal to 6.45%. Based on OTS estimates incorporating June 30, 2004 financial
data and market rate information, assuming a positive 200 basis point
instantaneous and permanent rate shock, the post-shock NPV ratio for all thrifts
operating in the OTS Northeast Region equaled 9.41%, which reflects a 251 basis
point decline relative to the base scenario. Thus, the volatility of the Bank's
NPV ratio is lower, but the post-shock NPV ratio is also lower.
The NPV analysis is an indicator of the risk to earnings in a volatile
interest rate environment as it incorporates changing assumptions with respect
to maturity and repricing of assets and liabilities. The OTS NPV analysis
indicates that OCS has a lower NPV ratio and lower interest sensitivity measure
(i.e., the change in the post-shock NPV ratio is more limited) pursuant to a
rising interest rate scenario, which is typically the more adverse scenario for
a thrift institution. Moreover, the Bank's interest rate risk exposure is
projected to be further reduced following the completion of the conversion and
reinvestment of the net conversion proceeds into interest-earning assets. At the
same time, the Bank's plan to invest more heavily in mortgage loans in the
future may tend to increase its interest rate risk exposure.
LENDING ACTIVITIES AND STRATEGY
Over the last several years, the Bank's lending operations have
principally focused on originating automobile loans, which the Bank originates
to customers within its market as well as on a national basis. Other loans,
including primarily residential, home equity, and commercial mortgage loans in
OCS' portfolio were originated prior to the Bank's affiliation with TFS in
RP(R) FINANCIAL, LC.
PAGE 1.14
2001. Details regarding the Bank's loan portfolio composition are included in
Exhibits I-6, I-7 and I-8.
AUTOMOBILE LENDING
The lending strategy has been developed to take advantage of the Bank's
expertise in the origination and servicing of automobile loans. The Bank
believes it has developed an effective process to originate automobile loans
while minimizing the credit risk typically associated with this type of consumer
lending. In this regard, there are some unique features to the Bank's marketing
strategies and underwriting processes with respect to automobile lending, as
noted below.
>> OCS has focused on originating automobile loans solely on a
direct basis pursuant to underwriting guidelines which have
proven to be effective in maintaining a very low delinquency
rate relative to industry standards;
>> The focus of the Bank's underwriting is on the borrower's level
of unsecured debt in combination with the debt-to-income ratio
coupled with a personal review of each loan application by one
of OCS' senior management;
>> By maintaining very strong quality with respect to the
portfolio, the Bank is able to offer a highly attractive rate to
the borrower, which is currently in the range of 4% to 5%, for
most of the loans originated by the Bank;
>> OCS originates loans to customers in the areas surrounding its
branches as well as to other customers who are generated through
Internet sources, including through third party referrals - the
Bank has sourced many of its Internet-generated loans through
Bankrate.com; and
>> Automobile loans originated outside of the markets served by the
Bank's branches are limited to borrowers purchasing new
automobiles through a dealership.
RESIDENTIAL LENDING
As previously discussed, concurrent with the affiliation with TFS, the
Bank largely ceased mortgage lending and began referring such applications to
TFS for underwriting, processing and origination. In turn, it was expected that
the Bank would repurchase these or other mortgage loans from TFS. However, the
Bank has not purchased any whole mortgage loans over the last several fiscal
years and has primarily purchased investments and MBS to deploy investable cash
balances and attain the QTL requirement.
RP(R) FINANCIAL, LC.
PAGE 1.15
The Bank expects to reengage in mortgage lending following the
Conversion. In this regard, in order to minimize costs, OCS will utilizes the
services of a regional mortgage banking company to process the originations of
real estate mortgage loans, which are expected to primarily consist of permanent
residential mortgage loans. This is similar to the Bank's practice prior to its
affiliation with TFS wherein it would take the loan application which would it
would forward to the mortgage banking company. The mortgage banking company
would process the application and underwrite the loan on a fee basis. Pursuant
to this arrangement, the Bank was able to retain loans subsequent to their
origination or alternatively, Bank would sell the loan to the mortgage banking
company. In the future, once the Bank has reached an acceptable level of loan
activities, including originations, certain of these functions may be brought
in-house.
As of September 30, 2004, 1-4 family mortgage loans totaled $7.5
million, or 28.1% of total loans. In the future, as OCS reengages in mortgage
lending, the Bank will be seeking to originate both fixed rate and adjustable
rate 1-4 family mortgage loans, and its general philosophy is to emphasize
adjustable rate loans and/or shorter-term fixed rate mortgage loans for
portfolio (hybrid loans with a fixed rate of up to 5 years initially) or fixed
rate loans with maturities of up to 15 years. It is expected that fixed rate
mortgage loans with maturities in excess of 15 years will be sold into the
secondary market for interest rate risk management purposes.
As an adjunct to its future residential lending, OCS will offer home
equity loans and lines of credit. Home equity loans will be offered with fixed
rates and terms of up to seven years, while home equity lines of credit will
typically have maturities not exceeding seven years.
MULTI-FAMILY AND COMMERCIAL MORTGAGE LENDING
Prior to its affiliation with TFS, OCS made various types of secured
commercial loans to customers in its market area for the purpose of financing
equipment acquisition, expansion, working capital and other general business
purposes. The Bank also made real estate loans secured by multi-family and
commercial properties, typically small businesses or professional offices. The
terms of these loans generally range from less than one year to 25 years. The
loans are either negotiated on a fixed-rate basis or carry adjustable interest
rates indexed to: (1) a lending rate that is determined internally; or (2) a
short-term market rate index.
RP(R) FINANCIAL, LC.
PAGE 1.16
At September 30, 2004, OCS had 11 commercial loans outstanding with an aggregate
balance of $736,000, or 2.8% of the total loan portfolio.
In the future, the Bank may make similar loans on a select basis. Such
loans will generally be originated to its residential mortgage or deposit
customers, or generated through the Bank's relationship with the local mortgage
banker.
LOAN ORIGINATIONS, PURCHASES AND SALES
Exhibit I-9, which shows the Bank's recent data regarding loan
originations, repayments and sales, highlights OCS' emphasis on automobile
lending, which comprise substantially all of the Bank's loan originations over
the last two fiscal years. In this regard, automobile loan originations totaled
$49.4 million in fiscal 2003, and declined to $35.1 million in fiscal 2004.
Management attributes the decline in volume to diminished support from TFS with
respect to the marketing of automobile loans to its customers. Automobile loan
sales and the resulting gains on sale also declined (from $38.0 million in
fiscal 2003 to $25.0 million in fiscal 2004) as result of diminishing loan
volume. Importantly, TFS will not be purchasing automobile loans from OCS on a
post-conversion basis and as a result, OCS is currently seeking to identify
other financial institutions which may be interested in purchasing automobile
loans originated by the Bank.
ASSET QUALITY
The Bank's asset quality has historically been strong and the level of
non-performing assets ("NPAs") is low currently. As reflected in Exhibit I-11,
the NPA balance was $27,000, equal to 0.05% of assets, consisting solely of
non-performing loans. The ratio of allowances to total loans increased from
0.73% as of the end of fiscal 2003 to 0.88% as of September 30, 2004 (see
Exhibits I-10 and I-11), owing to loan portfolio shrinkage coupled with limited
chargeoffs.
RP(R) FINANCIAL, LC.
PAGE 1.17
FUNDING COMPOSITION AND STRATEGY
As of September 30, 2004, the Bank's assets were funded primarily with
deposits, and, to a lesser extent, borrowings and equity (see Exhibits I-12,
I-13 and I-14). The Bank's deposit services cater to individuals rather than
commercial businesses.
DEPOSITS
Local retail deposits have consistently addressed the substantial
portion of OCS' funding needs, with core deposits in the form of non-interest
bearing checking, passbook accounts, and money market deposit accounts
comprising the majority of deposits. In the aggregate, these accounts totaled
$23.5 million, or 73.0% of total deposits as of September 30, 2004. As of
September 30, 2004 CDs accounted for approximately 27.0% of deposits.
Approximately 40% of CDs had remaining maturities of one year or less. Large
balance CDs (i.e. balances greater than $100,000), which tend to be more rate
sensitive than lower balance CDs, accounted for $1.6 million, or 4.9% of
deposits, at September 30, 2004.
BORROWINGS
Borrowings serve as an alternative funding source for the Bank to enable
the Bank to fully leverage the capital base, support control of deposit costs
and to aid in interest rate risk management. The Bank has increasingly employed
borrowed funds over the last three fiscal years as it has been seeking to
lock-in longer term funds in the low interest rate environment. As of September
30, 2004, borrowed funds totaled $16.5 million, equal to 29.6% of assets. The
Bank may continue to utilize borrowings as a supplemental funding source in the
future, generally for these same purposes but its preference is to utilize
deposits to fund operations with the objective of building customer
relationships.
SUBSIDIARY ACTIVITIES
As an adjunct to the Bank's automobile lending operations and to take
advantage of the Bank's experience and expertise in originating high quality
automobile loans, the Bank recently established its AutoARM(TM), LLC subsidiary
("AutoARM"). As a third party originator and servicer of direct automobile loans
for other financial institutions, it is the Bank's intent to build
RP(R) FINANCIAL, LC.
PAGE 1.18
this fee-based business through providing back office and underwriting support,
as well as subservicing. To date, AutoARM has not retained any clients nor
generated any revenues. The Bank has no other planned subsidiary activities.
LEGAL PROCEEDINGS
Other than the routine legal proceedings that occur in the Bank's
ordinary course of business, the Bank is not involved in litigation which is
expected to have a material impact on the OCS' financial condition or
operations.
RP(R) FINANCIAL, LC.
PAGE 2.1
II. MARKET AREA
INTRODUCTION
Chartered in 1949 as a credit union, OC Financial currently conducts
operations through its main office in Dublin, Ohio, which is in the suburban
Columbus area, and a branch office in Cleveland, Ohio. Additionally, the Bank
maintains a stand alone ATM at the Cleveland Clinic, which is also in Cleveland,
Ohio. These locations reflect, in part, the credit union roots of the Bank which
served a variety of employer groups in these markets with many in the healthcare
and university educational fields.
The Bank currently serves Cuyahoga and Franklin Counties in northern and
central Ohio. In this regard, the Bank's markets are generally urban to suburban
in character and possess a relatively large employment base, supported by a
diverse array of industries and employers. A map showing the location of the
Bank's offices in the Cleveland (Cuyahoga County) and Columbus (Franklin County)
areas has been set forth below and details regarding the Bank's office and
recent trends with respect to market interest rate levels are set forth in
Exhibit II-1 and II-2, respectively.
Table 2.1
Ohio Central Savings
Map of Branch Locations
[PICTURE]
RP(R) FINANCIAL, LC.
PAGE 2.2
Future growth opportunities for the Bank depend on the future growth and
stability of the regional economy, demographic growth trends, and the nature and
intensity of the competitive environment. These factors have been briefly
examined in the following pages to help determine the growth potential that
exists for the Bank and the relative economic health of the Bank's market area.
The growth potential and the stability provided by the market area have a direct
bearing on the market value of the Bank and will be factored into our valuation
analysis accordingly.
MARKET AREA DEMOGRAPHICS
Growth trends for the Bank's market are moderate, as Cuyahoga County's
population has been shrinking since 2000 at a 0.5% annual rate, and is thus
below the average for the State of Ohio as a whole (0.2% annually). While
population growth trends are more favorable in Franklin County, equal to 0.6%
annually, they nonetheless are below the population growth rate for the nation
as a whole (see Table 2.2).
However, while the Bank's markets reflect limited growth, they are
comparatively large urban markets providing OCS with exposure to a relatively
large number of potential customers. In this regard, the relatively large size
and scope of the Cuyahoga and Franklin County markets, particularly in
comparison to the Bank's relatively small size, is evidenced by the demographic
data in Table 2.2 which shows that as of 2004, the total population of Cuyahoga
and Franklin Counties was 1.4 million and 1.1 million, respectively, while the
total population of the Cleveland and Columbus metropolitan areas was 2.2
million and 1.7 million, respectively. As referenced above, population growth
for both of the Bank's markets was limited and the growth of households
paralleled the rate of growth in population, as total households shrank at a
0.4% annual rate in Cuyahoga County and expanded at a 0.8% annual rate in
Franklin County.
Median household and per capita income levels in Franklin County were
modestly above the state and national aggregates. Specifically, the median
household income in Franklin County was estimated at $46,931 as compared to
$44,607 for the state as a whole while per capita income levels as of 2004
equaled $25,684 and $23, 192 for Franklin County and the State of Ohio. By
comparison, median household income was relatively modest in Cuyahoga County
($42,199) while per capita income was slightly above the state and national
averages at $24,348.
RP(R) FINANCIAL, LC.
PAGE 2.3
Table 2.2
Ohio Central Savings
Summary Demographic Data
Year Growth Rate
------------------------------------------- -----------------------------
2000 2004 2009 2000-2004 2004-2009
---- ---- ---- --------- ---------
POPULATION (000)
- ----------------
United States 281,422 292,937 307,116 1.0% 0.9%
Ohio 11,353 11,455 11,577 0.2% 0.2%
Cuyahoga County 1,394 1,367 1,334 -0.5% -0.5%
Franklin County 1,069 1,096 1,128 0.6% 0.6%
HOUSEHOLDS (000)
- ----------------
United States 105,480 109,949 115,474 1.0% 1.0%
Ohio 4,446 4,515 4,601 0.4% 0.4%
Cuyahoga County 571 563 552 -0.4% -0.4%
Franklin County 439 454 473 0.8% 0.8%
MEDIAN HOUSEHOLD INCOME ($)
- ---------------------------
United States $42,729 $46,475 $51,597 2.1% 2.1%
Ohio $41,499 $44,607 $48,633 1.8% 1.7%
Cuyahoga County $39,618 $42,199 $45,879 1.6% 1.7%
Franklin County $43,702 $46,931 $51,153 1.8% 1.7%
PER CAPITA INCOME ($)
- ---------------------
United States $21,587 $24,092 $27,309 2.8% 2.5%
Ohio $21,003 $23,192 $26,076 2.5% 2.4%
Cuyahoga County $22,272 $24,348 $26,972 2.3% 2.1%
Franklin County $23,059 $25,684 $28,984 2.7% 2.4%
Less Than $25,000 to
2004 HH INCOME DIST. (%) $25,000 50,000 $50,000 +
- ------------------------ --------- ---------- ---------
United States 26.0% 28.0% 46.0%
Ohio 26.0% 29.0% 44.0%
Cuyahoga County 30.0% 28.0% 42.0%
Franklin County 24.0% 29.0% 47.0%
Source: Claritas.
RP(R) FINANCIAL, LC.
PAGE 2.4
Household income distribution patterns for Franklin and Cuyahoga Counties
compare relatively closely to each other and to the state and national
aggregates. The most significant divergence is with respect to the relatively
higher proportion of lower income households (i.e., household incomes under
$25,000) in Cuyahoga County reflecting the impact of lower income areas in
Cleveland.
SUMMARY OF LOCAL ECONOMY AND WORKFORCE
The Bank's markets in Franklin and Cuyahoga Counties have economies with
a broad mix of industries including the manufacturing, service, transportation
and finance industries, as well as the public sector. As reflected in Table 2.3
showing the largest employers, two of the largest employers in the Franklin
County market are the State of Ohio and Ohio State University, both of which are
based in Columbus. Franklin County is also home to several major medical centers
and ancillary facilities and also has several large financial services employers
including Huntington Bancshares, National City Corp. and Nationwide Insurance.
Traditional manufacturing employers represent four out of the fourteen
largest employers in Cuyahoga County including two automakers (Ford and General
Motors). At the same time, service and finance industry employers also have a
significant presence including Case Western Reserve University, the Cleveland
Clinic, MBNA Bank and National City Corp.
RP(R) FINANCIAL, LC.
PAGE 2.5
Table 2.3
Ohio Central Savings
Major Employers in Cuyahoga County and Franklin County
Employer Industry
-------- --------
CUYAHOGA COUNTY
---------------
American Greetings Corp. Manufacturing
Case Western Reserve University Service
Cleveland Clinic Health System Service
Continental Airlines Transportation
Ford Motor Co. Manufacturing
General Motors Corp. Manufacturing
KeyCorp Finance
Lincoln Electric Co. Manufacturing
MBNA America Bank Finance
National City Corp. Finance
Progressive Corp. Insurance
SBC Communications Utility
Sherwin-Williams Co. Manufacturing
University Hospitals Health System Service
FRANKLIN COUNTY
---------------
Abbott Laboratories/Ross Products Manufacturing
American Electric Power Co. Utility
Ashland Chemical Co. Manufacturing
Banc One Corp. Finance
Battelle Memorial Institute Service
Grant/Riverside Methodist Hospitals Service
Huntington Bancshares Inc. Finance
Limited Brands Trade
National City Corp. Finance
Nationwide Insurance Enterprise Co. Insurance
Ohio State University Government
Schottenstein Stores Corp. Trade
State of Ohio Government
Wendy's International Inc. Trade
Worthington Industries Manufacturing
RP(R) FINANCIAL, LC.
PAGE 2.6
UNEMPLOYMENT TRENDS
Unemployment trends in OC Financial's markets as well as Ohio and the
U.S. are displayed in Table 2.4. The unemployment rates in Ohio and Cuyahoga
County are above the national average reflecting in part, the significant
presence of old-line manufacturing industries which are subject to strong
competitive pressures from both other lower-cost areas of the U.S. as well as
foreign competition. Moreover, notwithstanding a gradually improving national
economy, unemployment rates in Ohio and Cuyahoga County have remained stubbornly
high, equal to 6.3% and 6.5% as of August 2004.
The unemployment rate in Franklin County is comparatively moderate and
equaled 4.8% as of August 2004. As the location state capital, Franklin County
benefits from a high level of government employment and state spending.
Moreover, the presence of Ohio State University has fostered economic growth in
the healthcare and research areas which are growth areas of the economy,
facilitating its ability to maintain a low unemployment rate.
Table 2.4
Ohio Central Savings
Unemployment Trends (1)
August 2003 August 2004
Region Unemployment Unemployment
------ ------------ ------------
United States 6.1% 5.4%
Ohio 6.1% 6.3%
Cuyahoga County 6.3% 6.5%
Franklin County 4.7% 4.8%
(1) State and county unemployment rates are not seasonally adjusted.
Source: U.S. Bureau of Labor Statistics.
MARKET AREA DEPOSIT CHARACTERISTICS
As a savings institution with its primary business functions of real
estate lending and the gathering of deposits in northern and central Ohio, the
Bank's primary competitors are: (1) other financial institutions with offices
proximate to the Bank's locations; (2) other lenders including
RP(R) FINANCIAL, LC.
PAGE 2.7
auto lenders and mortgage loan originators; (3) those depository and lending
organizations not physically located within the Bank's markets, but capable of
doing business remotely through the Internet or by other means; and (4) other
competitors such as investment firms, mutual funds, insurance companies, etc.
Competition among financial institutions in the Bank's market is
significant. As larger institutions compete for market share to achieve
economies of scale, the environment for the Bank's products and services is
expected to remain highly competitive. Community-sized institutions such as the
Bank typically compete with larger institutions on pricing or operate in a niche
that will allow for operating margins to be maintained at profitable levels. The
Bank's business plan reflects elements of both strategies.
Table 2.5 displays deposit market trends over recent years for the two
markets where the Bank maintains branches. The large size of the markets overall
are indicated by the deposit totals, which equaled $20.5 billion in Franklin
County and $52.3 billion in Cuyahoga County, with commercial banks controlling
nearly 94% and 83% of the total deposit market, respectively, as compared to the
statewide average of 86%. Deposit growth trends in Cuyahoga County are
comparatively strong (6.65% in the most recent year), but this primarily
reflects strong deposit growth at Key Corp which is headquartered in Cleveland;
such deposits are not necessarily reflective of core deposit growth within the
market. The deposit growth rate for Franklin County equal to 3.27%, compared
closely to the state average of 3.64%.
The largest competitors in the markets served by the Bank are comprised
of some of the largest financial institutions in Ohio and the nation as a whole.
In this regard, Key Corp holds the largest market share in Cuyahoga County, with
deposits equaling more than 32% of all deposits as of June 30, 2004 (see Table
2.5 for details). Other large competitors include National City and Charter One.
Bank One, a subsidiary of JPMorgan Chase & Co., holds the largest market
share in Franklin County, with deposits equaling nearly 30% of all deposits as
of June 30, 2004 (see Table 2.5 for details), while Huntington Bank was a close
second with a 27% market share. Other large competitors include National City
and U. S. Bank.
RP(R) FINANCIAL, LC.
PAGE 2.8
Table 2.5
Ohio Central Savings
Cuyahoga County Deposit Detail
TOTAL DEPOSITS
AS OF JUNE 30,
HQ HQ # OF ------------------
Holding Company Name Institution Name City State Type Brchs 2002 2004
- -------------------- ---------------- ---- ----- ---- ----- ---- ----
($000) ($000)
KeyCorp KeyBank National Association Cleveland OH Bank 68 $12,315,105 $16,826,576
National City Corp. National City Bank Cleveland OH Bank 63 $9,914,667 $11,591,294
Royal Bank of Scotland Group Charter One Bank NA Cleveland OH Bank 82 $4,316,144 $3,760,770
KeyCorp KeyBank USA NA Cleveland OH Bank 1 $3,176,243 $3,374,390
Huntington Bancshares Inc. Huntington National Bank Columbus OH Bank 43 $1,549,581 $1,820,847
Fifth Third Bancorp Fifth Third Bank Cincinnati OH Bank 43 $1,724,136 $1,811,088
U.S. Bancorp U.S. Bank NA Cincinnati OH Bank 54 $1,485,076 $1,516,856
JPMorgan Chase & Co. Bank One National Association Columbus OH Bank 25 $1,026,000 $1,027,469
FirstMerit Corp. FirstMerit Bank NA Akron OH Bank 26 $570,607 $650,398
Sky Financial Group Inc. Sky Bank Salineville OH Bank 17 $787,939 $601,944
Republic Bancorp Inc. Republic Bank Lansing MI Bank 10 $204,172 $227,957
Independence Banccorp Independence Bank Independence OH Bank 1 $127,700 $134,922
Shorebank Corp. ShoreBank Cleveland Cleveland OH Bank 1 $49,340 $54,015
National City Corp. Provident Bank Cincinnati OH Bank 2 $38,363 $52,546
LNB Bancorp Inc. Lorain National Bank Lorain OH Bank 4 $45,435 $26,760
American National Bancorp American National Bank Parma OH Bank 2 $24,124 $24,047
Liberty Bank NA Liberty Bank NA Twinsburg OH Bank 1 $8,407 $10,649
Credit First NA Credit First NA Brook Park OH Bank 1 $500 $500
Sky Financial Group Inc. Sky Trust NA Pepper Pike OH Bank 1 $500 $500
Rurban Financial Corp. State Bank & Trust Company Defiance OH Bank 1 $18,915 $0
-- -------- ---
TOTAL BANKS 446 $37,382,954 $43,513,528
Third FS&LA M.H.C. Third FS&LA (MHC) Cleveland OH Thrift 22 $4,094,129 $4,159,302
Ohio Savings Financial Corp. Ohio Savings Bank Cleveland OH Thrift 23 $1,447,257 $1,818,160
Dollar Bank FSB Dollar Bank FSB Pittsburgh PA Thrift 18 $1,374,153 $1,423,149
First FS&LA First FS&LA Lakewood OH Thrift 8 $783,918 $810,926
PVF Capital Corp. Park View FSB Solon OH Thrift 9 $340,339 $359,576
Century Bank Century Bank Parma OH Thrift 3 $103,063 $103,792
Third FS&LA M.H.C. DeepGreen Bank (MHC) Seven Hills OH Thrift 1 $383,135 $32,068
Pioneer Savings Bank Pioneer Savings Bank Cleveland OH SB 1 $20,628 $19,031
- ----------------------------------------------------------------------------------------------------------------------------
Third FS&LA M.H.C. Ohio Central Savings (MHC) Dublin OH Thrift 1 $11,896 $11,901
- ----------------------------------------------------------------------------------------------------------------------------
First Place Financial Corp. First Place Bank Warren OH Thrift 1 $0 $4,895
-- --- -------
TOTAL SAVINGS INSTITUTIONS 87 $8,558,518 $8,742,800
TOTAL BANKS AND SAVINGS INSTITUTIONS 533 $45,941,472 $52,256,328
OHIO 4,716 $186,378,511 $200,199,727
BANKS 4,176 $161,148,857 $172,557,050
SAVINGS INSTITUTIONS 540 $25,229,654 $27,642,677
MARKET SHARE
------------- 2002-2004
Holding Company Name 2002 2004 CAGR
- -------------------- ---- ---- ---------
(%) (%) (%)
KeyCorp 26.81% 32.20% 16.89%
National City Corp. 21.58% 22.18% 8.13%
Royal Bank of Scotland Group 9.39% 7.20% -6.66%
KeyCorp 6.91% 6.46% 3.07%
Huntington Bancshares Inc. 3.37% 3.48% 8.40%
Fifth Third Bancorp 3.75% 3.47% 2.49%
U.S. Bancorp 3.23% 2.90% 1.06%
JPMorgan Chase & Co. 2.23% 1.97% 0.07%
FirstMerit Corp. 1.24% 1.24% 6.76%
Sky Financial Group Inc. 1.72% 1.15% -12.60%
Republic Bancorp Inc. 0.44% 0.44% 5.66%
Independence Banccorp 0.28% 0.26% 2.79%
Shorebank Corp. 0.11% 0.10% 4.63%
National City Corp. 0.08% 0.10% 17.03%
LNB Bancorp Inc. 0.10% 0.05% -23.26%
American National Bancorp 0.05% 0.05% -0.16%
Liberty Bank NA 0.02% 0.02% 12.55%
Credit First NA 0.00% 0.00% 0.00%
Sky Financial Group Inc. 0.00% 0.00% 0.00%
Rurban Financial Corp. 0.04% 0.00% -100.00%
----- ----- --------
TOTAL BANKS 81.35% 83.27% 7.89%
Third FS&LA M.H.C. 8.91% 7.96% 0.79%
Ohio Savings Financial Corp. 3.15% 3.48% 12.08%
Dollar Bank FSB 2.99% 2.72% 1.77%
First FS&LA 1.71% 1.55% 1.71%
PVF Capital Corp. 0.74% 0.69% 2.79%
Century Bank 0.22% 0.20% 0.35%
Third FS&LA M.H.C. 0.83% 0.06% -71.07%
Pioneer Savings Bank 0.04% 0.04% -3.95%
- -------------------------------------------------------------
Third FS&LA M.H.C. 0.03% 0.02% 0.02%
- -------------------------------------------------------------
First Place Financial Corp. 0.00% 0.01% N.M.
----- ----- ----
TOTAL SAVINGS INSTITUTIONS 18.62% 16.73% 1.07%
TOTAL BANKS AND SAVINGS
INSTITUTIONS 99.97% 100.00% 6.65%
OHIO 100.02% 99.98% 3.64%
BANKS 86.51% 86.17% 3.48%
SAVINGS INSTITUTIONS 13.51% 13.81% 4.67%
Source: SNL Securities.
RP(R) FINANCIAL, LC.
PAGE 2.9
Table 2.5 (continued)
Ohio Central Savings
Franklin County Deposit Detail
Total Deposits
as of June 30,
HQ HQ # of ------------------------
Holding Company Name Institution Name City State Type Brchs 2002 2004
-------------------- ---------------- ---- ----- ---- ----- ---- ----
($000) ($000)
JPMorgan Chase & Co. Bank One National Association Columbus OH Bank 52 $5,994,000 $6,108,200
Huntington Bancshares, Inc. Huntington National Bank Columbus OH Bank 70 $3,991,546 $5,440,784
Futura Banc Corp. Fifth Third Bank Cincinnati OH Bank 78 $2,960,442 $2,818,433
First Merchants Corp. National City Bank Cleveland OH Bank 54 $1,591,331 $1,755,011
Commercial Bancshares Inc. U.S. Bank NA Cincinnati OH Bank 47 $918,640 $869,901
DCB Financial Corp. KeyBank National Association Cleveland OH Bank 20 $621,938 $661,632
Fifth Third Bancorp Bank One Trust Company NA Columbus OH Bank 1 $1,080,630 $351,975
Community Bancshares Inc. Sky Bank Salineville OH Bank 9 $194,719 $298,896
First City Bank Commerce National Bank Columbus OH Bank 1 $248,293 $292,221
First Community Bank Heartland Bank Gahanna OH Bank 7 $208,947 $200,409
FirstMerit Corp. WesBanco Bank Wheeling WV Bank 5 $68,403 $82,164
Bankers Bancshares Inc. First Community Bank Columbus OH Bank 2 $80,981 $79,966
Guernsey Bank Park National Bank Newark OH Bank 4 $44,176 $58,133
Heartland Banccorp Guernsey Bank Worthington OH Bank 1 $34,720 $56,696
Huntington Bancshares Inc. World Financial Network NB Gahanna OH Bank 2 $85,000 $51,000
KeyCorp First City Bank Columbus OH Bank 1 $44,396 $45,776
National City Corp. Great Lakes Bankers Bank Gahanna OH Bank 1 $32,454 $33,446
Oak Hill Financial Inc. Provident Bank Cincinnati OH Bank 1 $31,216 $26,304
Ohio Valley Banc Corp. First Bremen Bank Bremen OH Bank 1 $0 $20,949
Park National Corp. FirstMerit Bank NA Akron OH Bank 3 $18,764 $20,564
National City Corp. Ohio Valley Bank Company Gallipolis OH Bank 1 $21,700 $20,274
Sky Financial Group Inc. Champaign National Bank Urbana OH Bank 1 $8,643 $15,846
U.S. Bancorp Delaware County B&TC Lewis Center OH Bank 1 $12,544 $14,540
WesBanco Inc. Commercial Savings Bank Upper Sandusky OH Bank 1 $1,914 $3,899
World Financial Network NB Oak Hill Banks Jackson OH Bank 2 $0 $185
-- -----------
TOTAL BANKS 366 $18,295,397 $19,327,204
Arlington Bk Ohio Savings Bank Cleveland OH Thrift 5 $510,535 $552,494
Emerald Bank Union SB Cincinnati OH Thrift 5 $158,564 $198,880
Central Federal Corp. Grange Bank Columbus OH Thrift 1 $60,514 $174,576
Grange Mutual Casualty Co. Arlington Bk Upper Arlington OH SB 1 $95,464 $139,230
Third FS&LA M.H.C. United Midwest SB De Graff OH Thrift 1 $45,866 $50,086
- ------------------------------------------------------------------------------------------------------------------------------------
Ohio Savings Financial Corp. Ohio Central Savings (MHC) Dublin OH Thrift 1 $20,475 $19,906
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Bancorp CFBank Fairlawn OH Thrift 1 $0 $1,313
MSB Capital Corp. Emerald Bank Dublin OH SB 1 $0 $376
-- -----
TOTAL SAVINGS INSTITUTIONS 16 $891,418 $1,136,861
TOTAL BANKS AND SAVINGS INSTITUTIONS 382 $19,186,815 $20,464,065
OHIO 4,716 $186,378,511 $200,199,727
BANKS 4,176 $161,148,857 $172,557,050
SAVINGS INSTITUTIONS 540 $25,229,654 $27,642,677
Market Share
------------------- 2002-2004
Holding Company Name 2002 2004 CAGR
-------------------- ---- ---- ---------
(%) (%) (%)
JPMorgan Chase & Co. 31.24% 29.85% 0.95%
Huntington Bancshares, Inc. 20.80% 26.59% 16.75%
Futura Banc Corp. 15.43% 13.77% -2.43%
First Merchants Corp. 8.29% 8.58% 5.02%
Commercial Bancshares Inc. 4.79% 4.25% -2.69%
DCB Financial Corp. 3.24% 3.23% 3.14%
Fifth Third Bancorp 5.63% 1.72% -42.93%
Community Bancshares Inc. 1.01% 1.46% 23.90%
First City Bank 1.29% 1.43% 8.49%
First Community Bank 1.09% 0.98% -2.06%
FirstMerit Corp. 0.36% 0.40% 9.60%
Bankers Bancshares Inc. 0.42% 0.39% -0.63%
Guernsey Bank 0.23% 0.28% 14.71%
Heartland Banccorp 0.18% 0.28% 27.79%
Huntington Bancshares Inc. 0.44% 0.25% -22.54%
KeyCorp 0.23% 0.22% 1.54%
National City Corp. 0.17% 0.16% 1.52%
Oak Hill Financial Inc. 0.16% 0.13% -8.20%
Ohio Valley Banc Corp. 0.00% 0.10% N.M.
Park National Corp. 0.10% 0.10% 4.69%
National City Corp. 0.11% 0.10% -3.34%
Sky Financial Group Inc. 0.05% 0.08% 35.40%
U.S. Bancorp 0.07% 0.07% 7.66%
WesBanco Inc. 0.01% 0.02% 42.73%
World Financial Network NB 0.00% 0.00% N.M.
-------- ----- ----
TOTAL BANKS 95.34% 94.44% 2.78%
Arlington Bk 2.66% 2.70% 4.03%
Emerald Bank 0.83% 0.97% 11.99%
Central Federal Corp. 0.32% 0.85% 69.85%
Grange Mutual Casualty Co. 0.50% 0.68% 20.77%
Third FS&LA M.H.C. 0.24% 0.24% 4.50%
- -------------------------------------------------------------------
Ohio Savings Financial Corp. 0.11% 0.10% -1.40%
- -------------------------------------------------------------------
U.S. Bancorp 0.00% 0.01% N.M.
MSB Capital Corp. 0.00% 0.00% N.M.
----- ----- ----
TOTAL SAVINGS INSTITUTIONS 4.66% 5.55% 12.93%
TOTAL BANKS AND SAVINGS
INSTITUTION 100.00% 99.99% 3.27%
OHIO 100.02% 99.98% 3.64%
BANKS 86.51% 86.17% 3.48%
SAVINGS INSTITUTIONS 13.51% 13.81% 4.67%
Source: SNL Securities.
RP(R) FINANCIAL, LC.
PAGE 2.10
The proceeds from the stock conversion offering will enhance the Bank's
competitiveness by providing increased operating flexibility, and the ability to
grow through mortgage lending in addition to the auto lending niche.
RP(R) FINANCIAL, LC.
PAGE 3.1
III. PEER GROUP ANALYSIS
This chapter presents an analysis of OCS' operations versus a group of
comparable savings institutions (the "Peer Group") selected from the universe of
all publicly-traded savings institutions in a manner consistent with the
regulatory valuation guidelines. The basis of the pro forma market valuation of
OCS is derived from the pricing ratios of the Peer Group institutions,
incorporating valuation adjustments for OCS to reflect key differences in
relation to the Peer Group. Since no Peer Group can be exactly comparable to
OCS, key areas examined for differences are: financial condition; profitability,
growth and viability of earnings; asset growth; primary market area; dividends;
liquidity of the shares; marketing of the issue; management; and effect of
government regulations and regulatory reform.
PEER GROUP SELECTION
The Peer Group selection process is governed by the general parameters
set forth in the regulatory valuation guidelines. Accordingly, the Peer Group is
comprised of only those publicly-traded savings institutions whose common stock
is either listed on a national exchange (NYSE or AMEX), or is NASDAQ listed,
since their stock trading activity is regularly reported and generally more
frequent than non-publicly traded and closely-held institutions. Non-listed
institutions are inappropriate since the trading activity for thinly-traded or
closely-held stocks is typically highly irregular in terms of frequency and
price and thus may not be a reliable indicator of market value. We have also
excluded from the Peer Group those companies under acquisition or subject to
rumored acquisition, mutual holding companies and recent conversions, since
their pricing ratios may be subject to unusual distortion and/or have limited
trading history. A recent listing of the universe of all publicly-traded savings
institutions is included as Exhibit III-1.
Ideally, the Peer Group, which must have at least 10 members to comply
with the regulatory valuation guidelines, should be comprised of locally or
regionally-based savings institutions with comparable resources, strategies and
financial characteristics. There are approximately 190 publicly-traded savings
institutions nationally and, it is from this group that the Peer Group must be
selected. To the extent that differences exist between the converting
RP(R) FINANCIAL, LC.
PAGE 3.2
institution and the Peer Group, valuation adjustments may be applied to account
for the differences. Since OCS will be a full stock public company upon
completion of the offering, we considered only full stock public companies to be
viable candidates for inclusion in the Peer Group. From the universe of
publicly-traded thrifts, we selected 12 institutions with characteristics
reasonably similar to those of OCS, utilizing the following key selection
criteria:
o Operating in the Midwest region;
o Total assets less than $250 million; and
o Return on equity ("ROE") less than 10%.
We considered focusing the selection criteria on companies with a
relatively high proportion of consumer loans but believe this criteria has
limited usefulness in the valuation process based on the following
considerations: (1) most such companies have considerably higher yields,
earnings and credit risk exposure than the Bank; and (2) the Bank's business
plan is focused on increasing the proportion of mortgage loans in the future.
Table 3.1 shows the general characteristics of each of the 12 Peer Group
members. Exhibit III-2 provides financial and public market pricing
characteristics of all publicly-traded Midwest based thrifts with assets less
than $250 million, from which the Peer Group was selected. While there are
expectedly some differences between the Peer Group companies and OCS, we believe
that the Peer Group companies, on average, provide a good basis for valuation
subject to valuation adjustments. The following sections present a comparison of
OCS' financial condition, income and expense trends, loan composition, interest
rate risk and credit risk versus the Peer Group incorporating the most recent
publicly available data.
In aggregate, the Peer Group companies maintain a slightly higher level
of capital than the industry average (11.83% of assets versus 10.80% for all
public thrifts), generate stronger core return on average assets ("ROA") (0.71%
core "ROA" versus 0.61% for all public thrifts), and generate a higher core ROE
(7.27% core "ROE" versus 5.23% for all public thrifts). Overall, the Peer
Group's average core P/E multiple was at a slight premium to the average for all
publicly-traded thrifts while the average P/B ratio was discounted.
RP(R) FINANCIAL, LC.
PAGE 3.3
Table 3.1
Peer Group of Publicly-Traded Thrifts
December 3, 2004(1)
Operating Total Fiscal Conv. Stock Market
Ticker Financial Institution Exchg. Primary Market Strategy(2) Assets Offices Year Date Price Value
- ------ --------------------- ------ -------------- ----------- ------ ------- ---- ---- ----- -----
($) ($Mil)
NEIB Northeast Indiana Bancorp of IN NASDAQ Northeast IN Thrift $229 3 12-31 06/95 $21.90 31
FBTC First BancTrust Corp. of IL NASDAQ EastCentral IL Thrift 225 3 12-31 04/01 $12.25 31
BRBI Blue River Bancshares of IN NASDAQ Central IN Thrift 214 4 12-31 06/98 $5.35 18
HLFC Home Loan Financial Corp. of OH NASDAQ Central OH Thrift 160 3 06-30 03/98 $21.00 35
GTPS Great American Bancorp of IL NASDAQ EastCentral IL Thrift 157 3 12-31 06/95 $25.50 19
AMFC AMB Financial Corp. of Munster IN NASDAQ Northwest IN Thrift 154 3 12-31 04/96 $14.50 14
HCFC Home City Financial Corp. of OH NASDAQ Southwest OH Thrift 153 J 2 12-31 12/96 $15.19 13
FFDF FFD Financial Corp. of Dover OH NASDAQ Northeast OH Thrift 136 J 3 06-30 04/96 $15.25 18
PSFC Peoples Sidney Financial Corp. of OH NASDAQ WestCentral OH Thrift 136 J 4 06-30 04/97 $15.75 23
CIBI Community Inv. Bancorp, Inc. of OH NASDAQ NorthCentral OH Thrift 122 3 06-30 02/95 $14.77 16
PBNC PFS Bancorp Inc. of Aurora IN NASDAQ Southeastern IN Thrift 117 J 3 12-31 10/01 $15.21 22
HWEN Home Financial Bancorp of IN NASDAQ Central IN Thrift 63 J 2 06-30 07/96 $6.00 8
NOTES: (1) Or most recent date available (M=March, S=September, D=December,
J=June, E=Estimated, and P=Pro Forma)
(2) Operating strategies are: Thrift=Traditional Thrift,
M.B.=Mortgage Banker, R.E.=Real Estate Developer, Div.=Diversified
and Ret.=Retail Banking.
(3) FDIC savings bank institution.
Source: Corporate offering circulars, data derived from information published
in SNL Securities Quarterly Thrift Report, and financial reports of
publicly-traded thrifts.
RP(R) FINANCIAL, LC.
PAGE 3.4
ALL
PUBLICLY-TRADED
SAVINGS INSTITUTIONS PEER GROUP
-------------------- ----------
FINANCIAL CHARACTERISTICS (AVERAGES)
Assets ($Mil) $2,524 $156
Market Capitalization ($Mil) $395.74 $20.68
Equity/Assets (%) 10.77% 11.42%
Tangible Equity/Assets (%) 9.80% 11.20%
Core Return on Assets (%) 0.71% 0.61%
Core Return on Equity (%) 7.27% 5.24%
PRICING RATIOS (AVERAGES)(1)
Core Price/Earnings (x) 19.81x 20.67x
Price/Book (%) 164.94% 116.93%
Price/Tangible Book (%) 180.21% 120.00%
Price/Assets (%) 17.75% 13.51%
(1) Based on market prices as of November 26, 2004.
Source: Table 4.3.
The similarities and differences between the Bank and the Peer Group
will be highlighted in the following comparative analysis.
FINANCIAL CONDITION
Table 3.2 shows comparative balance sheet measures for OCS and the Peer
Group. OCS' pre-conversion equity ratio of 6.8% of assets falls below the Peer
Group average of 11.4%; however, with the addition of stock proceeds, net of
expenses, stock benefit plan purchases, and the payment to TFS, the Bank's pro
forma capital position is expected to modestly exceed the Peer Group's ratio.
OCS does not have intangible assets and the Peer Group amount on average is
nominal. The increased equity is anticipated to enhance OCS' earnings potential
through reinvestment of proceeds, lower funding costs and potentially through
profitable growth. At the same time, the Bank will incur increased operating
costs resulting from its separation from TFS and as a result of the cost of the
stock benefit plans and normal public company costs. The Bank and all of the
Peer Group companies are in compliance with their regulatory capital
requirements.
RP(R) FINANCIAL, LC.
PAGE 3.5
Table 3.2
Balance Sheet Composition and Growth Rates
Comparable Institution Analysis
As of September 30, 2004
Balance Sheet as a Percent of Assets
---------------------------------------------------------------------------------------
MEMO:
Cash & MBS & Borrowed Subd. Net Goodwill Tng Net Pref.
Equivalents Invest Loans Deposits Funds Debt Worth & Intang Worth Stock
----------- ------ ----- -------- ----- ---- ----- -------- ----- -----
Ohio Central Savings
- --------------------
September 30, 2004 1.2% 49.8% 47.1% 58.0% 29.6% 0.0% 6.8% 0.0% 6.8% 0.0%
All Public Companies 4.1% 23.6% 67.5% 66.3% 20.9% 0.7% 10.6% 0.9% 9.8% 0.0%
State of OH 4.1% 17.4% 74.3% 68.0% 18.5% 0.5% 12.0% 0.5% 11.5% 0.0%
Comparable Group Average 5.8% 11.1% 78.5% 69.0% 18.5% 0.3% 11.4% 0.2% 11.1% 0.0%
Comparable Group
- ----------------
AMFC AMB Financial Corp. of Munster IN 6.2% 4.5% 81.8% 73.4% 12.7% 3.2% 8.5% 0.0% 8.5% 0.0%
BRBI Blue River Bancshares of IN 7.1% 17.2% 70.3% 82.6% 9.2% 0.0% 7.6% 1.7% 6.0% 0.0%
CIBI Community Inv. Bancorp, Inc. of OH 3.5% 12.9% 80.8% 67.0% 21.7% 0.0% 10.9% 0.0% 10.9% 0.0%
FFDF FFD Financial Corp. of Dover OH (1) 8.0% 5.5% 84.3% 77.6% 9.3% 0.0% 12.3% 0.0% 12.3% 0.0%
FBTC First BancTrust Corp. of IL 4.3% 38.9% 51.7% 70.6% 16.7% 0.0% 12.1% 0.0% 12.1% 0.0%
GTPS Great American Bancorp of IL 15.9% 3.2% 75.3% 78.1% 9.6% 0.0% 11.1% 0.3% 10.8% 0.0%
HCFC Home City Financial Corp. of OH (1) 4.6% 8.2% 82.0% 68.7% 22.6% 0.0% 8.1% 0.2% 7.9% 0.0%
HWEN Home Financial Bancorp of IN (1) 5.7% 5.7% 80.0% 61.3% 26.8% 0.0% 11.2% 0.0% 11.2% 0.0%
HLFC Home Loan Financial Corp. of OH 1.5% 12.3% 82.6% 55.3% 29.7% 0.0% 14.1% 0.0% 14.1% 0.0%
NEIB Northeast Indiana Bancorp of IN 2.3% 17.3% 75.4% 56.2% 31.7% 0.0% 11.4% 0.0% 11.4% 0.0%
PBNC PFS Bancorp Inc. of Aurora IN (1)(2) 3.9% 2.3% 92.4% 73.5% 8.5% 0.0% 16.8% 0.0% 16.8% 0.0%
PSFC Peoples Sidney Financial Corp. of OH 7.4% 5.1% 85.2% 63.9% 22.9% 0.0% 12.8% 0.0% 12.8% 0.0%
Regulatory
Balance Sheet Annual Growth Rates Capital
------------------------------------------------------------- ------------------------
MBS, Cash & Borrows. Net Tng Net
Assets Investments Loans Deposits &Subdebt Worth Worth Tangible Core Reg.Cap.
------ ----------- ----- ----------------- ----- ----- -------- ---- --------
Ohio Central Savings
- --------------------
September 30, 2004 10.71% 27.05% -1.88% 7.94% 32.16% 0.67% 0.67% 6.76% 6.76% 13.86%
All Public Companies 13.25% 4.45% 14.57% 8.58% 17.78% 4.04% 3.24% 9.03% 9.02% 15.96%
State of OH 8.33% -4.14% 12.35% 4.67% 13.97% 0.60% -1.83% 9.10% 8.94% 14.10%
Comparable Group Average 8.66% -9.26% 6.44% -1.00% 14.39% 3.07% 0.64% 10.33% 10.33% 18.34%
Comparable Group
- ----------------
AMFC AMB Financial Corp. of Munster IN 3.95% -14.25% 7.60% 1.66% 17.55% 8.00% 8.00% 8.95% 8.95% 15.51%
BRBI Blue River Bancshares of IN 93.47% 36.58% N.M. N.M. 78.75% 35.82% 6.24% N.M. N.M. N.M.
CIBI Community Inv. Bancorp, Inc. of OH 0.82% -14.22% 4.27% -5.42% 25.69% 3.16% 3.16% N.M. N.M. N.M.
FFDF FFD Financial Corp. of Dover OH (1) -0.38% 6.39% -1.26% 1.05% -8.80% -1.06% -1.06% N.M. N.M. N.M.
FBTC First BancTrust Corp. of IL 0.08% -8.70% 7.84% -2.26% 5.63% 5.80% 5.80% 11.85% 11.85% 23.65%
GTPS Great American Bancorp of IL -4.02% -45.88% 18.87% -6.35% 15.38% -1.59% -1.63% 8.05% 8.05% 15.07%
HCFC Home City Financial Corp. of OH (1) 3.25% 59.35% -2.25% 3.44% 1.59% 5.91% 6.36% N.M. N.M. N.M.
HWEN Home Financial Bancorp of IN (1) 2.85% -15.74% 4.58% 0.93% 6.25% 6.03% 6.03% N.M. N.M. N.M.
HLFC Home Loan Financial Corp. of OH 6.49% 6.16% 3.77% 2.56% 16.30% 3.84% 3.84% 11.30% 11.30% 18.40%
NEIB Northeast Indiana Bancorp of IN 3.25% -20.82% 11.56% 4.91% 3.24% -4.23% -4.23% 10.90% 10.90% 17.40%
PBNC PFS Bancorp Inc. of Aurora IN (1)(2) -0.36% -66.72% 15.49% -4.40% N.M. -25.16% -25.16% N.M. N.M. N.M.
PSFC Peoples Sidney Financial Corp.
of OH -5.43% -33.26% 0.34% -7.16% -3.26% 0.27% 0.27% 10.90% 10.90% 20.00%
RP(R) FINANCIAL, LC.
PAGE 3.6
The Bank's asset composition reflects a lower concentration of loans to
assets of 47.1% versus a 78.5% average for the Peer Group. Thus, the ratio of
cash, investments, and MBS for the Bank was higher than for the Peer Group
(51.0% of assets versus 16.9% for the Peer Group). The lower ratio of loans
reflects the Bank's limited internal loan origination activities recently (with
the exception of automobile loans). In this regard, unlike the Peer Group
companies, the Bank lacks an internal loan origination capacity for residential
mortgage loans. Overall, the Bank's interest-earning assets ("IEA") ratio
approximated 98.1% of assets, higher than the Peer Group ratio of 95.4%, which
partially reflects the Bank's more limited investment in fixed assets, no
intangible assets and lower non-performing assets. On a pro forma basis, the
Bank's current IEA advantage is expected to increase as the net proceeds are
reinvested into IEA. At the same time, the earnings power of the Bank's assets
are comparatively lower than the Peer Group given the lower proportion of higher
yielding loans to assets.
The Bank's deposits/assets ratio equaled 58.0%, which was below the Peer
Group average of 69.0%. Borrowings were utilized to a greater degree by OCS, at
29.6% versus the Peer Group ratio of 18.5%. The level of borrowings by the Bank
restricts future growth through borrowings and suggests that future asset growth
will be dependent on the ability to increase deposits. Also, deposits are
generally considered to be more valuable from a franchise perspective. Total
interest-bearing liabilities ("IBL") maintained by OCS and the Peer Group,
equaled 87.6% and 87.5% of assets, respectively. The Bank's IBL ratio will be
improved on a post-conversion basis as the pro forma equity level will be
higher.
A key measure of balance sheet strength and earnings power is the
IEA/IBL ratio. Presently, the Bank's IEA/IBL ratio is above OCS' ratio, based on
respective ratios of 112.0% and 109.0%. The additional capital realized from
stock proceeds should improve OCS' advantage in this regard.
Table 3.2 shows growth rates for key balance sheet items for the most
recent 12 months for OCS and the Peer Group. OCS realized faster asset growth
than the Peer Group, at 10.71% and 8.66%, respectively. The Bank's comparatively
faster growth is attributable to growth in wholesale elements of the balance
sheet, as the expanding cash and investments portfolio was funded primarily by
borrowings, and the loan portfolio declined. Specifically, the Bank's loan
portfolio diminished by 1.88% over the most recent 12 month period as compared
to 6.44%
RP(R) FINANCIAL, LC.
PAGE 3.7
average growth for the Peer Group. Comparatively, OCS' portfolio of cash and
investments increased by 27.05%, as compared to modest shrinkage realized by the
Peer Group. Deposit growth for the Bank reflects a comparative advantage
relative to the Peer Group who experienced slight shrinkage on average.
The Bank's equity increased by less than 1% due to low profitability
versus 3.07% for the Peer Group despite the Peer Group's higher equity and that
they were engaged in capital management strategies. On a post-offering basis,
the Bank's equity growth rate will initially be restricted due to the increased
equity level and low current market rates for proceeds reinvestment.
INCOME AND EXPENSE COMPONENTS
OCS and the Peer Group reported ROA ratios of 0.05% and 0.63%,
respectively (see Table 3.3), for the most recent 12 months. The Bank's lower
profitability reflects its comparatively weaker spreads which leads to its thin
net interest income ratio. Additionally, OCS' lower profitability results from
its comparatively high operating expenses, which are partially mitigated by the
Bank's relatively high level of non-interest revenues and gains on sale.
The Bank's interest income and interest expense ratios relative to
average assets were less favorable in comparison to the Peer Group, resulting in
a less favorable net interest income ratio of 2.76% versus the Peer Group
average of 3.31%. The Bank's lower interest income ratio was the result of its
lower IEA yield (4.67% versus 5.70% for the Peer Group), reflecting its lower
loans/assets ratio and the relatively low yields on the Bank's high quality
automobile loans. The Bank's higher interest expense ratio, 2.54% versus 2.13%
of average assets for the Peer Group, reflects the Bank's competitive deposit
rates, despite a higher proportion of transaction accounts, and higher
utilization of borrowed funds. On a pro forma basis the net interest income
ratio may improve marginally, partially limited by the currently low
reinvestment rates.
Non-interest income equaled 1.02% of average assets for OCS versus an
average of 0.60% for the Peer Group (excluding gains on sale for both). The
Bank's higher non-interest
RP(R) FINANCIAL, LC.
PAGE 3.8
Table 3.3
Income as Percent of Average Assets and Yields, Costs, Spreads
Comparable Institution Analysis
For the Twelve Months Ended September 30, 2004
Net Interest Income Other Income
------------------------------ ---------------------
Loss NII Total
Net Provis. After Loan R.E. Other Other
Income Income Expense NII on IEA Provis. Fees Oper. Income Income
------ ------ ------- --- ------ ------- ---- ----- ------ ------
Ohio Central Savings
- --------------------
September 30, 2004 0.05% 5.35% 2.59% 2.76% 0.07% 2.69% 0.00% 0.00% 1.02% 1.02%
All Public Companies 0.77% 5.02% 1.97% 3.05% 0.13% 2.92% 0.05% 0.00% 0.66% 0.71%
State of OH 0.60% 5.15% 2.20% 2.95% 0.15% 2.80% 0.05% 0.00% 0.39% 0.43%
Comparable Group Average 0.63% 5.44% 2.13% 3.31% 0.15% 3.16% 0.03% -0.02% 0.59% 0.60%
Comparable Group
- ----------------
AMFC AMB Financial Corp. of Munster IN 0.63% 5.20% 2.34% 2.86% 0.11% 2.75% 0.09% -0.03% 0.81% 0.87%
BRBI Blue River Bancshares of IN 0.11% 5.11% 1.94% 3.17% 0.23% 2.94% 0.00% 0.00% 0.51% 0.51%
CIBI Community Inv. Bancorp, Inc. of OH 0.69% 5.20% 2.02% 3.18% 0.13% 3.05% 0.00% 0.00% 0.38% 0.38%
FFDF FFD Financial Corp. of Dover OH (1) 0.50% 4.65% 1.82% 2.83% 0.02% 2.81% 0.00% -0.01% 0.20% 0.19%
FBTC First BancTrust Corp. of IL 0.57% 5.18% 1.96% 3.22% 0.28% 2.94% 0.15% -0.04% 1.20% 1.30%
GTPS Great American Bancorp of IL 0.78% 4.87% 1.40% 3.48% 0.00% 3.48% 0.05% 0.00% 1.78% 1.84%
HCFC Home City Financial Corp. of OH (1) 0.43% 5.85% 2.92% 2.93% 0.26% 2.67% 0.00% 0.00% 0.13% 0.13%
HWEN Home Financial Bancorp of IN (1) 0.59% 7.44% 2.48% 4.95% 0.39% 4.56% 0.00% -0.12% 0.63% 0.51%
HLFC Home Loan Financial Corp. of OH 1.09% 6.18% 2.32% 3.86% 0.29% 3.57% 0.00% 0.00% 0.45% 0.45%
NEIB Northeast Indiana Bancorp of IN 0.75% 5.34% 2.57% 2.77% 0.00% 2.77% 0.09% 0.00% 0.45% 0.53%
PBNC PFS Bancorp Inc. of Aurora IN (1) 0.71% 4.58% 1.35% 3.23% 0.04% 3.19% 0.00% -0.05% 0.40% 0.35%
PSFC Peoples Sidney Financial Corp. of OH (1) 0.70% 5.70% 2.45% 3.25% 0.04% 3.21% 0.00% 0.00% 0.11% 0.11%
(CONTINUED)
G&A/Other Exp. Non-Op. Items Yields, Costs, and Spreads MEMO:
--------------- ------------- ----------------------------- Effec-
MEMO: tive
G&A Goodwill Net Extrao. Yield Cost Yld-Cost Assets Tax
Expense Amort. Gains Items On Assets Of Funds Spread FTE Emp. Rate
------- ------ ----- ----- --------- -------- ------ ------- -------
Ohio Central Savings
- --------------------
September 30, 2004 4.53% 0.00% 0.90% 0.00% 5.06% 2.31% 2.61% $2,652 35.96%
All Public Companies 2.53% 0.02% 0.09% 0.01% 5.20% 2.22% 2.99% $5,378 34.00%
State of OH 2.46% 0.01% 0.13% 0.00% 5.37% 2.53% 2.83% $4,270 32.01%
Comparable Group Average 2.87% 0.00% 0.03% 0.00% 5.70% 2.44% 3.27% $3,608 34.18%
Comparable Group
- ----------------
AMFC AMB Financial Corp. of Munster IN 2.77% 0.00% -0.06% 0.00% 5.64% 2.63% 3.01% $4,824 38.05%
BRBI Blue River Bancshares of IN 3.27% 0.03% 0.02% 0.00% 5.42% 2.14% 3.29% $3,683 N.M.
CIBI Community Inv. Bancorp, Inc. of OH 2.46% 0.00% 0.06% 0.00% 5.35% 2.28% 3.07% $3,307 34.41%
FFDF FFD Financial Corp. of Dover OH (1) 2.50% 0.00% 0.26% 0.00% 4.76% 2.09% 2.66% $3,160 34.01%
FBTC First BancTrust Corp. of IL 3.57% 0.00% 0.17% 0.00% 5.45% 2.24% 3.21% $2,643 31.00%
GTPS Great American Bancorp of IL 4.08% 0.00% 0.01% 0.00% 5.15% 1.59% 3.56% $1,956 37.25%
HCFC Home City Financial Corp. of OH (1) 2.18% 0.02% 0.00% 0.00% 6.17% 3.20% 2.97% $4,379 28.34%
HWEN Home Financial Bancorp of IN (1) 4.29% 0.00% -0.29% 0.00% 8.08% 2.82% 5.26% $2,643 N.M.
HLFC Home Loan Financial Corp. of OH 2.44% 0.00% 0.12% 0.00% 6.33% 2.73% 3.59% $4,112 35.59%
NEIB Northeast Indiana Bancorp of IN 2.35% 0.00% 0.06% 0.00% 5.62% 2.95% 2.67% $4,574 25.62%
PBNC PFS Bancorp Inc. of Aurora IN (1) 2.35% 0.00% 0.00% 0.00% 4.65% 1.76% 2.89% $3,900 40.52%
PSFC Peoples Sidney Financial Corp. of OH (1) 2.21% 0.00% 0.00% 0.00% 5.84% 2.82% 3.02% $4,114 37.06%
(1) Financial information is for the quarter ending June 30, 2004.
Source: Audited and unaudited financial statements, corporate reports and offering circulars, and R (R) Financial, LC. calculations.
The information provided in this table has been obtained from sources we believe ar reliable, but we cannot guarantee the
accuracy or completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.
RP(R) FINANCIAL, LC.
PAGE 3.9
income ratio primarily reflects the high level of fee income generated through
the Bank's higher proportion of transaction accounts as well as the automobile
loan servicing income.
The Bank has recognized gains on the sale of automobile loans sold to
TFS over the last three fiscal years, who has been the sole purchaser of such
loans. With the termination of the TFS affiliation, OCS must identify other
purchasers in order to maintain the automobile lending emphasis. Thus, the 0.90%
gains realized in fiscal 2004 are an unpredictable source of earnings in the
future. By comparison, gains on sale totaled averaged only 0.03% for the Peer
Group.
The operating expense ratios for OCS and the Peer Group were 4.53% and
2.87%, respectively. As noted in Section One, several factors have caused OCS to
operate with a high operating expense ratio including a higher proportion of
transaction deposits, small average loan balance of consumer loans, greater
portfolio of loans serviced for others and the Bank's small asset size. Further
pressure on expenses are expected as the TFS affiliation terminates and with the
introduction of public company costs and stock benefit plans expenses.
Intangible assets amortization for the Peer Group was nominal.
OCS' efficiency ratio (operating expenses as a percent of the sum of
non-interest operating income and net interest income) of 119.9% is considerably
less favorable than the Peer Group's ratio of 73.4%. On a post-offering basis,
the Bank's efficiency ratio is expected to show some improvement as the net
interest ratio increases with the reinvestment of proceeds, although the
increased operating expenses (reflecting the costs of operating as public
company, stock plans expenses and incremental costs resulting from the Bank's
separation from TFS) may limit the improvement. Thus, the efficiency ratio is
expected to remain at a competitive disadvantage relative to the Peer Group.
Loan loss provisions for the Bank and the Peer Group were relatively
modest, amounting to 0.07% and 0.15% of average assets for the Bank and the Peer
Group, respectively, reflecting relatively strong asset quality and limited loan
chargeoffs for both. However, the modestly higher level of loss provisions
established by the Peer Group is consistent with the higher loans/assets ratio
and higher level of NPAs in comparison to the Bank.
The Bank's effective tax rate for the last 12 months of 35.9% is
comparable to the Peer Group average of 34.2%. The Bank's tax rate was skewed
upward by the low level of earnings overall
RP(R) FINANCIAL, LC.
PAGE 3.10
and management expects OCS' tax rate to approximate the current Peer Group
average over the long term.
LOAN COMPOSITION
The Bank's higher consumer lending orientation relative to the Peer
Group is evidenced in Table 3.4. The Bank's consumer loan portfolio, consisting
principally of automobile loans, equaled 32.8% of total assets, while
residential mortgage loans and MBS comprised the majority of the balance.
Comparatively, the Peer Group's lending is more diversified, including
1-4 family and multifamily lending and commercial lending (both real estate and
commercial and industrial lending). On average, the Peer Group's consumer loans
comprised only 5.1% of total assets while mortgage secured assets (i.e., MBS,
residential mortgage, construction and multi-family/commercial mortgage loans)
equaled 72.1% of assets, which were primarily comprised of residential loans
(49.6% of assets) and multi-family/commercial mortgage loans (14.7% of assets).
Overall, the Bank's higher proportion of cash and investments led to a
lower risk-weighted assets ratio relative to the Peer Group, at 51.74% and
59.35%, respectively, notwithstanding the Bank's higher ratio of consumer
lending.
CREDIT RISK
The Bank reported a lower level of NPAs/assets ratio than the Peer
Group, at 0.05 percent and 1.25%, respectively (see Table 3.5). The Bank's NPAs
consist solely of non-performing loans ("NPLs"), while the Peer Group also
maintained real estate owned ("REO") and NPLs. The Bank maintains slightly
higher reserves as a percent of loans, as well as higher reserve coverage in
comparison to NPLs and NPAs. Loan chargeoffs are comparatively modest for both,
equal to 0.08% of loans for the Bank and averaging 0.11% of loans for the Peer
Group.
Overall, the nature of the Bank's lending, with an emphasis on
automobile lending tends to increase credit risk exposure relative to prime
mortgage lenders. However, such risks are mitigated to an extent by the Bank's
success at maintaining strong asset quality and minimizing
RP(R) FINANCIAL, LC.
PAGE 3.11
Table 3.4
Loan Portfolio Composition and Related Information
Comparable Institution Analysis
As of September 30, 2004
Portfolio Composition as a Percent of Assets
---------------------------------------------------------
1-4 Constr. 5+Unit Commerc. RWA/ Serviced Servicing
Institution MBS Family & Land Comm RE Business Consumer Assets For Others Assets
----------- --- ------ ------ ------- -------- -------- ------ ---------- ------
(%) (%) (%) (%) (%) (%) (%) ($000) ($000)
Ohio Central Savings 36.69% 13.41% 0.00% 1.20% 0.12% 32.82% 51.74% $51,371 $0
- --------------------
All Public Companies 12.81% 37.34% 4.92% 15.86% 3.56% 3.83% 60.26% $729,161 $8,468
State of OH 7.80% 44.51% 4.92% 15.87% 2.70% 4.40% 62.50% $224,219 $2,270
Comparable Group Average 4.59% 49.61% 3.29% 14.65% 5.14% 5.08% 59.35% $15,018 $162
Comparable Group
- ----------------
AMFC AMB Financial Corp. of Munster IN 1.72% 56.36% 4.31% 16.91% 1.71% 3.04% 59.28% $0 $0
BRBI Blue River Bancshares of IN N.A. N.A. N.A. N.A. N.A. N.A. 31.83% $496 $0
CIBI Community Inv. Bancorp, Inc. of OH 0.93% 65.08% 2.73% 3.88% 3.68% 3.36% 56.38% $3,579 $44
FFDF FFD Financial Corp. of Dover OH (1) 0.69% 40.64% 1.10% 28.85% 1.99% 11.49% 69.00% $0 $633
FBTC First BancTrust Corp. of IL 27.38% 16.43% 0.84% 11.96% 11.23% 3.08% 53.10% $89,947 $817
GTPS Great American Bancorp of IL 2.52% 39.29% 2.57% 16.71% 4.80% 6.95% 56.86% $45,224 $93
HCFC Home City Financial Corp. of OH (1) 1.57% 43.17% 3.64% 24.58% 1.57% 9.53% 68.35% $2,284 $0
HWEN Home Financial Bancorp of IN (1) 2.45% 50.78% 4.83% 11.92% 12.38% 0.63% 66.22% $0 $0
HLFC Home Loan Financial Corp. of OH 6.44% 56.49% 2.64% 11.05% 7.56% 4.64% 63.60% $7,087 $57
NEIB Northeast Indiana Bancorp of IN 6.82% 44.78% 2.83% 12.43% 6.15% 6.26% 66.03% $31,602 $300
PBNC PFS Bancorp Inc. of Aurora IN (1) 0.00% 66.63% 7.26% 13.17% 2.40% 3.56% 64.69% $0 $0
PSFC Peoples Sidney Financial Corp. of OH (1) 0.00% 66.02% 3.48% 9.70% 3.09% 3.33% 56.86% $0 $0
(1) Financial information is for the quarter ending June 30, 2004.
Source: Audited and unaudited financial statements, corporate reports and
offering circulars, and RP(R) Financial, LC. calculations. The
information provided in this table has been obtained from sources
we believe are reliable, but we cannot guarantee the accuracy or
completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.
RP(R) FINANCIAL, LC.
PAGE 3.12
Table 3.5
Credit Risk Measures and Related Information
Comparable Institution Analysis
As of September 30, 2004
NPAs & Rsrves/
REO/ 90+Del/ NPLs/ Rsrves/ Rsrves/ NPAs & Net Loan NLCs/
Institution Assets Assets Loans Loans NPLs 90+Del Chargoffs Loans
----------- ----- ------ ----- ----- ---- ------ --------- -----
(%) (%) (%) (%) (%) (%) ($000) (%)
Ohio Central Savings 0.00% 0.05% 0.10% 0.88% 855.56% 855.56% $21 0.08%
- --------------------
All Public Companies 0.09% 0.54% 0.61% 0.97% 224.79% 203.07% $274 0.11%
State of OH 0.08% 0.79% 0.88% 0.85% 185.50% 126.79% $127 0.05%
Comparable Group Average 0.24% 1.25% 1.30% 0.82% 87.84% 56.89% $41 0.11%
Comparable Group
- ----------------
AMFC AMB Financial Corp. of Munster IN 0.29% 1.37% 1.31% 0.56% 43.16% 33.95% $41 0.13%
BRBI Blue River Bancshares of IN 0.93% 1.99% 0.52% 1.18% 228.63% 42.18% $186 -0.09%
CIBI Community Inv. Bancorp, Inc. of OH 0.00% N.A. 1.31% 0.52% 40.00% N.A. $67 0.27%
FFDF FFD Financial Corp. of Dover OH (1) 0.00% N.A. N.A. 0.66% N.A. N.A. $0 0.00%
FBTC First BancTrust Corp. of IL 0.10% 1.03% 1.77% 1.95% 109.76% 99.61% $21 0.07%
GTPS Great American Bancorp of IL 0.00% 0.02% N.A. 1.01% N.A. N.A. $0 0.00%
HCFC Home City Financial Corp. of OH (1) 0.00% N.A. N.A. 0.63% N.A. N.A. $12 0.04%
HWEN Home Financial Bancorp of IN (1) 1.46% 2.69% 1.52% 0.66% 43.20% 19.83% $100 0.76%
HLFC Home Loan Financial Corp. of OH 0.00% N.A. 2.59% 0.50% 19.41% N.A. $24 0.07%
NEIB Northeast Indiana Bancorp of IN 0.07% 0.72% 0.86% 0.84% 97.86% 88.28% $23 0.05%
PBNC PFS Bancorp Inc. of Aurora IN (1) 0.00% N.A. N.A. 0.69% N.A. N.A. $19 0.00%
PSFC Peoples Sidney Financial Corp.
of OH (1) 0.07% 0.96% 0.54% 0.65% 120.67% 57.48% $0 0.00%
(1) Financial information is for the quarter ending June 30, 2004.
Source: Audited and unaudited financial statements, corporate reports and
offering circulars, and RP(R) Financial, LC. calculations. The
information provided in this table has been obtained from sources
we believe are reliable, but we cannot guarantee the accuracy or
completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.
RP(R) FINANCIAL, LC.
PAGE 3.13
loan losses, and by the low credit risk exposure in the majority of the Bank's
assets which consist of investment securities and MBS. In the future, the Bank's
credit risk exposure may be subject to increase given the change in lending
focus and the outsourcing of the underwriting and processing functions.
INTEREST RATE RISK
Table 3.6 reflects various key ratios highlighting the relative interest
rate risk exposure. From a balance sheet perspective, OCS' lower pre-conversion
capital position suggests higher exposure while the higher IEA/IBL ratio which
is supported by a relatively low ratio of non-earnings assets is favorable from
an interest rate risk exposure perspective. On a post-conversion basis, these
ratios should improve relative to the Peer Group. In the absence of
comparability in timely interest rate risk reporting and methodology, we
reviewed quarterly changes in the net interest income ratio. In general, the
quarterly fluctuations in the Bank's net interest income ratio exceed the Peer
Group average, and are primarily the result of the Bank's current negative
earnings trend resulting from spread compression. At the same time, the Bank's
net interest income ratio should stabilize to some degree following the
conversion, given the initial expected proceeds reinvestment strategy (primarily
short-to-intermediate term investment securities). In this regard, we believe
the Bank's principal risk factor with respect to its interest rate risk exposure
in comparison to the Peer Group is derived from its low level of profitability
rather than an A/L repricing mismatch.
SUMMARY
Based on the foregoing, the Peer Group appears to provide a reasonable
basis for determining the pro forma market value of OCS. Areas where comparative
differences exist will be addressed in the form of valuation adjustments in the
following section.
RP(R) FINANCIAL, LC.
PAGE 3.14
Table 3.6
Interest Rate Risk Measures and Net Interest Income Volatility
Comparable Institution Analysis
As of September 30, 2004 or Most Recent Date Available
Balance Sheet Measures
----------------------- Quarterly Change in Net Interest Income
Non-Earn. -------------------------------------------------------------
Equity/ IEA/ Assets/
Institution Assets IBL Assets 9/30/2004 6/30/2004 3/31/2004 12/31/2003 9/30/2003 6/30/2003
----------- ------ --- ------ --------- --------- --------- ---------- --------- ---------
(%) (%) (%) (change in net interest income is annualized in basis points)
Ohio Central Savings 6.8% 112.0% 1.9% -11 -11 -8 -10 -12 6
- --------------------
All Public Companies 9.7% 108.2% 4.7% 2 -3 1 7 -4 -4
State of OH 11.5% 110.5% 4.2% 2 -6 1 2 -2 -1
Comparable Group Average 11.2% 108.9% 4.6% -4 2 5 3 -2 -2
Comparable Group
- ----------------
AMFC AMB Financial Corp. of Munster IN 8.5% 103.6% 7.5% -24 5 41 -32 -6 2
BRBI Blue River Bancshares of IN 6.0% 103.0% 5.4% 24 -32 -47 51 6 -2
CIBI Community Inv. Bancorp, Inc. of OH 10.9% 109.7% 2.8% -14 18 3 11 -8 12
FFDF FFD Financial Corp. of Dover OH (1) 12.3% 112.4% 2.3% N.A. -6 8 6 -6 -17
FBTC First BancTrust Corp. of IL 12.1% 108.6% 5.2% -15 12 -16 18 -11 -40
GTPS Great American Bancorp of IL 10.8% 107.7% 5.5% 27 27 12 0 -22 -6
HCFC Home City Financial Corp. of OH (1) 7.9% 103.8% 5.2% N.A. -7 -6 -21 8 15
HWEN Home Financial Bancorp of IN (1) 11.2% 103.7% 8.6% N.A. 9 19 5 2 3
HLFC Home Loan Financial Corp. of OH 14.1% 113.3% 3.6% -20 -2 8 -14 -2 23
NEIB Northeast Indiana Bancorp of IN 11.4% 108.1% 5.0% -5 4 16 11 -12 -1
PBNC PFS Bancorp Inc. of Aurora IN (1) 16.8% 120.1% 1.4% N.A. 7 6 -3 8 -11
PSFC Peoples Sidney Financial Corp. of
OH (1) 12.8% 112.4% 2.4% N.A. -6 19 3 14 -3
(1) Financial information is for the quarter ending June 30, 2004. NA=Change is
greater than 100 basis points during the quarter.
Source: Audited and unaudited financial statements, corporate reports and
offering circulars, and RP(R) Financial, LC. calculations. The
information provided in this table has been obtained from sources
we believe are reliable, but we cannot guarantee the accuracy or
completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.
RP(R) FINANCIAL, LC.
PAGE 4.1
IV. VALUATION ANALYSIS
INTRODUCTION
This chapter presents the valuation analysis and methodology used to
determine the estimated pro forma market value of the common stock to be issued
in conjunction with OCS' conversion transaction. The valuation incorporates the
appraisal methodology promulgated by the Federal and state banking agencies for
standard conversions and mutual holding company offerings, particularly
regarding selection of the Peer Group, fundamental analysis on both the Bank and
the Peer Group, and determination of the Bank's pro forma market value utilizing
the market value approach.
APPRAISAL GUIDELINES
The OTS written appraisal guidelines, originally released in October
1983 and updated in late-1994, specify the market value methodology for
estimating the pro forma market value of an institution. The valuation
methodology provides for: (1) the selection of a peer group of comparable
publicly-traded institutions, excluding from consideration institutions which
have recently converted, subject to acquisition or in MHC form; (2) a financial
and operational comparison of the subject company to the selected peer group,
identifying key differences and similarities; and (3) a valuation analysis in
which the pro forma market value of the subject company is determined based on
the market pricing of the peer group as of the date of valuation, incorporating
valuation adjustments for key differences. In addition, the pricing
characteristics of recent conversions, both at conversion and in the
aftermarket, must be considered.
RP FINANCIAL APPROACH TO THE VALUATION
The valuation analysis herein complies with such regulatory appraisal
guidelines, i.e., the pro forma market value approach. Accordingly, the
valuation incorporates a detailed analysis based on the Peer Group, discussed in
Chapter III, which constitutes "fundamental analysis" techniques. Additionally,
the valuation incorporates a "technical analysis" of recently completed stock
conversions, including closing pricing and aftermarket trading of such
offerings. It should
RP(R) FINANCIAL, LC.
PAGE 4.2
be noted that such analyses cannot possibly fully account for all the market
forces which impact trading activity and pricing characteristics of a stock on a
given day.
The pro forma market value determined herein is a preliminary value for
the Bank's to-be-issued stock. Throughout the conversion process, RP Financial
will: (1) review changes in the Bank's operations and financial condition; (2)
monitor the Bank's operations and financial condition relative to the Peer Group
to identify any fundamental changes; (3) monitor the external factors affecting
value including, but not limited to, local and national economic conditions,
interest rates, and the stock market environment, including the market for
thrift stocks; and (4) monitor pending conversion offerings (including those in
the offering phase) both regionally and nationally. If material changes should
occur prior to closing the offering, RP Financial will evaluate if updated
valuation reports should be prepared reflecting such changes and their related
impact on value, if any. RP Financial will also prepare a final valuation update
at the closing of the offering to determine if the prepared valuation analysis
and resulting range of value continues to be appropriate.
The appraised value determined herein is based on the current market and
operating environment for the Bank and for all thrifts. Subsequent changes in
the local and national economy, the legislative and regulatory environment, the
stock market, interest rates, and other external forces (such as natural
disasters or major world events), which may occur from time to time (often with
great unpredictability) may materially impact the market value of all thrift
stocks, including the Bank's value, or the Bank's value alone. To the extent a
change in factors impacting the Bank's value can be reasonably anticipated
and/or quantified, RP Financial has incorporated the estimated impact into its
analysis.
VALUATION ANALYSIS
A fundamental analysis discussing similarities and differences relative
to the Peer Group was presented in Chapter III. The following sections summarize
the key differences between the Bank and the Peer Group and how those
differences affect the pro forma valuation. Emphasis is placed on the specific
strengths and weaknesses of the Bank relative to the Peer Group in such key
areas as financial condition, profitability, growth and viability of earnings,
asset growth, primary market area, dividends, liquidity of the shares, marketing
of the issue, management, and
RP(R) FINANCIAL, LC.
PAGE 4.3
the effect of government regulations and/or regulatory reform. We have also
considered the market for thrift stocks, in particular new issues, to assess the
impact on value of the Bank's coming to market at this time.
1. FINANCIAL CONDITION
The financial condition of an institution is an important determinant in
pro forma market value, because investors typically look to such factors as
liquidity, capital, asset composition and quality, and funding sources in
assessing investment attractiveness. The similarities and differences in
financial strength are noted as follows:
o OVERALL A/L COMPOSITION. While both the Bank and the Peer Group
fund lending activity primarily with deposits, there are notable
differences. Relative to the Peer Group, the Bank maintains a
lower proportion of total loans to assets, a significantly
higher proportion of consumer loans, a lower proportion of
mortgage loans and a higher proportion of investments and MBS.
Thus, the Bank's assets have lower earnings power than for the
Peer Group on average. Notwithstanding the Bank's higher
concentration of savings and transaction accounts, the
competitive deposit rates offered and the greater reliance on
term borrowed funds contributes to the Bank's comparatively
higher funding costs.
o CREDIT QUALITY. The Bank's credit risk profile appears to be
comparatively favorable based on its lower NPAs/assets, stronger
reserve coverage ratios and relatively favorable experience with
respect to its credit quality. At the same time, the Bank's
credit risk profile may be subject to increase on a
post-conversion basis given the shift in lending emphasis and
the outsourcing arrangements.
o BALANCE SHEET LIQUIDITY. The Bank currently maintains a higher
ratio of cash, investments and MBS. However, the majority of the
Bank's portfolio is classified as HTM, thereby restricting their
sale. Additionally, the Bank has lower current borrowings
capacity than the Peer Group due to the proportionately higher
balance of borrowed funds currently outstanding. The infusion of
the stock proceeds will initially increase the Bank's level of
liquid assets pending investment into loans and other
longer-term investments.
o EQUITY CAPITAL. On a pro forma basis, the Bank's current capital
ratio disadvantage is expected to be eliminated. The Bank's pro
forma ROE is expected to compare unfavorably to the Peer Group
average due to lower pro forma profitability and similar to
greater capital ratio.
RP(R) FINANCIAL, LC.
PAGE 4.4
On balance, we concluded that no valuation adjustment was warranted for
the Bank's financial condition relative to the Peer Group.
2. PROFITABILITY, GROWTH AND VIABILITY OF EARNINGS
Earnings are a key factor in determining pro forma market value, as the
level and risk characteristics of an institution's earnings stream and the
prospects and ability to generate future earnings heavily influence the multiple
the investment community will pay for earnings. The major factors considered in
the valuation are described below.
o EARNINGS. On a pro forma basis, the Bank's profitability
compares less favorably to the Peer Group average, primarily
reflecting the impact of the Bank's weaker net interest income
ratio and higher operating expense ratio despite the greater
contribution from non-interest income and gains on sale. The
Bank's efficiency ratio is less favorable than the Peer Group
average. Earnings for Peer Group are generated primarily through
core sources while the Bank's earnings have been supported to a
greater extent by gains on the sale (which are at risk as
described below). Thus, the Peer Group's higher profitability is
more predictable and higher quality than the Bank's measure.
o INTEREST RATE RISK. The Bank's interest rate risk is moderate as
the majority of its assets have short terms and/or repricing
structures which closely match the short term repricing of OCS'
deposit base. Moreover, the Bank has employed term borrowings to
extend the maturities of its funding liabilities to a greater
extent than the Peer Group. While the Bank has been effective in
matching the repricing structure of assets and liabilities, the
Bank's low profitability provides little tolerance for adverse
changes in interest rates.
o CREDIT RISK. As noted earlier, the Bank appears to have a more
favorable credit risk profile, and thus the earnings risk to
loss is also lower. At the same time, the proposed shift in
lending focus and related outsourcing arrangements may raise the
Bank's credit risk profile.
o EARNINGS GROWTH POTENTIAL. The Bank's ability to achieve
earnings growth involves execution risk of a new business plan
following the termination of the TFS affiliation, which involves
the following issues:
>> The ability to replace TFS as a purchaser for the
automobile loans originated - thus, the gains on sale
realized in the past are at risk;
>> The expected incremental increase in operating expenses
due to the new expenses that are currently borne by TFS
(estimated in the range of $50,000 to $60,000 annually);
and
RP(R) FINANCIAL, LC.
PAGE 4.5
>> The ability to introduce residential mortgage lending
and effectively monitor the related outsourcing
arrangements.
o RETURN ON EQUITY. Following the infusion of stock proceeds, the
Bank's pro forma capital position is expected to be similar to
the Peer Group, although the lower pro forma profitability would
produce a lower ROE relative to the Peer Group average.
Overall, RP Financial made a moderate downward adjustment for
profitability, growth and viability of earnings.
3. ASSET GROWTH
The recent asset growth advantage reflects the Bank's efforts to support
earnings through wholesale leveraging in the face of a shrinking loan portfolio.
From an equity ratio perspective, the Bank has similar leverage capacity as the
Peer Group, but the Bank's future growth will be more dependent on deposit
growth and reengaging its residential mortgage lending through outsourcing
arrangements. In view of these challenges, we believe a slight downward
adjustment was warranted relative to the Peer Group for this factor.
4. PRIMARY MARKET AREA
The general condition of a thrift's market area has an impact on value,
as future success is in part dependent upon opportunities for profitable
activities in the local market area. Operating in the Columbus (Franklin County)
and Cleveland (Cuyahoga County) metropolitan areas, the Bank faces significant
competition for loans and deposits from a large number of financial
institutions, the majority of which provide a broader array of services and have
significantly larger branch networks.
The Columbus area is a relatively strong and diverse economy, and enjoys
relatively greater affluence in comparison to the growing markets served by the
Peer Group companies, five of which were located in Ohio and all were located in
the Midwest (see Table 4.1). The Cleveland area reflects weaker economic growth,
comparatively higher unemployment and population shrinkage relative to the Peer
Group markets on average. At the same time, the Cleveland market also enjoys
greater affluence than the markets served by the Peer Group
RP(R) FINANCIAL, LC.
PAGE 4.6
Table 3.6
Interest Rate Risk Measures and Net Interest Income Volatility
Comparable Institution Analysis
As of September 30, 2004 or Most Recent Date Available
Balance Sheet Measures
----------------------- Quarterly Change in Net Interest Income
Non-Earn. -------------------------------------------------------------
Equity/ IEA/ Assets/
Institution Assets IBL Assets 9/30/2004 6/30/2004 3/31/2004 12/31/2003 9/30/2003 6/30/2003
----------- ------ --- ------ --------- --------- --------- ---------- --------- ---------
(%) (%) (%) (change in net interest income is annualized in basis points)
Ohio Central Savings 6.8% 112.0% 1.9% -11 -11 -8 -10 -12 6
- --------------------
All Public Companies 9.7% 108.2% 4.7% 2 -3 1 7 -4 -4
State of OH 11.5% 110.5% 4.2% 2 -6 1 2 -2 -1
Comparable Group Average 11.2% 108.9% 4.6% -4 2 5 3 -2 -2
Comparable Group
- ----------------
AMFC AMB Financial Corp. of Munster IN 8.5% 103.6% 7.5% -24 5 41 -32 -6 2
BRBI Blue River Bancshares of IN 6.0% 103.0% 5.4% 24 -32 -47 51 6 -2
CIBI Community Inv. Bancorp, Inc. of OH 10.9% 109.7% 2.8% -14 18 3 11 -8 12
FFDF FFD Financial Corp. of Dover OH (1) 12.3% 112.4% 2.3% N.A. -6 8 6 -6 -17
FBTC First BancTrust Corp. of IL 12.1% 108.6% 5.2% -15 12 -16 18 -11 -40
GTPS Great American Bancorp of IL 10.8% 107.7% 5.5% 27 27 12 0 -22 -6
HCFC Home City Financial Corp. of OH (1) 7.9% 103.8% 5.2% N.A. -7 -6 -21 8 15
HWEN Home Financial Bancorp of IN (1) 11.2% 103.7% 8.6% N.A. 9 19 5 2 3
HLFC Home Loan Financial Corp. of OH 14.1% 113.3% 3.6% -20 -2 8 -14 -2 23
NEIB Northeast Indiana Bancorp of IN 11.4% 108.1% 5.0% -5 4 16 11 -12 -1
PBNC PFS Bancorp Inc. of Aurora IN (1) 16.8% 120.1% 1.4% N.A. 7 6 -3 8 -11
PSFC Peoples Sidney Financial Corp. of
OH (1) 12.8% 112.4% 2.4% N.A. -6 19 3 14 -3
(1) Financial information is for the quarter ending June 30, 2004. NA=Change is
greater than 100 basis points during the quarter.
Source: Audited and unaudited financial statements, corporate reports and
offering circulars, and RP(R) Financial, LC. calculations. The
information provided in this table has been obtained from sources
we believe are reliable, but we cannot guarantee the accuracy or
completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.
RP(R) FINANCIAL, LC.
PAGE 4.7
companies. The deposit market share exhibited by the Bank was relatively smaller
than the Peer Group average (less than 1% for the Bank versus 14.8% for the Peer
Group).
On balance, we concluded that no adjustment was warranted for the Bank's
primary market area relative to the Peer Group.
5. DIVIDENDS
The Bank has indicated that it does not intend to pay a cash dividend
following completion of the Conversion. This is a different posture than stated
by most recently converted thrifts who indicated in their prospectuses that they
expected to establish a dividend policy following conversion. Future
declarations of dividends by the Board of Directors will depend upon a number of
factors, including investment opportunities, growth objectives, financial
condition, profitability, tax considerations, minimum capital requirements,
regulatory limitations, stock market characteristics and general economic
conditions.
Eleven out of the twelve Peer Group companies pay regular cash
dividends, with implied dividend yields ranging from 1.66% to 3.56%. The average
dividend yield on the stocks of the Peer Group institutions was 2.30% as of
November 26, 2004, representing an average core earnings payout ratio of 39.10%.
By comparison, approximately 90% of all publicly-traded full stock thrifts had
adopted cash dividend policies (see Exhibit IV-1), exhibiting an average yield
of 2.06% and an average payout ratio of 34.86%. The dividend paying thrifts
generally maintain higher than average profitability ratios, facilitating their
ability to pay cash dividends.
In light of the Bank's stated intention to not pay a dividend and given
the Bank's more limited capacity to pay a dividend comparable to the Peer Group,
based on its weaker pro forma earnings, we concluded that a slight downward
adjustment was warranted for purposes of dividends relative to the Peer Group.
6. LIQUIDITY OF THE SHARES
The Peer Group is by definition composed of companies that are traded in
the public markets, and all of the Peer Group members trade on the NASDAQ
system. Typically, the number of shares outstanding and market capitalization
provides an indication of how much
RP(R) FINANCIAL, LC.
PAGE 4.8
liquidity there will be in a particular stock. The market capitalization of the
Peer Group companies ranged from $8.1 million to $35.5 million as of November
26, 2004, with an average market value of $29.7 million. The shares issued and
outstanding to the public of the Peer Group members ranged from approximately
735,000 to 3.4 million, with average shares outstanding of approximately 1.5
million.
The Bank's stock offering is expected to result in shares outstanding
that will be below the Peer Group average and median, and a market
capitalization that will be less than the Peer Group average and median.
Accordingly, we anticipate that the liquidity in the Bank's stock will be lower
to most of the Peer Group's stocks. Additionally, it is anticipated that the
Companies stock will be listed on OTC Bulletin Board, which indicates the
limited aftermarket trading expected. Overall, we concluded that a slight
downward adjustment was warranted for this factor.
7. MARKETING OF THE ISSUE
We believe that four separate markets need to be considered for thrift
stocks such as the Bank coming to market: (1) the after-market for public
companies, in which trading activity is regular and investment decisions are
made based upon financial condition, earnings, capital, ROE, dividends and
future prospects; (2) the new issue market in which converting thrifts are
evaluated on the basis of the same factors, but on a pro forma basis without the
benefit of prior operations as a fully-converted publicly-held company and stock
trading history; (3) the thrift acquisition market for thrift and bank
franchises in the Midwest; and (4) the market for the public stock of the Bank.
All of these markets were considered in the valuation of the Bank's to-be-issued
stock.
A. THE PUBLIC MARKET
The value of publicly-traded thrift stocks is easily measurable,
and is tracked by most investment houses and related organizations. Exhibit IV-1
provides pricing and financial data on all publicly-traded thrifts. In general,
thrift stock values react to market stimuli such as interest rates, inflation,
perceived industry health, projected rates of economic growth, regulatory issues
and stock market conditions in general. Exhibit IV-2 displays historical stock
market
RP(R) FINANCIAL, LC.
PAGE 4.9
trends for various indices and includes historical stock price index values for
thrifts and commercial banks. Exhibit IV-3 displays historical stock price
indices for thrifts only.
In terms of assessing general stock market conditions, the
performance of the overall stock market has been mixed over the past year. In
late-November and early-December 2003, positive economic news such as improved
third quarter corporate profits and a strong start to the Christmas shopping
season provided a boost to stocks. Stocks continued to move higher at the close
of 2003, as key sectors of the economy continued to show signs of strengthening.
Year end momentum in the stock market was sustained at the beginning of 2004,
reflecting generally favorable fourth quarter earnings and an increase in
consumer confidence. Profit taking and slower than expected GDP growth in the
fourth quarter of 2003 caused stocks to falter in late-January. However, aided
by January employment data that showed jobs were added and a decline in the
national unemployment rate to 5.6%, the broader stock market moved higher during
the first half of February. Stocks generally declined during the balance of
February and during the first half of March, reflecting valuation concerns
following a year of strong gains and weaker than expected job growth during
February. Concerns about terrorism and higher oil prices caused stocks to tumble
in late-March, before rebounding at the close of the first quarter on more
attractive fundamentals and optimism about first quarter earnings.
Stocks moved higher in early April 2004, as investors reacted
favorably to a strong employment report for March. For the balance of April
trading in the broader market produced uneven results, as generally favorable
first quarter earnings and strong economic data weighed against the growing
threat of inflation and higher interest rates. The DJIA closed below 10000 for
the first time in 2004 in the second week of May, as strong job growth during
April raised expectations of a rate increase by the Federal Reserve. The
downward trend in stocks prevailed through most of May, on concerns about higher
oil prices, violence in the Middle East and higher interest rates. Stocks
rebounded in late-May, primarily on the basis of higher corporate earnings and
lower oil prices. Strong employment data for May combined with lower oil prices
and favorable inflation data provided for a positive trend in the broader market
through mid-June. Stocks traded in a narrow range through the end of the second
quarter, as investors awaited the outcome of the Federal Reserve meeting at the
end of June.
RP(R) FINANCIAL, LC.
PAGE 4.10
Rising oil prices and profit warnings from some technology
companies caused major stock indices to fall at the start of the third quarter
of 2004. Stocks continued to trend lower through most of July, as a slow down in
the economic expansion raised concerns about future earnings growth. Strong
consumer confidence numbers for July reversed the downward in stocks during the
last week of July, with the DJIA closing up for the week for the first time
since mid-June. The recovery in the stock market was short-lived, as record high
oil prices, weak retail sales for July and weaker than expected job growth for
July pulled stocks lower in early-August. A positive economic outlook by the
Federal Reserve and bargain hunting supported gains in the stock market during
mid-August, as the DJIA moved back above the 10000 barrier. The Dow Jones
Industrial Average ("DJIA") hit a six week high in late-August, which was
supported by a drop in oil prices. After the DJIA closed at a two month high in
early-September on hopes for favorable employment numbers for August, the
broader stock market traded in a narrow range through mid-September. Concerns
that rising oil prices would hurt the economy and reduce corporate earnings
pressured stocks lower in late-September.
Stocks rallied at the start of the fourth quarter, largely on
the basis of a rebound in technology stocks due to an upbeat outlook for third
quarter earnings. Higher oil prices and allegations of improprieties in the
insurance industry pressured the DJIA to its lowest level of the year in
late-October. Lower oil prices reversed the downward trend in stock at the close
of October. The election outcome and a strong jobs report for October extended
the stock market rally into mid-November, as the DJIA hit a five month high.
Positive expectations to the opening of the holiday retail shopping season also
provide upward momentum to the stock markets in general. As an indication of the
general trends in the nation's stock markets over the past year, as of November
26, 2004, the DJIA closed at 10522.23, an increase of 7.6% from one year ago and
an increase of 0.7% year-to-date. As of November 26, 2004 the NASDAQ closed at
2,102.0, an increase of 7.2% from one year ago and an increase of 4.9%
year-to-date. The Standard & Poors 500 Index closed at 1182.7 on November 26,
2004, an increase of 11.8% from a year ago and an increase of 6.4% year-to-date.
The market for thrift stocks has been mixed as well during the
past 12 months, but, in general, thrift issues have paralleled trends in the
broader market.
RP(R) FINANCIAL, LC.
PAGE 4.11
After following the broader stock market lower as the close of
the third quarter approached, thrift issues posted solid gains at the beginning
of the fourth quarter. In late-November and early-December 2003, thrift stocks
followed the broader market higher and then stabilized at the close of the
fourth quarter. After trading in a narrow range at the beginning of 2004, thrift
issues trended higher in late-January and the first half of February. The
positive trend was supported by further consolidation in the thrift sector,
including GreenPoint Financial's agreement to sell to North Fork Bancorp, as
well as generally favorable fourth quarter earnings. Indications that interest
rates would continue to remain low provided further support to thrift prices.
Thrift stocks followed the broader market lower in mid-February, before
recovering in late-February following a dip in long term Treasury yields. Thrift
issues generally experienced some selling pressure during the first half of
March, reflecting profit taking and weakness in the broader stock market. Higher
interest rates and weakness in the broader market pressured thrift issues lower
in late-March, which was followed by an upward move in thrift prices at the
close of the first quarter.
Thrifts stocks generally traded lower at the start of the second
quarter of 2004, as a strong employment report for March pushed interest rates
higher. Higher interest rates and inflation worries pressured interest rate
sensitive issues lower through most of April, with the sell-off sharpening in
early-May following another strong employment report for April. Thrift stocks
recovered modestly in mid-May as the yield on 10-year Treasury note declined
slightly. Acquisition speculation involving the sale of Washington Mutual lifted
the thrift sector in late-May. Thrift stocks generally retreated during the
first half of June, as the yield on the 10-year Treasury note moved to a
two-year high on inflation concerns. Following the sharp sell-off, thrift stocks
rebounded as a moderate increase in core consumer prices during may and comments
by the Federal Reserve Chairman that inflation does not seem likely to be a
serious problem eased fears of a sharp rise in inflation. Acquisition activity
helped to boost thrift stocks in late-June, but the upward trend was abruptly
reversed at the end of June as a significant decline in Washington Mutual's 2004
earnings guidance pulled the broader thrift sector lower.
Thrift stocks responded favorably to the 25 basis point rate
increase implemented by the Federal Reserve at the close of the 2004 second
quarter, as the Federal Reserve indicated that it would continue to raise the
federal funds rate 25 basis points at a time. June employment
RP(R) FINANCIAL, LC.
PAGE 4.12
data which showed weaker than expected job growth also provided support to
thrift stocks in early-July. For most of July there was little movement in
thrift stocks, as second quarter earnings were generally in line with
expectations. A rally in the broader market in late-July provided a boost to
thrift stocks as well. Thrift issues traded down with the rest of the market in
early-August, although losses in the thrift sector were mild compared to the
sell-off experienced in the boarder market as weaker than expected job growth
for July pushed interest rates lower. Improved inflation data, lower interest
rates and a rally in the broader stock market combined to push the thrift sector
higher in mid-August. Thrift stocks sustained a positive trend in late-August,
which was fueled by lower interest rates and strength in the broader stock
market. The upward trend in thrift prices continued through mid-September, as
September employment data matched expectations and inflation remained low.
Thrift stocks edged lower at the close of the third quarter, which was largely
attributable to weakness in the broader stock market.
Thrift issues also rebounded in conjunction with the broader
stock market rally at the start of the fourth quarter. After trading in a narrow
range into mid-October, thrift stocks moved lower on some disappointing third
quarter earnings and lower guidance on future earnings due to margin compression
resulting from a flatter yield curve. The rally in the boarder stock market and
the Federal Reserve's indication that inflation risks were well contained fueled
gains in the thrift sector during the first half of November. On November 26,
2004, the SNL Index for all publicly-traded thrifts closed at 1,568.8, an
increase of 3.0% from one year ago and an increase of 5.8% year-to-date.
B. THE NEW ISSUE MARKET
In addition to thrift stock market conditions in general, the
new issue market for converting thrifts is also an important consideration in
determining the Company's pro forma market value. The new issue market is
separate and distinct from the market for seasoned thrift issues in that the
pricing ratios for converting issues are computed on a pro forma basis,
specifically: (1) the numerator and denominator are both impacted by the
conversion offering amount, unlike existing stock issues in which price change
affects only the numerator; and (2) the pro forma pricing ratio incorporates
assumptions regarding source and use of proceeds, effective tax rates, stock
plan purchases, etc. which impact pro forma financials, whereas pricing
RP(R) FINANCIAL, LC.
PAGE 4.13
for existing issues are based on reported financials. The distinction between
pricing of converting and existing issues is perhaps no clearer than in the case
of the price/book ("P/B") ratio in that the P/B ratio of a converting thrift
will typically result in a discount to tangible book value whereas in the
current market for existing thrifts the P/B ratio often reflects a premium to
book value. Therefore, it is appropriate to also consider the market for new
issues, both at the time of the conversion and in the aftermarket.
Thrift offerings completed in 2004 have generally been well
received, with most offerings being oversubscribed and trading higher in initial
trading activity. As shown in Table 4.2, one second-step conversion and four
mutual holding company offerings were completed during the past three months.
The mutual holding company offerings are considered to be more relevant for our
analysis in the absence of standard conversion transactions completed during
this period. All four of the MHC offerings were oversubscribed. On a
fully-converted basis, the average closing pro forma price/tangible book ratios
of the recent MHC offerings equaled 87.7% and a pro forma core P/E multiple of
44.4 times. On average, the prices of the recent MHC offerings reflected price
appreciation of 12.0% after the first week of trading and 9.4% based on the
median. The one other offering completed during the last three months was by
Roebling Financial's, which completed a second-step offering at the top of the
super range. Roebling Financial's pro forma price/tangible book ratio at closing
equaled 112.3% and pro forma core price/earnings ratio at closing equaled 32.6
times, and the issued declined by 0.5% after the first week of trading.
C. THE ACQUISITION MARKET
Also considered in the valuation was the potential impact on the
Bank's stock price of recently completed and pending acquisitions of other
financial institutions operating in Ohio. As shown in Exhibit IV-4, there were 8
acquisitions of Ohio-based savings institutions completed or announced between
the beginning of 2003 through year-to-date 2004. The recent acquisition activity
involving regionally based financial institutions may imply a certain degree of
acquisition speculation for the Bank's stock. To the extent that acquisition
speculation may impact the Bank's offering, we have largely taken this into
account in selecting companies which operate in markets that have experienced a
comparable level of acquisition activity as the Bank's
RP(R) FINANCIAL, LC.
PAGE 4.14
Table 4.2
Public Market Pricing
Ohio Central Savings and the Comparables
As of November 26, 2004
Pre-Conversion Data
-------------------------- Conribution to
Financial Asset Charitable
Institutional Information Information Quality Offering Information Found Insider Purchases
- ----------------------------------- -------------- ----------- ----------------------- ------------- ----------------
Benefit
Plans
----------
Conversion Equity/ NPAs/ Res. Gross % %of Exp./ %of Recog Mgmt.&
Institution ST. Date Ticker Assets Assets Assets Cov. Proc. Offered Mid. Proc.Form Offering ESOP Plans Dirs.
- ----------- --- ---- ------ ------ ------ ------ ---- ----- ----- ---- ----- ---- -------- ---- ----- -----
($Mil) (%) (%) (%) ($Mil.) (%) (%) (%) (%) (%) (%) (%)(2)
- --------------------------------------------------------------------------------------------------------------------------------
STANDARD CONVERSIONS NONE
SECOND STEP CONVERSIONS
Roebling Financial Corp. NJ 10/1/04 RBLG-OTC BB $ 90 8.33% 0.21% 272% $ 9.1 54% 132% 5.4% N.A N.A 8.0% 4.0% 11.8%
AVERAGES-SECOND STEP CONVERSIONS: $ 90 8.33% 0.21% 272% $ 9.1 54% 132% 5.4% NA NA 8.0% 4.0% 11.8%
MEDIANS - SECOND STEP CONVERSIONS: $ 90 8.33% 0.21% 272% $ 9.1 54% 132% 5.4% NA NA 8.0% 4.0% 11.8%
MUTUAL HOLDING COMPANY CONVERSIONS
PSB Holdings, Inc.* CT 10/5/04 PSBH-NASDAQ $ 279 8.36% 0.24% 196% $30.9 45% 132% 2.7% Stock 4.0% 8.0% 4.0% 8.0%
Atlantic Coast Federal
Corp.* (9) GA 10/5/04 ACFC-NASDAQ $ 580 7.77% 0.67% 96% $58.2 40% 132% 2.4% N.A N.A 8.0% 4.0% 6.1%
Naugatuck Valley
Fin. Corp. CT 10/1/04 NVSL-NASDAQ $ 254 8.51% 0.39% 199% $32.7 43% 132% 2.6% Stock 4.7% 9.1% 4.6% 2.4%
SI Financial Group, Inc. CT 10/1/04 SIFI-NASDAQ $ 555 6.21% 0.33% 160% $50.3 40% 132% 2.4% Stock 5.0% 9.8% 4.9% 2.4%
AVERAGES-MUTUAL HOLDING COMPANY CONVERSIONS: $ 417 7.71% 0.41% 163% $43.0 42% 132% 2.5% NA NA 8.7% 4.4% 4.7%
MEDIANS-MUTUAL HOLDING COMPANY CONVERSIONS: $ 417 8.07% 0.36% 178% $41.5 42% 132% 2.5% NA NA 8.6% 4.3% 4.2%
AVERAGES-ALL CONVERSIONS: $ 351 7.84% 0.37% 185% $36.2 44% 132% 3.1% NA NA 8.6% 4.3% 6.1%
MEDIANS-ALL CONVERSIONS: $ 279 8.33% 0.33% 196% $32.7 43% 132% 2.6% NA NA 8.0% 4.0% 6.1%
Pro Forma Data
-------------------------------------
Institutional Information Pricing Ratios(3) Financial Charac.
- ----------------------------------- -------------------- ----------------
Initial
Conversion Dividend Core Core Core IPO
Institution ST. Date Ticker Yield P/TB P/E P/A ROA TE/A ROE Price
- ----------- --- ---- ------ ------ ------- ------ ----- ---- ------ ---- ------
(%) (%) (x) (%) (%) (%) (%) ($)
- --------------------------------------------------------------------------------------------------
STANDARD CONVERSIONS NONE
SECOND STEP CONVERSIONS
Roebling Financial Corp. NJ 10/1/04 RBLG-OTC BB 0.00% 112.3% 32.6x 17.3% 0.5% 15.4% 3.4% $10.00
AVERAGES-SECOND STEP CONVERSIONS: 0.00% 112.3% 32.6x 17.3% 0.5% 15.4% 3.4% $10.00
MEDIANS - SECOND STEP CONVERSIONS: 0.00% 112.3% 32.6x 17.3% 0.5% 15.4% 3.4% $10.00
MUTUAL HOLDING COMPANY CONVERSIONS
PSB Holdings, Inc.* CT 10/5/04 PSBH-NASDAQ
Atlantic Coast Federal
Corp.* (9) GA 10/5/04 ACFC-NASDAQ 0.00% 85.2% 40.9x 20.6% 0.5% 16.4% 3.2% $10.00
Naugatuck Valley 0.00% 87.6% 43.9x 20.7% 0.6% 14.6% 3.9% $10.00
Fin. Corp. CT 10/1/04 NVSL-NASDAQ 0.00% 88.8% 49.6x 23.9% 0.6% 17.5% 3.2% $10.00
SI Financial Group, Inc. CT 10/1/04 SIFI-NASDAQ 0.00% 89.3% 43.3x 19.0% 0.5% 12.8% 3.8% $10.00
AVERAGES-MUTUAL HOLDING COMPANY CONVERSIONS: 0.00% 87.7% 44.4x 21.1% 0.5% 15.3% 3.5% $10.00
MEDIANS-MUTUAL HOLDING COMPANY CONVERSIONS: 0.00% 88.2% 43.6x 20.6% 0.5% 15.5% 3.5% $10.00
AVERAGES-ALL CONVERSIONS: 0.00% 92.7% 42.1x 20.3% 0.5% 15.4% 3.5% $10.00
MEDIANS-ALL CONVERSIONS: 0.00% 88.8% 43.3x 20.6% 0.5% 15.4% 3.4% $10.00
Post-IPO Pricing Trends
---------------------------------------
Institutional Information Closing Price:
- ----------------------------------- ---------------------------------------
After After
First First First
Conversion Trading % Week % Month %
Institution ST. Date Ticker Day Change (4) Change (5) Change
- ----------- --- ---- ------ ------ ----- ------ ----- ------ -----
($) (%) ($) (%) ($) (%) Through
- --------------------------------------------------------------------------------------- Nov. 26
STANDARD CONVERSIONS NONE
SECOND STEP CONVERSIONS
Roebling Financial Corp. NJ 10/1/04 RBLG-OTC BB $ 9.90 -1.0% $ 9.95 -0.5% $9.20 -8.0% $9.60 -4.0%
AVERAGES-SECOND STEP CONVERSIONS: $ 9.90 -1.0% $ 9.95 -0.5% $9.20 -8.0% $9.60 -4.0%
MEDIANS - SECOND STEP CONVERSIONS: $ 9.90 -1.0% $ 9.95 -0.5% $9.20 -8.0% $9.60 -4.0%
MUTUAL HOLDING COMPANY CONVERSIONS
PSB Holdings, Inc.* CT 10/5/04 PSBH-NASDAQ
Atlantic Coast Federal
Corp.* (9) GA 10/5/04 ACFC-NASDAQ $10.50 5.0% $10.60 6.0% $10.50 5.0% $12.00 20.0%
Naugatuck Valley $11.75 17.5% $12.31 23.1% $13.00 30.0% $14.15 41.5%
Fin. Corp. CT 10/1/04 NVSL-NASDAQ $10.80 8.0% $10.81 8.1% $10.80 8.0% $11.00 10.0%
SI Financial Group, Inc. CT 10/1/04 SIFI-NASDAQ $11.20 12.0% $11.06 10.6% $11.03 10.3% $12.10 21.0%
AVERAGES-MUTUAL HOLDING COMPANY CONVERSIONS: $11.06 10.6% $11.20 12.0% $11.33 13.3% $12.31 23.1%
MEDIANS-MUTUAL HOLDING COMPANY CONVERSIONS: $11.00 10.0% $10.94 9.4% $10.92 9.2% $12.05 20.5%
AVERAGES-ALL CONVERSIONS: $10.83 8.3% $10.95 9.5% $10.91 9.1%
MEDIANS-ALL CONVERSIONS: $10.80 8.0% $10.81 8.1% $10.80 8.0%
Note: * - Appraisal performed by RP Financial; "NT" - Not Traded; "NA" - Not
Applicable, Not Available; C/S-Cash/Stock.
(1) Non-OTS regulated thrift.
(2) As a percent of MHC offering for MHC transactions.
(3) Does not take into account the adoption of SOP 93-6.
(4) Latest price if offering is less than one week old.
(5) Latest price if offering is more than one week but less than one month
old.
(6) Mutual holding company pro forma data on full conversion basis.
(7) Simultaneously completed acquisition of another financial institution.
(8) Simultaneously converted to a commercial bank charter.
(9) Former credit union.
November 26, 2004
RP(R) FINANCIAL, LC.
PAGE 4.15
market and, thus, are subject to the same type of acquisition speculation that
may influence the Bank's trading price.
* * * * * * * * * *
In determining our valuation adjustment for marketing of the issue, we
considered trends in both the overall thrift market, the new issue market
including the new issue market for newly-converted issues and the acquisition
market. Taking these factors and trends into account, RP Financial concluded
that a slight upward adjustment was appropriate in the valuation analysis for
purposes of marketing of the issue.
8. MANAGEMENT
OCS' management team appears to have experience and expertise in all of
the key areas of the Bank's operations. Exhibit IV-5 provides summary resumes of
OCS' Board of Directors and senior management. The Bank appears to have the
organizational structure and management depth typically found in institutions of
a similar asset size and complexity of operations. Management and the Board have
been effective in implementing an operating strategy that can be well managed by
the Bank's present organizational structure.
Similarly, the returns, capital positions and other operating measures
of the Peer Group companies are indicative of well-managed financial
institutions, which have Boards and management teams that have been effective in
implementing competitive operating strategies. Therefore, on balance, we
concluded no valuation adjustment relative to the Peer Group was appropriate for
this factor.
9. EFFECT OF GOVERNMENT REGULATION AND REGULATORY REFORM
In summary, as a fully-converted federally-insured institution, OCS will
operate in substantially the same regulatory environment as the Peer Group
members -- all of whom are well capitalized institutions and are operating with
no apparent restrictions. Exhibit IV-6 reflects the Bank's pro forma regulatory
capital ratios, while the Peer Group's regulatory capital ratios were previously
shown in Table 3.2. On balance, no adjustment has been applied for the effect of
government regulation and regulatory reform.
SUMMARY OF ADJUSTMENTS
Overall, based on the factors discussed above, we concluded that the
Bank's pro forma market value should be discounted relative to the Peer Group as
follows:
Key Valuation Parameters Valuation Adjustment
------------------------ --------------------
Financial Condition No Adjustment
Profitability, Growth and Viability of Earnings Moderate Downward
Asset Growth Slight Downward
Primary Market Area No Adjustment
Dividends Slight Downward
Liquidity of the Shares Slight Downward
Marketing of the Issue Slight Upward
Management No Adjustment
Effect of Government Regulations and
Regulatory Reform No Adjustment
VALUATION APPROACHES
In applying the accepted valuation methodology promulgated by the OTS,
i.e., the pro forma market value approach, including the fully-converted
analysis described above, we considered the three key pricing ratios in valuing
the Bank's to-be-issued stock -- price/earnings ("P/E"), price/book ("P/B"), and
price/assets ("P/A") approaches -- all performed on a pro forma basis including
the effects of the conversion proceeds. In computing the pro forma impact of the
conversion and the related pricing ratios, we have incorporated the valuation
parameters disclosed in the Bank's prospectus for reinvestment rate, the
effective tax rate, offering expenses, stock benefit plan assumptions and the
cash payment of $792,000 to TFS (summarized in Exhibits IV-7 and IV-8). We have
adjusted the Bank's September 30, 2004, financial data for the $792,000 cash
payment and withheld this amount from the net proceeds available from
reinvestment for the pro forma earnings calculation. In our estimate of value,
we assessed the relationship of the pro forma pricing ratios relative to the
Peer Group and recent conversions.
RP Financial's valuation placed an emphasis on the following:
o PRICE/EARNINGS ("P/E") APPROACH. The P/E approach is typically a
preferred indicator of long-term value for a stock, and thus the
P/E approach was carefully considered in this valuation. The
usefulness of this approach is limited by the Bank's recent
earnings trends and low level of earnings overall.
RP(R) FINANCIAL, LC.
PAGE 4.17
o PRICE/BOOK ("P/B") APPROACH. P/B ratios have generally served as
a useful benchmark in the valuation of thrift stocks,
particularly in the context of conversion offerings, as the
earnings approach involves assumptions regarding the use of
proceeds. RP Financial considered the P/B approach to be a
valuable indicator of pro forma value taking into account the
pricing ratios under the P/E and P/A approaches. We have also
modified the P/B approach to exclude the impact of intangible
assets (i.e., price/tangible book value or "P/TB"), in that the
investment community frequently makes this adjustment in its
evaluation of this pricing approach.
o PRICE/ASSETS ("P/A") APPROACH. P/A ratios are generally a less
reliable indicator of market value, as investors typically
assign less weight to assets and attribute greater weight to
book value and earnings. Normally, we would give less weight to
the assets approach than the earnings approach, but in OCS'
case, given the less meaningful application of the P/E approach,
we have given more weight to the assets approach. A limitation
to this approach is that there is no accounting for the amount
of stock purchases funded by deposit withdrawals, thus
understating the pro forma P/A ratio. At the same time, the P/A
ratio is an indicator of franchise value, and, in the case of
highly capitalized institutions, high P/A ratios may limit the
investment community's willingness to pay market multiples for
earnings or book value when ROE is expected to be low.
The Bank intends to adopt Statement of Position ("SOP") 93-6, which
causes earnings per share computations to be based on shares issued and
outstanding excluding unreleased ESOP shares. For purposes of preparing the pro
forma pricing analyses, we have reflected all shares issued in the offering,
including all ESOP shares, to capture the full dilutive impact, particularly
since the ESOP shares are economically dilutive, receive dividends and can be
voted. However, we did consider the impact of the adoption of SOP 93-6 in the
valuation.
Based on the application of the three valuation approaches, taking into
consideration the valuation adjustments discussed above, RP Financial concluded
that the pro forma market value of the Bank's conversion stock as of November
26, 2004 was $6,000,000 at the midpoint, equal to 600,000 shares at $10.00 per
share. The following sections describe the application of the valuation
methodology.
PRICE-TO-EARNINGS ("P/E"). The application of the P/E valuation method
requires calculating the Bank's pro forma market value by applying a valuation
P/E multiple to the pro forma earnings base. In applying this technique, we
considered both reported earnings and a
RP(R) FINANCIAL, LC.
PAGE 4.18
recurring earnings base, that is, earnings adjusted to exclude any one-time
non-operating items, plus the estimated after-tax earnings benefit of the
reinvestment of the net proceeds. The Bank's reported earnings equaled $25,000,
and are not considered to provide a meaningful valuation earnings base even
after considering the reinvestment benefit of the net conversion proceeds given
the low pro forma profitability. In adjusting reported earnings, we typically
exclude gains on sale of loans net of applicable income taxes. In the Bank's
case, however, this would be reported in negative core earnings. Moreover,
adjusting the Bank's earnings for the incremental expenses projected as a result
of the termination of the TFS affiliation further reduces the valuation earnings
base. For these reasons, we have not utilized the P/E approach directly but we
have considered the low pro forma profitability in the application of the other
valuation approaches. Since the pro forma P/Es are over 100 times for reported
earnings and not calculable for core earnings, we have indicated these fields in
Table 4.3 as "NM".
PRICE-TO-BOOK ("P/B"). The application of the P/B valuation method
requires calculating the Bank's pro forma market value by applying a valuation
P/B ratio to the Bank's pro forma book value. Consistent with the investment
community, we also consider the price/tangible book ("P/TB"), taking into
account the intangible assets carried on an institution's books. The Bank has no
intangible assets and the intangible assets amount for the Peer Group is
nominal.
Based on the $6.0 million midpoint valuation, the Bank's pro forma P/B
and P/TB ratios both equaled 77.60%. In comparison to the average P/B and P/TB
ratios for the Peer Group of 116.93% and 120.00%, the Bank's ratios at the $6.0
million valuation reflect a discount of 33.6% on a P/B basis and a discount of
35.3% on a P/TB basis. RP Financial considered the discounts under the P/B
approach to be reasonable in light of the valuation adjustments referenced
earlier, and the lack of meaningful multiples pursuant to the earnings approach.
At the supermaximum of the valuation range, the Bank's pro forma P/TB ratio
equaled 84.21%, which is discounted from the Peer Group average and median by
28.0% and 30.0%, respectively.
PRICE-TO-ASSETS ("P/A"). The P/A valuation methodology determines market
value by applying a valuation P/A ratio to the Bank's pro forma asset base,
conservatively assuming no deposit withdrawals are made to fund stock purchases.
In all likelihood there will be deposit withdrawals, which results in
understating the pro forma P/A ratio which is computed herein. At
RP(R) FINANCIAL, LC.
PAGE 4.19
the midpoint of the valuation range, the Bank's value equaled 10.08% of pro
forma assets. Comparatively, the Peer Group companies exhibited an average P/A
ratio of 13.51%, which implies a 25.4% discount for the Bank. At the
supermaximum of the valuation range, the Bank's pro forma P/A equals 12.96%,
which implies a discount of 4.1% for the Bank.
COMPARISON TO RECENT CONVERSIONS
As indicated at the beginning of this chapter, RP Financial's analysis
of recent conversion offering pricing characteristics at closing and in the
aftermarket has been limited to a "technical" analysis and, thus, the pricing
characteristics of recent conversion offerings can not be a primary determinate
of value. Particular focus was placed on the P/TB approach in this analysis,
since the P/E multiples do not reflect the actual impact of reinvestment and the
source of the stock proceeds (i.e., external funds vs. deposit withdrawals).
There has been no standard conversion offering completed within the past three
months. However, the four mutual holding company offerings closed at a fully
converted P/TB ratio of 87.7% and appreciated 12.0% during the first week of
trading. In comparison, the Bank's pro forma P/TB ratio at the midpoint of
77.15% represents a discount of 12.0% from the average fully converted P/TB
ratios of these recent transactions. Importantly, we believe this discount is
appropriate given the Bank's comparatively smaller size, less favorable
profitability and business plan execution risk relative to the companies
completing these recent transactions.
VALUATION CONCLUSION
Based on the foregoing, it is our opinion that, as of November 26, 2004,
the estimated aggregate pro forma market value of the shares to be issued
immediately following the conversion was $6,000,000 at the midpoint. Pursuant to
conversion guidelines, the 15% offering range indicates a minimum value of
$5,100,000 and a maximum value of $6,900,000. Based on the $10.00 per share
offering price, this valuation range equates to an offering of 510,000 shares at
the minimum and 690,000 shares at the maximum. In the event the appraised value
is subject to an increase, the offering range may be increased up to a super
maximum value of $7,935,000, or 793,500 shares, without requiring a
resolicitation. The comparative pro forma valuation
RP(R) FINANCIAL, LC.
PAGE 4.20
calculations relative to the Peer Group are shown in Table 4.3 and are detailed
in Exhibit IV-7 and Exhibit IV-8.
RP(R) FINANCIAL, LC.
PAGE 4.21
Table 4.3
Public Market Pricing
Ohio Central Savings and the Comparables
As of November 26, 2004
Market Per Share Data
Capitalization --------------
---------------- Core Book Pricing Ratios(3)
Price/ Market 12 Month Value/ ----------------------------------------
Financial Institution Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/Core
- --------------------- -------- ------ -------- ------ --- --- --- ---- ------
($) ($Mil) ($) ($) (x) (%) (%) (%) (x)
Ohio Central Savings
- --------------------
Superrange $10.00 $7.93 $0.06 $11.87 N.M. 84.21% 12.93% 84.21% N.M.
Maximum $10.00 $6.90 $0.06 $12.35 N.M. 80.95% 11.41% 80.95% N.M.
Midpoint $10.00 $6.00 $0.06 $12.89 N.M. 77.60% 10.05% 77.60% N.M.
Minimum $10.00 $5.10 $0.06 $13.70 N.M. 73.49% 8.66% 73.49% N.M.
All Public Companies(7)
- -----------------------
Averages $22.72 $395.74 $1.02 $14.16 18.47x 164.94% 17.75% 180.21% 19.81x
Medians - - - - 17.47x 155.47% 15.22% 170.41% 18.28x
All Non-MHC State of OH(7)
- --------------------------
Averages $17.69 $90.51 $0.61 $12.95 22.78x 138.87% 15.43% 148.01% 24.94x
Medians - - - - 22.71x 137.91% 15.00% 145.40% 26.63x
Comparable Group Averages
- -------------------------
Averages $15.22 $20.68 $0.73 $13.05 20.81x 116.93% 13.51% 120.00% 20.67x
Medians - - - - 20.79x 112.86% 13.18% 113.66% 19.89x
Comparable Group
- ----------------
AMFC AMB Financial Corp. of
Munster IN $14.50 $14.22 $1.04 $13.41 14.80x 108.13% 9.21% 108.13% 13.94x
BRBI Blue River Bancshares
of IN $5.35 $18.22 $0.05 $4.77 N.M. 112.16% 8.53% 143.43% N.M.
CIBI Community Inv. Bancorp,
Inc. of OH $14.77 $15.94 $0.73 $12.38 18.94x 119.31% 13.02% 119.31% 20.23x
FFDF FFD Financial Corp. of
Dover OH $15.25 $18.12 $0.38 $14.09 26.29x 108.23% 13.33% 108.23% N.M.
FBTC First BancTrust Corp.
of IL $12.25 $30.63 $0.42 $10.89 23.56x 112.49% 13.63% 112.49% 29.17x
GTPS Great American Bancorp
of IL $25.50 $18.74 $1.67 $23.59 15.18x 108.10% 11.98% 111.21% 15.27x
HCFC Home City Financial Corp.
of OH $15.19 $12.52 $0.78 $15.03 19.23x 101.06% 8.17% 103.54% 19.47x
HWEN Home Financial Bancorp
of IN $6.00 $8.14 $0.35 $5.26 22.22x 114.07% 12.83% 114.07% 17.14x
HLFC Home Loan Financial Corp.
of OH $21.00 $35.47 $0.93 $13.40 20.79x 156.72% 22.12% 156.72% 22.58x
NEIB Northeast Indiana Bancorp
of IN $21.90 $31.21 $1.12 $18.23 18.56x 120.13% 13.65% 120.13% 19.55x
PBNC PFS Bancorp Inc. of
Aurora IN $15.21 $22.40 $0.58 $13.43 26.22x 113.25% 19.08% 113.25% 26.22x
PSFC Peoples Sidney Financial
Corp. of OH $15.75 $22.57 $0.68 $12.16 23.16x 129.52% 16.62% 129.52% 23.16x
Dividends(4) Financial Characteristics(6)
--------------------------- --------------------------------------------------
Amount/ Payout Total Equity/ NPAs/ Reported Core
Financial Institution Share Yield Ratio(5) Assets Assets Assets ROA ROE ROA ROE
- --------------------- ----- ----- -------- ------ ------ ------ --- --- --- ---
($) (%) (%) ($Mil) (%) (%) (%) (%) (%) (%)
Ohio Central Savings
- --------------------
Superrange $0.00 0.00% 0.00% $61 15.35% 0.04% 0.07% 0.48% 0.07% 0.48%
Maximum $0.00 0.00% 0.00% $61 14.10% 0.04% 0.07% 0.47% 0.07% 0.47%
Midpoint $0.00 0.00% 0.00% $60 12.96% 0.05% 0.06% 0.46% 0.06% 0.46%
Minimum $0.00 0.00% 0.00% $59 11.79% 0.05% 0.05% 0.45% 0.05% 0.45%
All Public Companies(7)
- -----------------------
Averages $0.47 2.06% 34.86% $2,524 10.80% 0.54% 0.79% 8.38% 0.71% 7.27%
Medians - - - - - - - - - -
All Non-MHC State of OH(7)
- --------------------------
Averages $0.51 2.87% 59.32% $633 11.03% 0.84% 0.57% 5.48% 0.48% 4.65%
Medians - - - - - - - - - -
Comparable Group Averages
- -------------------------
Averages $0.38 2.30% 39.10% $156 11.42% 1.25% 0.63% 5.41% 0.61% 5.24%
Medians - - - - - - - - - -
Comparable Group
- ----------------
AMFC AMB Financial Corp. of
Munster IN $0.24 1.66% 23.08% $154 8.52% 1.37% 0.64% 7.58% 0.68% 8.04%
BRBI Blue River Bancshares
of IN $0.00 0.00% 0.00% $214 7.60% 1.99% 0.11% 1.32% 0.09% 1.10%
CIBI Community Inv. Bancorp,
Inc. of OH $0.36 2.44% 49.32% $122 10.92% N.A. 0.69% 6.36% 0.65% 5.95%
FFDF FFD Financial Corp. of
Dover OH $0.44 2.89% N.M. $136 12.32% N.A. 0.50% 4.06% 0.33% 2.66%
FBTC First BancTrust Corp.
of IL $0.24 1.96% 57.14% $225 12.12% 1.03% 0.58% 4.91% 0.47% 3.97%
GTPS Great American Bancorp
of IL $0.44 1.73% 26.35% $157 11.08% 0.02% 0.78% 7.07% 0.77% 7.03%
HCFC Home City Financial Corp.
of OH $0.44 2.90% 56.41% $153 8.08% N.A. 0.43% 5.43% 0.42% 5.36%
HWEN Home Financial Bancorp
of IN $0.12 2.00% 34.29% $63 11.25% 2.69% 0.60% 5.28% 0.77% 6.85%
HLFC Home Loan Financial Corp.
of OH $0.78 3.71% N.M. $160 14.11% N.A. 1.10% 7.63% 1.01% 7.03%
NEIB Northeast Indiana Bancorp
of IN $0.60 2.74% 53.57% $229 11.36% 0.72% 0.75% 6.27% 0.71% 5.95%
PBNC PFS Bancorp Inc. of
Aurora IN $0.30 1.97% 51.72% $117 16.85% N.A. 0.72% 3.37% 0.72% 3.37%
PSFC Peoples Sidney Financial
Corp. of OH $0.56 3.56% N.M. $136 12.83% 0.96% 0.70% 5.60% 0.70% 5.60%
(1) Average of High/Low or Bid/Ask price per share.
(2) EPS (estimate core basis) is based on actual trailing 12 month data,
adjusted to omit non-operating items (including the SAIF assessment) on a
tax-effected basis, and is shown on a pro forma basis where appropriate.
(3) P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB =
Price to tangible book value; and P/Core = Price to core earnings.
(4) Indicated 12 month dividend, based on last quarterly dividend declared.
(5) Indicated 12 month dividend as a percent of trailing 12 month estimated
core earnings.
(6) ROA (return on assets) and ROE (return on equity) are indicated ratios
based on trailing 12 month common earnings and average common equity and
total assets balances.
(7) Excludes from averages and medians those companies the subject of actual or
rumored acquisition activities or unusual operating characteristics.
Source: Corporate reports, offering circulars, and RP Financial, LC.
calculations. The information provided in this report has been obtained
from sources we believe are reliable, but we cannot guarantee the
accuracy or completeness of such information.
Copyright (c) 2004 by RP(R) Financial, LC.