<PAGE>
Rule 424(b)(3)
Registration No. 33-96248
[LENOX SAVINGS BANK LETTERHEAD]
NOTICE OF SPECIAL MEETING
TO BE HELD ON JUNE 26,1996
NOTICE IS HEREBY GIVEN that a Special Meeting ("Special Meeting") of the
Members of Lenox Savings Bank (the "Bank") will be held at the Bank's office
located at 5255 Beech Street, St. Bernard, Ohio, at 5:00 p.m., Cincinnati
Time, on June 26, 1996, to consider and vote upon:
1. The Plan of Conversion ("Plan") pursuant to which the Bank will be
converted from an Ohio chartered mutual savings bank to an Ohio chartered
stock savings bank, with the concurrent issuance and sale of all of the
Bank's outstanding capital stock to Lenox Bancorp, Inc. (the "Company") and
the issuance and sale of the Company's common stock to the public; and other
transactions provided for in the Plan including the adoption of Amended
Articles of Incorporation and Constitution of the Bank:
2. Such other business as may properly come before the Special Meeting
or any adjournment thereof.
NOTE: Management is not aware of any such other business.
The Board of Directors has fixed April 30, 1996 as the record date
("Voting Record Date") for the determination of members entitled to notice of
and to vote at the Special Meeting and at any adjournment thereof. All of the
Bank's depositors and borrowers as of April 30, 1996 are members of the Bank.
Only those members of the Bank of record as of the close of business on April
30, 1996, the Voting Record Date, will be entitled to vote at the Special
Meeting or any such adjournment. A copy of the Plan of Conversion, which
includes the proposed Ohio Stock Articles of Incorporation and Constitution
may be obtained by promptly marking and returning the enclosed request card.
By Order of the Board of Directors
/s/ RICHARD C. HARMEYER
Richard C. Harmeyer
Secretary
St. Bernard, Ohio
May 14, 1996
<PAGE>
SPECIAL MEETING OF MEMBERS OF THE BANK
PURPOSE OF THE SPECIAL MEETING
This Prospectus and Proxy Statement is being furnished to members of
Lenox Savings Bank in connection with the solicitation by the Board of
Directors of proxies to be voted at the Special Meeting of Members of the
Bank (the "Special Meeting") to be held on June 26, 1996, at the Bank's
office located at 5255 Beech Street, St. Bernard, Ohio, at 5:00 p.m.,
Cincinnati Time, and at any adjournments thereof. The Special Meeting is
being held for the purpose of considering and voting upon the Plan of
Conversion.
VOTING IN FAVOR OF OR AGAINST THE PLAN OF CONVERSION INCLUDES A VOTE FOR
OR AGAINST THE ADOPTION OF THE AMENDED ARTICLES OF INCORPORATION AND
CONSTITUTION OF THE BANK.
VOTING IN FAVOR OF THE PLAN OF CONVERSION WILL NOT OBLIGATE ANY PERSON
TO PURCHASE ANY STOCK.
VOTING RIGHTS AND VOTES REQUIRED FOR APPROVAL
The Board of Directors of the Bank has fixed April 30, 1996 as the
voting record date (the "Voting Record Date") for the determination of
members entitled to notice of and to vote at the Special Meeting. All of the
Bank's depositors and each borrower as of April 30, 1996 are members of the
Bank under its current Constitution. All of the Bank's depositors and
borrowers as of the close of business on the Voting Record Date will be
entitled to vote at the Special Meeting or any adjournment thereof.
Each depositor will be entitled at the Special Meeting to cast one vote
for each $100, or fraction thereof, of the aggregate withdrawal value of all
of such member's deposit accounts in the Bank as of the Voting Record Date
and each borrower as of the Voting Record Date will be entitled to one vote
in addition to any other vote the borrower may otherwise have.
In accordance with Ohio law, approval of the Plan of Conversion will
require the affirmative vote of three-fifths of the total outstanding votes
of the Bank's members eligible to be cast at the Special Meeting. As of the
Voting Record Date for the Special Meeting, the Bank had 3,723 depositor
members who are entitled to cast a total of 341,683 votes eligible to be cast
at the Special Meeting and there are 970 borrower members eligible to cast a
total of 970 votes in addition to any other votes the borrowers may have at
the Special Meeting for a total of 342,653 votes eligible to be cast at the
Special Meeting.
Deposits held in trust or other fiduciary capacity may be voted by the
trustee or other fiduciary to whom voting rights are delegated under the
trust instrument or other governing document or applicable law. In the case
of IRA and Keogh trusts established at the Bank, the beneficiary may direct
the trustee's vote on the Plan of Conversion by returning a completed proxy
card to the Bank. If no proxy card is returned, the trustee will vote in
favor of the Plan of Conversion on behalf of such beneficiary.
P-2
<PAGE>
PROXIES
The Bank's members may vote at the Special Meeting or at any adjournment
thereof in person or by proxy. Enclosed is a proxy card which may be used by
any member to vote on the Plan of Conversion. All properly executed proxies
received by the Bank will be voted in accordance with the instruction
indicated thereon by the members giving such proxies. IF NO INSTRUCTIONS ARE
GIVEN, EXECUTED PROXIES WILL BE VOTED FOR ADOPTION OF THE PLAN OF CONVERSION.
If any other matters are properly presented at the Special Meeting and may
properly be voted on, all proxies will be voted on such matters in accordance
with the best judgment of the proxy holders named therein. Management is not
aware of any other business to be presented at the Special Meeting.
REVOCABILITY OF PROXIES
A proxy may be revoked at any time before it is voted by filing written
revocation of the proxy with the Secretary of the Bank, by submitting a duly
executed proxy bearing a later date or by attending and voting in person at
the Special Meeting or any adjournment thereof. The presence of a member at
the Special Meeting shall not revoke a proxy unless a written revocation is
filed with the Secretary of the Bank prior to the voting of such Proxy. The
proxies being solicited by the Board of Directors of the Bank are only for
use at the Special Meeting and at any adjournment thereof and will not be
used for any other meeting.
SOLICITATION OF PROXIES
To the extent necessary to permit approval of the Plan of Conversion,
proxies may be solicited by officers, directors or regular employees of the
Bank, by telephone or through other forms of communication and, if necessary,
the Special Meeting may be adjourned to a later date. Such persons will be
reimbursed by the Bank for their reasonable out-of-pocket expenses incurred
in connection with such solicitation. The Company has retained Trident
Securities, Inc. to provide advisory services in connection with the
conversion, including solicitation of proxies, for an aggregate fee of
$65,000 plus reimbursement of reasonable out-of-pocket expenses. See "The
Conversion - Marketing and Underwriting Arrangements." The Company will bear
all costs of this solicitation.
REASONS FOR CONVERSION
See "Summary - Reasons for Conversion" and "Conversion - Purposes of
Conversion" and "-Effects of Conversion" in the attached Proxy Statement and
Prospectus for discussions of the basis upon which the Board determined to
undertake the proposed Conversion. As more fully discussed in those sections
and in other sections of the Proxy Statement and Prospectus, the Board
believes that the Plan of Conversion is equitable to the account holders and
to the Bank.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ADOPTION OF THE
PLAN OF CONVERSION.
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<PAGE>
PROSPECTUS AND PROXY STATEMENT
[LENOX BANCORP, INC. LOGO]
(Proposed Holding Company for Lenox Savings Bank)
575,000 Shares of Common Stock
$10.00 Purchase Price Per Share
Lenox Bancorp, Inc. (the "Company" or "Lenox Bancorp"), an Ohio
corporation, is offering up to 575,000 shares of its common stock, without par
value per share (the "Common Stock"), in connection with the conversion of Lenox
Savings Bank (the "Bank" or "Lenox") from an Ohio chartered mutual savings bank
to an Ohio chartered stock savings bank pursuant to the Bank's plan of
conversion (the "Plan" or "Plan of Conversion"). The simultaneous conversion of
the Bank to stock form, the issuance of the Bank's stock to the Company and the
offer and sale of the Common Stock by the Company are herein referred to as the
"Conversion." In certain circumstances, the Company may increase the amount of
Common Stock offered hereby to 661,250 shares. See footnote 5 to the table
below.
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK HAVE BEEN
GRANTED, IN ORDER OF PRIORITY, TO EACH OF THE BANK'S ELIGIBLE ACCOUNT HOLDERS,
TO THE ESOP, TO THE BANK'S SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS, AND TO CERTAIN
OTHER MEMBERS, (EACH AS DEFINED HEREIN) IN A SUBSCRIPTION OFFERING (THE
"SUBSCRIPTION OFFERING"). SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS
FOUND TO BE TRANSFERRING SUBSCRIPTION RIGHTS WILL BE SUBJECT TO THE FORFEITURE
OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"). Subject to the prior rights of
holders of subscription rights, the shares of Common Stock not subscribed for in
the Subscription Offering may be offered for sale in a community offering to
certain members of the general public, with preference given to natural persons
residing in Hamilton, Warren, Butler and Clermont Counties, Ohio (the Bank's
"Local Community") (the "Community Offering"). The Community Offering, if one
is held, is expected to begin immediately following the termination of the
Subscription Offering, but may begin at any time during the Subscription
Offering (the Subscription Offering and Community Offering, if any, are referred
to collectively as the "Subscription and Community Offerings"). It is
anticipated that shares not subscribed for in the Subscription and Community
Offerings will be offered to members of the general public in a syndicated
community offering (the "Syndicated Community Offering") (the Subscription and
Community Offerings and the Syndicated Community Offering are referred to
collectively as the "Offerings"). (CONTINUED ON THE FOLLOWING PAGE)
THE SECURITIES OFFERED ARE SUBJECT TO INVESTMENT RISKS, INVOLVING POSSIBLE
LOSS OF THE PRINCIPAL INVESTED.
A SUMMARY DESCRIPTION OF THE COMPANY, THE BANK, THE PLAN AND THE OFFERINGS
AND CERTAIN SUMMARY FINANCIAL INFORMATION ARE PROVIDED AT PAGES 3-19.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" ON PAGES 20 - 29.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE OHIO
DIVISION OF FINANCIAL INSTITUTIONS OR ANY OTHER FEDERAL OR STATE AGENCY OR
ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, CORPORATION,
DIVISION OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS AND PROXY STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ESTIMATED UNDERWRITING
COMMISSIONS AND OTHER FEES
PURCHASE PRICE (1) AND EXPENSES (2) ESTIMATED NET PROCEEDS (3)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share. . . . . . . . . . . . . . $10.00 .90(4) $9.10(4)
- --------------------------------------------------------------------------------------------------------------------
Total Minimum(1) . . . . . . . . . . $4,250,000 $450,000 $3,800,000
- --------------------------------------------------------------------------------------------------------------------
Total Midpoint(1). . . . . . . . . . $5,000,000 $450,000 $4,550,000
- --------------------------------------------------------------------------------------------------------------------
Total Maximum(1) . . . . . . . . . . $5,750,000 $450,000 $5,300,000
- --------------------------------------------------------------------------------------------------------------------
Total Maximum, as adjusted(5). . . . $6,612,500 $450,000 $6,162,500
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
______________________________
TRIDENT SECURITIES, INC.
THE DATE OF THIS PROSPECTUS AND PROXY STATEMENT IS MAY 13, 1996.
<PAGE>
(COVER PAGE CONTINUED)
THE SUBSCRIPTION OFFERING WILL TERMINATE AT 12:00 NOON, CINCINNATI TIME, ON
JUNE 26, 1996 (THE "EXPIRATION DATE") UNLESS EXTENDED BY THE BANK AND THE
COMPANY, WITH APPROVAL OF THE FDIC AND THE OHIO DIVISION OF FINANCIAL
INSTITUTIONS (THE "DIVISION") IF NECESSARY. The Community Offering, if any,
will terminate within 45 days after the close of the Subscription Offering,
unless extended with the consent of the FDIC and Division, if necessary.
Subscriptions paid by cash, check, bank draft or money order will be placed in a
segregated account at the Bank and will earn interest at the Bank's statement
savings rate of interest from the date of receipt until completion or
termination of the Conversion. Payments authorized by withdrawal from deposit
accounts at the Bank will continue to earn interest at the contractual rate
until the Conversion is completed or terminated; these funds will be otherwise
unavailable to the depositor until such time. Orders submitted are irrevocable
unless otherwise determined by the Company and the Bank on a case by case basis;
provided that, if the Conversion is not completed within 45 days after the close
of the Subscription and Community Offerings, unless such period has been
extended with the consent of the FDIC and the Division, if necessary, all
subscribers will have their funds returned promptly with interest, and all
withdrawal authorizations will be cancelled. If an extension of time has been
granted, all subscribers will be notified of such extension, and of any rights
to confirm their subscriptions, or to modify or rescind their subscriptions and
have their funds returned promptly with interest, and of the time period within
which the subscriber must notify the Bank of his intention to confirm, modify or
rescind his subscription. A resolicitation of subscribers will also be made if
the pro forma market value of the Common Stock is either more than 15% above the
maximum of the Estimated Price Range or less than the minimum of the Estimated
Price Range. If an affirmative response to any resolicitation is not received
by the Bank and the Company from a subscriber, such order will be rescinded and
all funds will be returned promptly with interest. Such extensions may not go
beyond March 26, 1997. See "The Conversion - Subscription Offering and
Subscription Rights" and "-Procedure for Purchasing Shares in Subscription and
Community Offerings." Funds on deposit with the Bank, which depositors intend
to use for the purchase of Common Stock will continue to be insured by the FDIC
in accordance with applicable FDIC regulations and limitations until such funds
are used for the purchase of shares of Common Stock at the close of the
Conversion at which time such funds will no longer be insured by the FDIC. The
Bank has engaged Trident Securities, Inc. ("Trident") as financial advisor and
to assist in the sale of shares of Common Stock, on a best efforts basis, in the
Offerings. See "Risk Factors - Absence of Market For Common Stock" and "The
Conversion - Marketing and Underwriting Arrangements."
The Bank is a mutual savings bank and, therefore, has never issued stock.
Consequently, as of the date of this Prospectus and Proxy Statement, no public
market exists for the Common Stock to be issued in the Conversion. The Bank has
requested that Trident undertake to match offers to buy and offers to sell the
Common Stock, and Trident intends to list the Common Stock over-the-counter
through the National Daily Quotation Service "Pink Sheet" published by the
National Quotation Bureau, Inc. However, a public trading market will depend
upon the presence in the market place of both willing buyers and willing sellers
at any given time. Due to the relatively small size of the offering, it is
highly improbable that a stockholder base sufficiently large to create an active
trading market will develop and be maintained. THEREFORE, A PURCHASER OF THE
COMMON STOCK SHOULD HAVE A LONG-TERM INVESTMENT INTENT AND SHOULD RECOGNIZE THAT
THE ABSENCE OF AN ACTIVE TRADING MARKET MAY MAKE IT DIFFICULT TO SELL THE COMMON
STOCK AFTER THE CONVERSION AND MAY HAVE AN ADVERSE EFFECT ON THE PRICE OF THE
COMMON STOCK. SEE "RISK FACTORS - ABSENCE OF MARKET FOR COMMON STOCK" AND
"MARKET FOR THE COMMON STOCK."
- ---------------
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, Inc. ("RP Financial") dated March 1, 1996, which states
that the aggregate estimated pro forma market value of the Common
Stock ranged from $4,250,000 to $5,750,000, with a midpoint of
$5,000,000 (the "Valuation Range"). The independent appraisal of RP
Financial is based upon estimates and projections that are subject to
change and the valuation must not be construed as a recommendation as
to the advisability of purchasing such shares nor that a purchaser
will thereafter be able to sell such shares at prices in the range of
the foregoing valuation. Based on the Valuation Range, the Board of
Directors (the "Board of Directors") established the estimated price
range of $4.25 million to $5.75 million (the "Estimated Price Range"),
or between 425,000 and 575,000 shares of Common Stock at the $10.00
price per share (the "Purchase Price") to be paid for each share of
Common Stock subscribed for or purchased in the offerings. See "The
Conversion - Stock Pricing" and "-Number of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Company arising
from the Conversion, including estimated fixed expenses of $450,000
including the management fee to be paid to Trident of $65,000. See
"The Conversion - Marketing and Underwriting Arrangements." See "Pro
Forma Data" for the assumptions used to arrive at these estimates.
The actual fees and expenses may vary from the estimates. Fees paid
to Trident may be deemed to be underwriting fees.
(3) Actual net proceeds may vary substantially from estimated amounts
depending on the number of shares sold in each of the offerings and
other factors. Includes the purchase of shares of Common Stock by the
Lenox Savings Bank Employee Stock Ownership Plan and related trust
(the "ESOP") funded by a loan from the Company to the ESOP, which will
initially be deducted from the Company's stockholders' equity. See
"Use of Proceeds," "Pro Forma Data" and "The Conversion - Stock
Pricing."
(4) Estimated at the midpoint. The estimated net proceeds at the minimum,
maximum and maximum, as adjusted are expected to be $8.94, $9.22 and
$9.32, respectively.
(5) As adjusted to reflect the sale of up to an additional 15% of the
Common Stock which may be offered at the Purchase Price, without
resolicitation of subscribers or any right of cancellation, due to
regulatory considerations, changes in the market and general financial
and economic conditions. See "Pro Forma Data" and "The Conversion -
Stock Pricing." For a discussion of the distribution and allocation
of the additional shares, if any, see "The Conversion - Subscription
Offering and Subscription Rights," "-Community Offering" and
"-Limitations on Common Stock Purchases."
2
<PAGE>
SUMMARY OF THE CONVERSION AND THE OFFERINGS
THE FOLLOWING SUMMARY OF THE CONVERSION AND THE OFFERINGS IS QUALIFIED IN
ITS ENTIRETY BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS AND PROXY STATEMENT.
Risk Factors . . . . . . . . A purchase of the Common Stock involves a
substantial degree of risk. Eligible Account
Holders, Supplemental Eligible Account
Holders, Other Members and other prospective
investors should carefully consider the
matters set forth under "Risk Factors." The
shares of Common Stock offered hereby are not
insured by the FDIC or any other government
agency.
Lenox Bancorp, Inc.. . . . . Lenox Bancorp, Inc. (the "Company") is an Ohio
corporation organized at the direction of
Lenox Savings Bank (the "Bank") to become a
savings and loan holding company and own all
of the Bank's capital stock to be issued upon
its conversion from mutual form to stock form.
To date, the Company has not engaged in any
business. Its executive office is located at
5255 Beech Street, St. Bernard, Ohio 45217 and
its telephone number is 513-242-6900.
Lenox Savings Bank . . . . . Lenox Savings Bank is an Ohio chartered mutual
savings bank. At December 31, 1995, the Bank
had total assets of $43.1 million, total
liabilities of $39.3 million and net retained
earnings of $3.8 million. The Bank is located
at 5255 Beech Street, St. Bernard, Ohio
45217, and its telephone number is
513-242-6900.
The Conversion . . . . . The Board of Directors of the Bank has adopted
a Plan of Conversion pursuant to which the
Bank intends to convert to a state-chartered
stock savings bank and issue all of its stock
to the Company. The Company is offering
shares of its Common Stock in the Offerings in
connection with the Bank's Conversion.
Management believes the Conversion offers a
number of advantages, including: (i) the
ability to attract new customers; (ii) the
ability to provide future access to capital
markets; (iii) the ability to increase its
presence in the communities it serves through
the acquisition or establishment of branch
offices or the acquisition of smaller
financial institutions, although the Bank has
no current understanding or agreement for the
acquisition of any specific financial
institution or the acquisition or
establishment of new branch offices; and (iv)
the ability to provide affordable home
financing opportunities to the communities it
serves or diversify into other financial
services to the extent permissible under
applicable law and regulations.
Terms of the Offering . . . . The shares of Common Stock of the Company to
be issued in connection with the Conversion
are being offered at $10.00 per share in the
Subscription Offering pursuant to subscription
rights in the following order of priority:
(i) holders of deposit accounts with a balance
of $50 or more ("Qualifying Deposit") as of
December 31, 1993 ("Eligible Account
Holders"); (ii) the Bank's tax-qualified
employee stock ownership plan ("ESOP"); (iii)
depositors who had a Qualifying Deposit on
March 31, 1996 ("Supplemental Eligible Account
Holders"); and (iv) other members of the Bank,
consisting of depositors of the Bank and
borrowers with loans outstanding, in each case
as of April 30, 1996, the voting record date
for the special meeting of members to vote on
the Conversion, other than members who
otherwise qualify as Eligible Account Holders
or Supplemental Eligible Account Holders
("Other
3
<PAGE>
Members"). Concurrently, and subject to the
prior rights of holders of subscription
rights, any shares of Common Stock not
subscribed for in the Subscription Offering
are being offered in the Community Offering at
$10.00 per share to certain members of the
general public with a preference given to
natural persons residing in the Bank's Local
Community. Subscription rights will expire if
not exercised by 12:00 Noon, Cincinnati Time,
on June 26, 1996, unless extended by the Bank
and the Company. Neither the Company nor the
Bank are making a recommendation with respect
to the purchase of shares of Common Stock
hereunder. Investors should base their
decision solely on information contained in
this Prospectus and Proxy Statement and
following consultation with their own
investment adviser.
Exercise of Subscription
Rights . . . . . . . . . . . Forms to order Common Stock offered in the
Subscription Offering and the Community
Offering will be preceded or accompanied by a
Prospectus and Proxy Statement. Any person
receiving an order form who desires to
subscribe for shares must do so prior to the
Expiration Date by delivering to the Bank a
properly executed order form together will
full payment. Once tendered, subscription
orders cannot be revoked or modified without
the consent of the Bank. See "The Conversion
- Procedure for Purchasing Shares in
Subscription and Community Offerings."
Payment for Shares . . . . . Payment for subscriptions may be made (i) in
cash (if delivered in person); (ii) by check,
bank draft or money order; or (iii) by
authorization of withdrawal from deposit
accounts maintained at the Bank. See
"Conversion - Procedure for Purchasing Shares
in Subscription and Community Offerings."
Nontransferability of
Subscription Rights. . . . The subscription rights of Eligible Account
Holders, Supplemental Eligible Account
Holders, Other Members and the ESOP are
nontransferable. See "The Conversion -
Restrictions on Transfer of Subscription
Rights and Shares."
Purchase Limitations. . . With the exception of the ESOP, no Eligible
Account Holder, Supplemental Eligible Account
Holder or Other Member may purchase in the
Subscription Offering more than $60,000 of the
aggregate value of shares of Common Stock
offered. No person may purchase in the
Community Offering more than $60,000 of the
aggregate value of the shares of Common Stock
offered. Except for the ESOP, no person,
together with affiliates and persons acting in
concert, may purchase in the Offerings more
than $60,000 of the aggregate value of the
shares of Common Stock offered. The minimum
purchase is 25 shares of Common Stock.
Securities Offered and
Purchase Price . . . . . . . The Company is offering between 425,000 and
575,000 shares of Common Stock (subject to
adjustment) at a Purchase Price of $10.00 per
share. See "The Conversion - Stock Pricing"
and "- Number of Shares to be Issued."
Appraisal . . . . . . . . The subscription price per share has been
fixed at $10.00. The total number of shares
to be issued in the Conversion is based upon
an independent appraisal prepared by RP
Financial, Inc., dated as of March 1, 1996,
which states that the estimated pro forma
market value of the Common Stock ranged from
$4,250,000 to $5,750,000. The final aggregate
value will be determined at the time of
closing of the Offerings and is subject to
change due to changing market conditions and
other factors. See "The Conversion."
4
<PAGE>
Use of Proceeds . . . . . . Initially, a portion of net proceeds retained
by the Company are expected to be invested in
overnight interest-bearing deposits, short-
term investment-grade marketable securities
and mortgage-backed or mortgage-related
securities, and the remaining portion is
expected to be loaned to the ESOP to provide
the ESOP's initial funding. On a longer-term
basis, net proceeds retained by the Company
are expected to be used for general business
activities. The net proceeds contributed to
the Bank initially will be invested in
overnight interest-bearing deposits, short-
term investment-grade marketable securities
and mortgage-backed or mortgage-related
securities. The Bank will use the funds
contributed to it for general business
activities.
Dividend Policy. . . . . . . Upon Conversion, the Board of Directors of the
Company will have the authority to declare
dividends on the Common Stock, subject to
statutory and regulatory requirements. In the
future, the Board of Directors of the Company
may consider a policy of paying cash dividends
on the Common Stock. However, no decision has
been made with respect to such dividends, if
any.
Benefits of the Conversion
to Management . . . . . . . . Among the benefits to the Bank and the Company
anticipated from the Conversion is the ability
to attract and retain personnel through the
prudent use of stock options and other stock
related benefit programs. Subsequent to the
Conversion, the Company intends to adopt Stock
Programs and Stock Option Plans for the
benefit of directors, officers and employees.
The adoption of the Stock Programs and the
Stock Option Plans and initial awards
thereunder will be subject to stockholders'
approval which the Company intends to seek to
obtain at the first meeting of stockholders.
If the Stock Programs are approved by the
stockholders, non-employee directors, officers
and employees of the Bank could be granted up
to 4% of the number of shares of Common Stock
issued in the Conversion, at no cost to the
recipients. These shares will be acquired
either through open market purchases, or from
authorized but unissued Common Stock. If the
Stock Option Plans are approved by the
shareholders, directors, officers and
employees could be granted stock options for
up to 10% of the number of shares of Common
Stock issued in the Conversion, at an exercise
price equal to the market price of the shares
of Common Stock, at the time of grant. The
Stock Programs and the Stock Option Plans will
not be implemented unless approved by the
stockholders of the Company. For a further
description of the Stock Programs and Stock
Option Plans, see "Management of the Bank."
In connection with the Conversion, the Bank
and the Company will enter into three year
employment agreements with Ms. Porowski (the
"Executive"). Under the Agreement the base
salary for the Executive will be $62,500, and
change in control provisions provide
compensation of the greater of (i) the
payments due for the remaining term of the
agreement; or (ii) three times the average of
the five preceding taxable years'
compensation. The Bank and the Company would
also continue the Executive's life, health and
disability coverage for thirty-six months.
Notwithstanding that both agreements provide
for a severance payment in the event of a
change in control, the Executive would only be
entitled to receive a severance payment under
one agreement.
5
<PAGE>
Voting Control of Officers
and Directors. . . . . . . . Directors and executive officers of the Bank
and the Company expect to purchase
approximately 4.08% or 3.02% of shares of
Common Stock outstanding based upon the
minimum and the maximum of the Estimated Price
Range, respectively. Additionally, assuming
the implementation of the ESOP and approval by
stockholders of the Stock Programs and Option
Plans, directors, executive officers and
employees have the potential to control the
voting of approximately 23.7% or 22.7% of the
Company's common stock at the minimum and the
maximum of the Estimated Price Range,
respectively.
Expiration Date for the
Subscription Offering. . . The Expiration Date for the Subscription
Offering is 12:00 Noon Cincinnati Time on June
26, 1996 unless extended by the Bank and the
Company. See "The Conversion - Subscription
Offering and Subscription Rights."
Expiration Date for the
Community Offering . . . . The Expiration Date for the Community Offering
is 12:00 Noon Cincinnati Time on June 26,
1996, unless extended by the Bank and the
Company. See "The Conversion - Community
Offering."
Market for Stock. . . . . As a mutual institution, the Bank has never
issued capital stock and, consequently, there
is no existing market for the Common Stock.
The Bank has requested that Trident undertake
to match offers to buy and offers to sell the
Common Stock, and Trident intends to list the
Common Stock over-the-counter through the
National Daily Quotation Service "Pink Sheet"
published by the National Quotation Bureau,
Inc.
No Board Recommendations. . The Bank's Board of Directors is not making
any recommendations to depositors or other
potential investors regarding whether such
person should purchase the Common Stock. An
investment in the Common Stock must be made
pursuant to each investor's evaluation of his
or her best interests.
Conversion Center . . . . If you have any questions regarding
Conversion, call the Conversion Center at
513-242-4690.
6
<PAGE>
[MAP PRESENTING THE LOCATION IN
HAMILTON COUNTY, OHIO OF LENOX
SAVINGS BANK APPEARS ON THIS PAGE]
7
<PAGE>
SUMMARY
This summary is qualified in its entirety by the more detailed information
and Financial Statements of the Bank and Notes thereto appearing elsewhere in
this Prospectus and Proxy Statement.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors.
LENOX BANCORP, INC.
Lenox Bancorp, Inc. is an Ohio corporation organized by the Bank for the
purpose of acquiring all of the capital stock of the Bank to be issued in the
Conversion. Immediately following the Conversion, the only significant assets
of the Company will be the capital stock of the Bank, the Company's loan to the
Bank's Employee Stock Ownership Plan ("ESOP"), and the net conversion proceeds
retained by the Company. The Company will purchase all of the capital stock of
the Bank to be issued upon the Conversion in exchange for 50% of the net
conversion proceeds with the remaining net proceeds to be retained by the
Company. Funds retained by the Company will be used for general business
activities, including a loan by the Company directly to the ESOP to enable the
ESOP to purchase shares in the Conversion. On an interim basis, the net
Conversion proceeds are expected to be invested in overnight interest-bearing
deposits, short-term investment grade marketable securities and mortgage-backed
or mortgage-related securities. The Company may also utilize net proceeds for
expansion activities, including the acquisition or establishment of branch
offices and the acquisition of other financial institutions, although the
Company has no pending arrangements or agreements regarding the acquisition of
any specific financial institutions or branch offices. See "Use of Proceeds"
and "Regulation and Supervision - FDIC Regulations." The business of the
Company will initially consist of the business of the Bank. See "Business of
the Bank" and "Regulation and Supervision - Holding Company Regulation." The
Company's executive offices are located at the office of the Bank at 5255 Beech
Street, St. Bernard, Ohio 45217. The Company's telephone number is
(513) 242-6900.
LENOX SAVINGS BANK
The Bank was originally chartered in 1887 as an Ohio building and loan
company for the primary purpose of serving the financial needs of the employees
of the Procter & Gamble Company ("Procter & Gamble"). The Bank later converted
to an Ohio savings and loan company and in November 1993, converted to an Ohio
savings bank under its current name. Since the chartering of the Bank in 1887,
the Bank's one office has been located on Procter & Gamble property directly
across the street from Procter & Gamble's Ivorydale factory. Additionally, the
Bank has ATMs located at various Procter & Gamble facilities throughout Hamilton
County. The Bank's close proximity to the Procter & Gamble factory, the
availability of direct payroll deductions for savings accounts and the repayment
of loans and the location of its ATMs have been significant factors in the
amount of business the Bank conducts with Procter & Gamble employees. At
December 31, 1995, approximately 79% of the Bank's total deposit accounts and
approximately 64% of its residential mortgage loans since 1994 and approximately
82% of the consumer loans in the Bank's portfolio were with Procter & Gamble
employees who primarily reside in and around Hamilton County. See "Risk Factors
- - Lending and Deposit Concentrations." Recently, both the Bank and Procter &
Gamble have taken steps to sever certain of the exclusive relationships enjoyed
by the Bank. For example, until 1995, the Bank paid no rent to Procter & Gamble
for the use of the property the Bank operated from; however, the Bank recently
entered into a lease arrangement through December 31, 1999 with Procter & Gamble
pursuant to which the Bank must pay rent averaging $21,000 per year.
8
<PAGE>
See "Risk Factors - Potential Decreases in Earnings." As a result, the Bank
has sought to expand the products and services offered by the Bank and
expects to attract new customers not affiliated with Procter & Gamble. The
Bank's efforts have been primarily to advertise its new products throughout
its primary market area, which consists primarily of Hamilton County, Ohio,
but also includes Warren, Butler and Clermont Counties, Ohio. The net
proceeds raised by the Conversion will further enhance the Bank's ability to
attract new customers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Management Strategy" and
"Business of the Bank." At December 31, 1995, the Bank had total assets of
$43.1 million, total liabilities of $39.3 million and net retained earnings
of $3.8 million. The Bank is regulated by the Division and the FDIC, and its
deposits are insured up to the maximum allowable amount by the Savings
Association Insurance Fund ("SAIF") of the FDIC.
The Bank's business primarily consists of accepting deposits from customers
within its primary market area and investing those funds in mortgage loans
secured by one- to four-family residences. The Bank also makes consumer loans,
including loans secured by automobiles, boats, common stock and savings accounts
as well as unsecured loans. At December 31, 1995, the Bank's loan portfolio,
net totaled $33.4 million or 77.4% of total assets. In addition to its lending
activities, the Bank also invests in U.S. Government and Agency securities,
corporate debt securities and mortgage-backed securities. At December 31, 1995,
the Bank's investment and mortgage-backed securities portfolio totaled $7.7
million, or 17.9% of total assets, all of which were classified as available for
sale. At December 31, 1995, the Bank's deposits totaled $33.7 million, or 85.7%
of total liabilities.
REASONS FOR CONVERSION
The Bank, as an Ohio mutual savings bank, does not have shareholders and
has no authority to issue capital stock. By converting to the capital stock
form of organization, the Bank will be structured in the form used by commercial
banks, other business entities and a growing number of savings institutions.
The Conversion may enhance the Bank's ability to: attract customers not
affiliated with Procter & Gamble; access capital markets; increase its presence
in the communities it serves through the acquisition or establishment of branch
offices or the acquisition of smaller financial institutions, although the Bank
has no current understanding or agreement for the acquisition of any specific
financial institution or the acquisition or establishment of new branch offices;
provide affordable home financing opportunities to the communities it serves or
diversify into other financial services to the extent permissible under
applicable law and regulation. In particular, the increase in the Bank's
capital as a result of the Conversion will enhance the ability of the Bank to
meet the needs of the communities it serves by, among other things, permitting
the Bank to increase its one- to four-family residential mortgage lending,
subject to the demand for such loans, competitive considerations and other
relevant factors. See "Risk Factors - Potential Decreases in Earnings,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management Strategy" and "Business of the Bank - Market Area and
Competition" for a discussion of specific market and competitive factors
affecting the Bank and the Bank's strategy for addressing these factors.
THE CONVERSION AND THE SUBSCRIPTION AND COMMUNITY OFFERINGS
On July 6, 1995, the Board of Directors of the Bank adopted the Plan of
Conversion pursuant to which the Bank is converting from an Ohio mutual savings
bank to an Ohio chartered stock savings bank. All of the outstanding capital
stock of the Bank will be acquired by the Company in exchange for 50% of the net
Conversion proceeds. The Conversion and the Offerings are subject to FDIC and
Division approval, which was received on May 14 and March 26, 1996,
respectively, and approval of the Bank's members at a special meeting to be held
on June 26, 1996. See "The Conversion - General." The Bank is converting to
increase its capital and structure itself in a form used by many commercial
banks and
9
<PAGE>
other business entities and a growing number of savings institutions. The
Conversion may enhance the Bank's ability to attract customers not affiliated
with Procter & Gamble, access capital markets, expand its current operations,
acquire other financial institutions or branch offices (although there are no
current plans to make such acquisitions), provide affordable home financing
opportunities to the communities it serves or diversify into other financial
services to the extent permissible under applicable law and regulation. The
holding company form of organization, if used, will provide additional
flexibility to diversify the Bank's business activities through newly formed
subsidiaries, or through acquisitions of or mergers with other financial
institutions, as well as other companies. See "The Conversion - General" for
a discussion of reasons why the holding company structure may not be
utilized. Although there are no current arrangements, understandings or
agreements regarding any such opportunities, the Company will be in a
position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any such opportunities
that may arise. The holding company form of organization also provides
certain anti-takeover protection. See "Risk Factors - Certain Anti-Takeover
Provisions."
Common Stock will be offered in the Subscription and Community Offerings
and, to the extent shares are available, in the Syndicated Community Offering.
Common Stock offered in the Subscription Offering will be offered in the
following order of priority: (1) depositors whose accounts in the Bank totaled
$50 or more ("Qualifying Deposit") on December 31, 1993 ("Eligible Account
Holders"); (2) the ESOP; (3) depositors who had a Qualifying Deposit on March
31, 1996 ("Supplemental Eligible Account Holders"); and (4) other members of the
Bank, consisting of depositors of the Bank and borrowers with loans outstanding,
in each case as of April 30, 1996, the voting record date ("Voting Record Date")
for the special meeting of members to vote on the Conversion, other than those
members who otherwise qualify as Eligible Account Holders or Supplemental
Eligible Account Holders ("Other Members"). In the event subscribers exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of shares eligible for subscription, shares shall be allocated in
full, to the extent possible in each category of priority beginning with
Eligible Account Holders. When all subscriptions by those in a particular level
of priority cannot be filled in full, the remaining shares of Common Stock shall
be allocated among the remaining subscribers in that category so as to permit
each remaining subscriber, to the extent possible, to purchase a number of
shares sufficient to make his or her total allocation equal to the lesser of 100
shares or the number of shares subscribed for. Additional allocations will be
made until all Common Stock is allocated. See "The Conversion - Subscription
Offering and Subscription Rights." Subject to the prior rights of holders of
subscription rights, Common Stock not subscribed for in the Subscription
Offering may be offered in the Community Offering to certain members of the
general public, with preference given to natural persons residing in the Bank's
Local Community. The Company and the Bank reserve the absolute right to reject
or accept any orders in the Community Offering, in whole or in part. The
Community Offering, if one is held, is expected to begin immediately after the
Expiration Date, but may begin at anytime during the Subscription Offering. All
shares of Common Stock not purchased in the Subscription Offering or the
Community Offering, if any, may be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Trident acting as agent of the Bank and the Company.
The Company and the Bank reserve the absolute right to reject orders in whole or
part in their sole discretion in the Syndicated Community Offering. Funds on
deposit with the Bank that depositors intend to use for the purchase of Common
Stock will continue to be insured by the FDIC in accordance with applicable FDIC
regulations and limitations until such funds are used for the purchase of shares
of Common Stock at the close of the Conversion at which time such funds will no
longer be insured by the FDIC. Neither Trident nor any registered broker-dealer
shall have any obligation to take or purchase any shares of the Common Stock in
the Subscription Offering, Community Offering or Syndicated Community Offering.
Subscription rights will expire if not exercised by 12:00 noon, Cincinnati Time,
on June 26, 1996, unless extended by the Bank and the Company. See "The
Conversion - Subscription Offering and
10
<PAGE>
Subscription Rights" and "-Community Offering." The Bank and the Company
have hired Trident as consultant and advisor in connection with the Offerings
and to assist in soliciting subscriptions and purchase orders in the
Offerings. Trident has not independently verified the appraisal prepared by
RP Financial or prepared any analysis relating to the fairness of the price
of the Common Stock or the advisability of purchasing the Common Stock as an
investment. See "The Conversion - Marketing and Underwriting Arrangements"
and "Market for the Common Stock."
PROSPECTUS AND PROXY STATEMENT DELIVERY AND PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a prospectus and proxy statement at
least 48 hours prior to the Expiration Date in accordance with Rule 15c2-8 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), no
Prospectus and Proxy Statement will be mailed any later than five days prior to
such date or hand delivered any later than two days prior to such date.
Execution of the order form will confirm receipt or delivery in accordance with
Rule 15c2-8. Order forms will only be distributed with a Prospectus and Proxy
Statement. The Company and Bank are not obligated to accept for processing
orders which are submitted on facsimilied or copied order forms. Order forms
unaccompanied by an executed certification form will not be accepted. Payment
by check, money order, bank draft, cash or debit authorization to an existing
account at the Bank must accompany the order form. No wire transfers will be
accepted. The Bank is prohibited from lending funds to any person or entity for
the purpose of purchasing shares of Common Stock in the Conversion. See "The
Conversion - Procedure for Purchasing Shares in Subscription and Community
Offerings."
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December 31,
1993), Supplemental Eligibility Record Date (March 31, 1996) and/or the Voting
Record Date (April 30, 1996) must list all accounts on the stock order form,
giving all names on each account and the account numbers. Failure to list all
such account numbers may result in the inability of the Company or the Bank to
fill all or part of a subscription order. See "The Conversion - Procedure for
Purchasing Shares in Subscription and Community Offerings."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
NO PERSON MAY TRANSFER OR ENTER INTO ANY AGREEMENT OR UNDERSTANDING TO
TRANSFER THE LEGAL OR BENEFICIAL OWNERSHIP OF THE SUBSCRIPTION RIGHTS ISSUED
UNDER THE PLAN OR THE SHARES OF COMMON STOCK TO BE ISSUED UPON THEIR EXERCISE.
EACH PERSON EXERCISING SUBSCRIPTION RIGHTS WILL BE REQUIRED TO CERTIFY THAT A
PURCHASE OF COMMON STOCK IS SOLELY FOR THE PURCHASER'S OWN ACCOUNT AND THAT
THERE IS NO AGREEMENT OR UNDERSTANDING REGARDING THE SALE OR TRANSFER OF SUCH
SHARES. THE COMPANY AND THE BANK WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES IN THE EVENT THEY BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS
AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE TRANSFER OF SUCH RIGHTS.
SEE "THE CONVERSION - RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND
SHARES."
FOLLOWING THE CONVERSION THERE GENERALLY WILL BE NO RESTRICTIONS ON THE
TRANSFER OR SALE OF SHARES BY PURCHASERS OTHER THAN AFFILIATES OF THE COMPANY
AND THE BANK. SEE "REGULATION AND SUPERVISION - FEDERAL SECURITIES LAWS," AND
"THE CONVERSION - CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER
CONVERSION."
11
<PAGE>
PURCHASE LIMITATIONS
The minimum purchase in the Offerings is 25 shares. The ESOP intends to
subscribe for up to 8% of the shares of Common Stock issued in the Conversion
pursuant to the subscription rights granted under the Plan. No Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member, in their capacity
as such, may subscribe in the Subscription Offering for more than $60,000 of the
aggregate value of shares of Common Stock offered, exclusive of any shares
issued pursuant to an increase in the Estimated Price Range of up to 15%; no
person, together with associates of or persons acting in concert with such
person, may purchase in the Community Offering and the Syndicated Community
Offering in the aggregate more than $60,000 of the aggregate value of shares of
Common Stock offered, exclusive of any shares issued pursuant to an increase in
the Estimated Price Range of up to 15%; and no person, together with associates
of or persons acting in concert with such person, may purchase more than the
overall maximum purchase limitation of $60,000 of the aggregate value of shares
of Common Stock offered, exclusive of any shares issued pursuant to an increase
in the Estimated Price Range of up to 15%. At any time during the Conversion
and without further approval by the Bank's members or the resolicitation of
subscribers, the Company and the Bank may in their sole discretion decrease the
amount that may be subscribed for in the Subscription and Community Offerings
below $60,000 of the aggregate value of shares of Common Stock offered.
Additionally, at any time during the Conversion and without further approval by
the Bank's members or the resolicitation of subscribers, the Company and Bank
may in their sole discretion increase the overall maximum purchase limitation,
and increase the amount that may be subscribed for in the Subscription and
Community Offerings, up to 5% of the shares offered or, if orders for Common
Stock exceeding 5% of the total offering of shares do not exceed in the
aggregate 10% of the total shares offered, up to 9.99%. Under certain
circumstances, certain subscribers may be resolicited in the event of any such
increase or decrease. See "The Conversion - Limitations on Common Stock
Purchases." See "The Conversion - Community Offering." In the event of an
increase in the total number of shares up to 15% above the maximum of the
Estimated Price Range, the additional shares attributable to such increase will
be distributed and allocated to fill unfilled orders in the Subscription and
Community Offerings, without any resolicitation of subscribers, as described in
"The Conversion - Subscription Offering and Subscription Rights" and "-
Limitations on Common Stock Purchases."
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
Federal and state regulations require that the aggregate purchase price of
the Common Stock to be issued in the Conversion be consistent with an
independent appraisal of the estimated pro forma market value of the Common
Stock following Conversion. RP Financial, Inc., an independent appraiser, has
advised the Bank that in its opinion, dated March 1, 1996, the aggregate
estimated pro forma market value of the Common Stock ranged from $4,250,000 to
$5,750,000, with a midpoint of $5,000,000. The Board of Directors of the Bank
has established the Estimated Price Range of $4.25 million to $5.75 million,
assuming the issuance of 425,000 shares to 575,000 shares of Common Stock at the
Purchase Price of $10.00 per share. THE APPRAISAL OF THE COMMON STOCK IS NOT
INTENDED AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE
ADVISABILITY OF PURCHASING SUCH STOCK NOR CAN ANY ASSURANCE BE GIVEN THAT
PURCHASERS OF THE COMMON STOCK IN THE CONVERSION WILL BE ABLE TO SELL SUCH
SHARES AFTER THE COMPLETION OF THE CONVERSION AT OR ABOVE THE PURCHASE PRICE.
THE APPRAISAL IS AVAILABLE AT THE BANK'S OFFICE FOR REVIEW BY MEMBERS OF THE
BANK.
All shares of Common Stock issued in the Conversion will be sold at the
Purchase Price, as determined by the Bank and approved by the Company. The
actual number of shares to be issued in the Conversion will be determined by the
Company and the Bank based upon the final updated valuation of the estimated pro
forma market value of the Common Stock, giving effect to the Conversion, at the
completion of the Offerings. The number of shares to be issued is expected to
range from a minimum
12
<PAGE>
of 425,000 shares to a maximum of 575,000 shares. Subject to approval of the
FDIC and the Division, the Estimated Price Range may be increased or
decreased to reflect regulatory or market and economic conditions prior to
the completion of the Conversion, and under such circumstances the Company
and the Bank may increase or decrease the number of shares of Common Stock to
be issued in the Conversion. The maximum of the Estimated Price Range may be
increased by up to 15% and the number of shares of Common Stock to be issued
in the Conversion may be increased to 661,250 shares due to regulatory
considerations, changes in the market and general financial and economic
conditions. No resolicitation of subscribers will be made and subscribers
will not be permitted to modify or cancel their subscriptions unless the
gross proceeds from the sale of the Common Stock are less than the minimum or
more than 15% above the maximum of the current Estimated Price Range. See
"Pro Forma Data," "Risk Factors - Possible Increase in Estimated Price Range
and Number of Shares Issued" and "The Conversion - Stock Pricing" and
"-Number of Shares to be Issued."
USE OF PROCEEDS
Net proceeds from the sale of the Common Stock are estimated to be between
$3.8 million and $5.3 million (or $6.16 million if the Estimated Price Range is
increased by 15%) depending on the number of shares sold and the expenses of the
Conversion. See "Pro Forma Data." The Company will purchase all of the
outstanding capital stock of the Bank to be issued upon Conversion in exchange
for 50% of the net Conversion proceeds with the remaining net proceeds to be
retained by the Company. Net proceeds to be retained by the Company after the
purchase of the capital stock of the Bank are estimated to be between $1.9
million and $2.6 million (or $3.1 million if the Estimated Price Range is
increased by 15%) without regard to the funding of the loan to the ESOP by the
Company. The Company will be unable to utilize any of the net proceeds of the
Offerings until the close of the Conversion. Funds retained by the Company will
be used for general business activities, including a loan by the Company
directly to the ESOP and, subject to applicable limitations, the possible
payment of dividends and repurchases of Common Stock. Assuming the acquisition
by the ESOP of 8% of the shares to be issued in the Conversion, the amount of
the loan to the ESOP is estimated to be between $340,000 and $460,000 (or
$529,000 if the Estimated Price Range is increased by 15%) to be repaid over a
10 year period at an interest rate of 8.75%. See "Management of the Bank -
Benefits - Employee Stock Ownership Plan and Trust." In determining the amount
of net proceeds to be used for the purchase of the capital stock of the Bank,
consideration was given to such factors as the regulatory capital position of
the Bank (both before and after the Conversion) and the rules and regulations of
the FDIC and the Division governing the amount of proceeds which may be retained
by the Company. Funds received by the Bank from the Company's purchase of its
capital stock will be used for general business purposes. The Company and the
Bank intend to explore opportunities to expand operations through the
acquisition or establishment of branch offices and the acquisition of other
financial institutions; however, neither the Bank nor the Company has any
pending agreements or understandings regarding acquisitions of any specific
financial institutions or branch offices. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Management
Strategy." On an interim basis, the Company and Bank intend to invest the net
Conversion proceeds in overnight interest-bearing deposits, short-term
investment grade marketable securities and mortgage-backed or mortgage-related
securities. See "Use of Proceeds."
DIVIDENDS
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. In the future, the Board of Directors of the Company
may consider a policy of paying cash dividends on the Common Stock. However, no
decision has been made with respect to such dividends, if any. Declarations of
dividends by the Board of Directors will depend upon a number of factors,
including the amount of the
13
<PAGE>
net proceeds retained by the Company in the Conversion, investment
opportunities available to the Company or the Bank, capital requirements,
regulatory limitations, the Company's and the Bank's financial condition and
results of operations, tax considerations and general economic conditions.
See "Dividend Policy."
BENEFITS TO MANAGEMENT AND DIRECTORS
It is currently anticipated that the Company and the Bank will enter into
employment agreements or change in control agreements with certain officers of
the Company and the Bank. In addition, it is anticipated that the Company and
the Bank will adopt stock benefit plans for the benefit of management and
directors. See "Risk Factors - Benefits to Management and Directors" and
"Management of the Bank - Employment Agreements" and "-Change in Control
Agreements," "-Benefits - Stock Option Plans," "-Benefits - Stock Programs."
VOTING CONTROL OF OFFICERS AND DIRECTORS
Directors and officers of the Bank currently expect to purchase
approximately 4.08% or 3.02% of the shares of Common Stock outstanding based
upon the minimum and the maximum of the Estimated Price Range, respectively.
Additional shares could be acquired through the Stock Option Plans and Stock
Programs, if adopted by the Board and approved by shareholders. See "Risk
Factors - Voting Control of Officers and Directors" and "Subscriptions by
Executive Officers and Directors."
14
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF THE BANK
The selected financial and other data of the Bank set forth below is
derived in part from, and should be read in conjunction with, the Financial
Statements of the Bank and Notes thereto presented elsewhere in this
Prospectus and Proxy Statement.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets............................ $43,149 $39,891 $42,162 $42,314 $40,960
Total liabilities....................... 39,301 36,152 38,531 39,027 37,998
Loans, net(1)........................... 33,384 31,605 28,204 28,796 29,351
Mortgage-backed securities(2)........... 1,083 787 5,582 6,319 6,286
Cash and cash equivalents............... 1,249 1,979 3,228 2,457 1,489
Investments(2)(3)....................... 6,639 5,026 4,681 4,440 3,548
Deposits................................ 33,669 35,526 38,120 38,744 37,808
Borrowings.............................. 5,328 447 259 85 44
Retained earnings....................... 3,848 3,739 3,631 3,286 2,962
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income......................... $2,981 $2,726 $3,169 $3,500 $3,676
Interest expense........................ 1,848 1,604 1,827 2,230 2,635
------ ------ ------ ------ ------
Net interest income.................... 1,133 1,122 1,342 1,270 1,041
Provision (credit) for loan losses...... (2) -- 6 4 8
------ ------ ------ ------ ------
Net interest income after
provision for loan losses............ 1,135 1,122 1,336 1,266 1,033
Non-interest income.................... 102 70 144 97 85
Non-interest expense................... 1,198 1,046 969 893 815
------ ------ ------ ------ ------
Income before income taxes............. 39 146 511 470 303
Income taxes........................... 10 38 166 146 96
------ ------ ------ ------ ------
Net income............................ $ 29 $ 108 $ 345 $ 324 $ 207
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
(CONTINUED ON NEXT PAGE)
15
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS(4):
Return on average assets.................... .07% .27% .83% .77% .52%
Return on average equity.................... .77 2.91 9.95 10.35 7.24
Average equity to average assets............ 9.11 9.13 8.30 7.45 7.14
Equity to total assets at year end.......... 8.92 9.37 8.61 7.77 7.23
Average interest rate spread(5)............. 2.49 2.53 2.92 2.69 2.07
Net interest margin(6)...................... 2.82 2.85 3.28 3.09 2.62
Average interest-earning assets
to average interest-bearing
liabilities................................ 107.19 107.73 108.23 107.31 108.32
Non-interest expense to average assets...... 2.88 2.57 2.32 2.13 2.03
REGULATORY CAPITAL RATIOS(4)(7):
Tier I leverage............................. 8.9 9.5 8.8 7.8 7.2
Total capital to risk-weighted capital...... 17.7 19.6 20.0 17.9 16.1
ASSET QUALITY RATIOS(4):
Non-performing assets as a percent
of total assets(8)......................... .21 .23 .26 .35 .67
Non-performing loans as a percent
of gross loans(8)(9)..................... .27 .29 .39 .51 .93
Allowance for loan losses as a
percent of gross loans(9).................. .18 .21 .23 .20 .20
Allowance for loan losses as a percent
of non-performing loans(8)................. 66.87 71.17 59.86 38.39 21.79
</TABLE>
___________________________________
(1) The allowance for loan losses at December 31, 1995, 1994, 1993, 1992 and
1991 was (in thousands) $60, $66, $66, $57, and $60, respectively.
(2) The Bank's investments and mortgage-related securities are classified as
"available for sale" at December 31, 1995. The Bank adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" on January 1, 1994. See
Footnote 1 to the Financial Statements of the Bank.
(3) Includes FHLB stock and certificates of deposit.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end of year ratios.
With the exception of end of year ratios, all ratios are based on average
monthly balances.
(5) The interest rate spread represents the difference between the weighted-
average yield on interest-earning assets and the weighted-average cost of
interest-bearing liabilities.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation and Supervision - Capital
Requirements." See "Regulatory Capital Compliance" for the Bank's pro
forma capital levels as a result of the Offerings.
(8) Non-performing assets consist of loans 90 days or more overdue and not
accruing interest. See "Business of the Bank."
(9) Gross loans include loans, less loans in process, allowance for loan losses
and deferred loan origination fees.
16
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth certain recent consolidated financial data
of the Bank at and for the periods indicated. Consolidated financial data at
March 31, 1996 and for the three months ended March 31, 1996 and 1995 are
unaudited. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation have been
included. The results of operations for the three month period ended March
31, 1996 are not necessarily indicative of the results of operations for the
fiscal year ending December 31, 1996.
AT AT
MARCH 31, DECEMBER 31,
1996 1995
-------- ------------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA: (UNAUDITED)
Total assets.......................... $44,461 $43,149
Total liabilities..................... 40,660 39,301
Loans, net(1)......................... 33,056 33,384
Mortgage-backed securities(2)......... 1,641 1,083
Cash and cash equivalents............. 1,527 1,249
Investments(2)(3)..................... 7,392 6,639
Deposits.............................. 34,463 33,669
Borrowings............................ 5,971 5,328
Retained earnings..................... 3,801 3,848
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
---------- -----------
(IN THOUSANDS)
SELECTED OPERATING DATA: (UNAUDITED)
Interest income......................... $794 $690
Interest expense........................ 483 414
---- ----
Net interest income(3)............... 311 276
Non-interest income..................... 25 31
Non-interest expense.................... 260 265
---- ----
Income before income taxes.............. 76 42
Income taxes............................ 25 12
---- ----
Net income............................ $ 51 $ 30
---- ----
---- ----
(CONTINUED ON NEXT PAGE)
17
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<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
1996 1995
---------- -----------
(UNAUDITED)
<S> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS(4):
Return on average assets 0.47% 0.30%
Return on average equity 5.37 3.19
Average equity to average assets 8.78 9.43
Equity to total assets at end of period 8.55 9.33
Average interest rate spread(5) 2.76 2.52
Net interest margin(6) 3.01 2.86
Average interest-earning assets to
average interest-bearing liabilities 105.40 108.12
Non-interest expense to average assets 2.41 2.65
REGULATORY CAPITAL RATIOS(4)(7):
Tier I leverage 8.56 9.33
Total capital to risk-weighted capital 18.16 19.47
ASSET QUALITY RATIOS(4):
Non-performing assets as a percent of total assets(8) 0.21 0.02
Non-performing loans as a percent of gross loans (8)(9) 0.28 0.02
Allowance for loan losses as a percent of gross loans(9) 0.18 0.21
Allowance for loan losses as a percent of non-performing loans (8) 63.44 957.14
</TABLE>
___________________________________
(1) The allowance for loan losses at March 31, 1996 and December 31, 1995 was
(in thousands) $60 and $60, respectively. No provision for loan losses was
made for the quarter ended March 31, 1996.
(2) The Bank's investments and mortgage-related securities are classified as
"available for sale" at December 31, 1995. The Bank adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" on January 1, 1994. See
Footnote 1 to the Financial Statements of the Bank.
(3) Includes FHLB stock and certificates of deposit.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods and are annualized
where appropriate.
(5) The interest rate spread represents the difference between the weighted-
average yield on interest-earning assets and the weighted-average cost of
interest-bearing liabilities.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation and Supervision - Capital
Requirements." See "Regulatory Capital Compliance" for the Bank's pro
forma capital levels as a result of the Offerings.
(8) Non-performing assets consist of loans 90 days or more overdue and not
accruing interest. See "Business of the Bank."
(9) Gross loans include loans, less loans in process, allowance for loan losses
and deferred loan origination fees.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Total assets increased $1.30 million, or 3.0%, to $44.5 million at March
31, 1996 from $43.2 million at December 31, 1995. The increase can be
attributable to increases in mortgage-backed securities, cash and cash
equivalents, and investments. Mortgage-backed securities increased $560,000,
or 51.8%, to $1.64 million from $1.08 million at December 31, 1995. Cash and
cash equivalents increased $280,000 or 22.3% to $1.53 million from $1.25
million at December 31, 1995. Investments increased $750,000, or 11.3%, to
$7.39 million at March 31, 1996 from $6.64 million at December 31, 1995.
Deposits increased $790,000, or 2.3%, to $34.5 million at March 31, 1996
from $33.7 million at December 31, 1995.
Retained earnings decreased $47,000, or 1.2%, to $3.80 million at March
31, 1996 from $3.85 million at December 31, 1995. This decrease occurred
despite net income increasing $51,000. The decrease was due to unrealized
losses in the Bank's investment portfolio caused by an increase in market
interest rates. At March 31, 1996, the Bank had $18,000 of unrealized losses
in its investment portfolio compared to an unrealized gain of $80,000 at
December 31, 1995.
Net income for the three months ended March 31, 1996 increased $21,000
to $51,000 from $30,000 for the three months ended March 31, 1995. The
increase in net income was primarily due to an increase in net interest
income. Net interest income increased due to total interest income expanding
faster than total interest expense. Total interest income increased
$104,000, or 15.1%, to $794,000 for the three months ended March 31, 1996
from $690,000 for the three months ended March 31, 1995. Total interest
expense increased $69,000, or 16.7%, to $483,000 for the three months ended
March 31, 1996 from $414,000 for the three months ended March 31, 1995.
Non-performing loans totalled $93,000 at March 31, 1996, up from $7,000
at March 31, 1995. This was due to two one- to four-family mortgage loans
that were in foreclosure. The ratio of non-performing loans to total loans
was 0.28% at March 31, 1996 compared to 0.02% at March 31, 1995.
19
<PAGE>
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus and Proxy Statement, should be considered by investors in
deciding whether to purchase the Common Stock offered hereby.
LENDING AND DEPOSIT CONCENTRATIONS
At December 31, 1995, approximately 99.5% of the Bank's total real
estate loans were secured by properties located in Hamilton, Butler, Warren
and Clermont Counties, located in southwest Ohio. At that date, Procter &
Gamble employees accounted for approximately 64% of the residential mortgage
loans the Bank has made since 1994 and approximately 82% of the consumer
loans in the Bank's portfolio. Furthermore, approximately 79% of the Bank's
total deposit accounts at December 31, 1995 were those of Procter & Gamble
employees. A concentration of loans secured by properties in any single area
presents the risk that any adverse change in the local economic or employment
conditions may result in increased loan delinquencies and loan losses. This
risk is exacerbated where there is a high concentration of loans to borrowers
with the same employer. The Bank attempts to address this risk by relying
upon conservative underwriting practices when considering loans, frequently
reviewing general economic information relating to Hamilton County and
closely monitoring Procter & Gamble's operations and the company's
relationship to its employees. A high concentration of depositors who have
the same employer bears additional risks in that any restructuring and
downsizing by that employer may result in people moving away and withdrawing
their funds from the Bank or depleting their savings, which could adversely
affect the Bank's liquidity and earnings because the Bank will have fewer
funds to invest unless it is able to replace those deposits. See "Potential
Decreases in Earnings."
POTENTIAL DECREASES IN EARNINGS
Potential Adverse Effects of Severing Certain Exclusive Relationships
With Procter & Gamble. In prior years, because the Bank was originally
chartered for the primary purpose of serving the financial needs of employees
of Procter & Gamble, the Bank was not required to pay rent to Procter &
Gamble for the use of the property the Bank operates from, which is located
directly across from Procter & Gamble's Ivorydale factory. However, in 1995,
Procter & Gamble negotiated a lease arrangement with the Bank pursuant to
which the Bank must pay market value rent to Procter & Gamble averaging
$21,000 per year through December 31, 1999. The Bank does not currently
anticipate moving from its current location. Consequently, earnings in
fiscal 1995 and thereafter will reflect an increase in non-interest expense
resulting from the lease payments to Procter & Gamble. See "Business of the
Bank - Properties." See also "Summary - Lenox Savings Bank" for more
information related to the Bank's relationship to Procter & Gamble.
Additionally, Procter & Gamble recently announced that it has agreed to
permit a Cincinnati-based commercial bank, whose consolidated assets exceeded
$9.0 billion as of September 30, 1995, to establish a branch office in one of
Procter & Gamble's facilities with the possible option to permit further
branching opportunities at other Procter & Gamble facilities. The commercial
bank would be able to offer products and services not currently available
from the Bank. It is unknown whether the commercial bank will establish
branches at other facilities and, if so, the date on which such facilities
will be opened. However, the significant asset size of the Cincinnati-based
bank, its access to Procter & Gamble employees and the availability of
additional products and services may adversely affect the ability of the Bank
to maintain deposit and loan relationships with Procter & Gamble employees in
the future, particularly if the commercial bank establishes additional
branches at other Procter & Gamble facilities. The Bank's liquidity and
earnings could be adversely affected by further decreases in deposits because
20
<PAGE>
the funds the Bank will have available to invest will decrease. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management Strategy."
Decrease in Deposits/Increased Reliance on Borrowings. Finally, the low
rates paid on deposits in recent periods have caused financial institutions,
including the Bank, to lose core deposits as customers sought higher yields
from competitors in the securities markets, mutual funds and other
alternative investments. Reflecting this trend, the Bank's total deposits,
excluding the effects of interest credited, decreased by $3.5 million, or
9.9%, and $4.2 million, or 10.9%, for the years ended December 31, 1995 and
1994, respectively. In addition, during periods of rising interest rates,
such as that experienced in 1994, the rates paid by the Bank on deposits may
not rise as quickly as rates on certain alternative investments, thus
increasing the Bank's vulnerability to disintermediation (the flow of funds
from the Bank). As a result of the decrease in deposits, the Bank has
increased its borrowings from the Federal Home Loan Bank of Cincinnati ("FHLB
- - Cincinnati") as a means to fund its recent loan growth. Borrowings from
the FHLB - Cincinnati, while not subject to FDIC deposit insurance premiums,
generally carry a higher average cost than deposits and therefore may
adversely affect earnings. In addition, the Bank's deposit costs may
increase as a result of the Bank's efforts to attract new customers not
affiliated with Procter & Gamble.
POTENTIAL EXPANSION STRATEGY
The portion of the net proceeds used by the Company to acquire all of
the capital stock of the Bank will be added to the Bank's general funds to be
used for general corporate purposes. The Bank may also use such funds for
the expansion of its facilities, and to expand operations through
acquisitions of other financial institutions, branch offices or other
financial services companies. The net proceeds retained by the Company may
also be used to support the future expansion of operations through branch
acquisitions and the acquisition of other financial institutions or
diversification into other banking related businesses. However, the Company
and the Bank have no current arrangements, understandings or agreements
regarding any such transactions. In the event the Company and the Bank
decide to pursue deposit growth through the formation of a de novo branch or
the acquisition of an existing branch, such an expansion strategy would not
likely be successful unless the Bank offers deposit rates either consistent
with or at the upper end of the market, which may adversely impact earnings.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as
loans and investments, and its interest expense on interest-bearing
liabilities, such as deposits and other borrowings. The Bank has been
affected by the dramatic changes in interest rates that have occurred in
recent years and will continue to be affected by general changes in levels of
interest rates and other economic factors beyond the Bank's control.
At December 31, 1995, the Bank had $13.2 million of long-term,
fixed-rate mortgage loans, or 44% of the Bank's total loan portfolio, with
average weighted maturities of 11.6 years; 56% of the Bank's total loan
portfolio consisted of ARM loans. Of the $17.1 million of adjustable rate
mortgage ("ARM") loans the Bank held at December 31, 1995, $7.8 million were
tied to the monthly national median cost of funds as reported by the Office
of Thrift Supervision ("OTS"), which lags behind the one-year U.S. Treasury
index, and therefore adjusts more slowly than the cost of the Bank's
interest-bearing liabilities. While this index is favorable to the Bank when
rates are decreasing, it has the opposite effect when rates are increasing.
During 1994, when rates began increasing, loans tied to that index were
adjusting downward in accordance with the lagging index as the Bank's cost of
funds increased, which contributed
21
<PAGE>
to the 69% decrease in net income for fiscal 1994 from fiscal 1993. The Bank
no longer prices its first mortgage ARM loans based on a lagging index, but
that portion of the Bank's loan portfolio will continue to make the Bank more
sensitive to changes in interest rates. The Bank has been further affected
by changes in interest rates because approximately $3.0 million of the ARM
loans tied to the lagging market index were originated when interest rates
were low and were originated with margins of as low as 50 basis points above
the lagging market index. Further, many of the ARM loans, including some of
those tied to the lagging market index, have an annual interest rate
adjustment cap of 1% or less, which has limited the effect the recent
increases in interest rates have on those loans. See "Business of the Bank -
Lending Activities." Finally, the Bank generally has accepted deposits for
considerably shorter terms than its fixed-rate mortgage loans. The majority
of the Bank's certificate of deposit accounts have terms of one year.
Although, management anticipates that substantially all of the Bank's
liabilities which mature or reprice within one year will be retained by the
Bank, the yield on interest-earning assets of the Bank will adjust to changes
in interest rates at a slower rate than the cost of the Bank's
interest-bearing liabilities. As a consequence, any significant increase in
interest rates will have an adverse effect on the Bank's results of
operations. Increases in the level of interest rates also may adversely
affect the amount of loans originated by the Bank and, thus, the amount of
loans and commitment fees, as well as the value of the Bank's investment
securities and other interest-earning assets. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Management
Strategy."
INCREASING OPERATING EXPENSES
The Bank has experienced increases in operating expenses in recent
years, which have been attributable to several factors, including a lack of
growth, maintenance of ATMs at Procter & Gamble facilities at a high cost to
the Bank and high data processing expenses. The Bank has entered into a
contract with a new data processing company at less cost to the Bank and is
in the process of renegotiating or eliminating its ATM contracts with Procter
& Gamble. Previously, the Bank maintained 10 ATMs at Procter & Gamble plants
at no cost to Procter & Gamble. In 1995, the Bank began to negotiate a fee
for the ATMs to cover the costs or eliminate the ATMs. During the fourth
quarter of 1995, four ATMs were eliminated from Procter & Gamble plants. The
remaining six ATM contracts come up for renewal within the next 21 months, at
which time the Bank will either negotiate a fee or eliminate the ATMs. Total
expense relating to the ATMs in fiscal 1995 was $51,000. In addition, 1995
earnings were adversely affected by a lawsuit that was settled by the Bank in
the fourth quarter of 1995. Total expenses relating to the lawsuit were
$104,000. Although management expects new expenses related to increased
regulatory and reporting requirements following the Conversion and costs
associated with stock benefit programs that may be adopted following the
Conversion will offset some of the Bank's recent efforts to reduce expenses,
it is management's intention to carefully monitor expenses in the future.
ANTICIPATED LOW RETURN ON EQUITY FOLLOWING CONVERSION
At December 31, 1995, the Bank's ratio of equity to assets was 8.9%. On
a pro forma basis at December 31, 1995, assuming the sale of the midpoint of
500,000 shares of Common Stock in the Conversion, the Company's ratio of
equity to assets would have been approximately 16.6%. With such a high
capital position as a result of the Conversion, it is doubtful that the
Company will be able to quickly deploy the capital raised in the Conversion
by increasing its deposits and loans and thereby generate earnings to support
its high level of capital, and, as a result, it is expected that the
Company's return on equity initially will be below industry norms.
Consequently, investors expecting a return on equity which will meet or
exceed industry standards for the foreseeable future should carefully
evaluate and consider the risk of a subpar return on equity.
22
<PAGE>
VALUATION NOT INDICATIVE OF FUTURE PRICE OF COMMON STOCK
The final aggregate purchase price of the Common Stock in the Conversion
will be based upon an independent appraisal. Such valuation is not intended,
and must not be construed, as a recommendation of any kind as to the
advisability of purchasing such shares of Common Stock. Because such
valuation is necessarily based upon estimates and projections of a number of
matters, all of which are subject to change from time to time, no assurance
can be given that persons purchasing shares of Common Stock in the Conversion
will thereafter be able to sell such shares at or above the Purchase Price.
See "The Conversion -Stock Pricing and Number of Shares to be Issued."
POTENTIAL COST OF ESOP AND STOCK PLANS
It is anticipated that the ESOP will purchase 8% of the Common Stock
sold in the Conversion with funds borrowed from the Company. The cost of
acquiring the ESOP shares will be $340,000, $400,000, $460,000 and $529,000
at the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively. In addition, it is possible that, following
the Conversion and subject to regulatory and stockholder approval, the
Company will implement the Stock Plans, under which employees and directors
could be awarded (at no cost to them) an aggregate amount of Common Stock
equal to 4% of the shares issued in the Conversion. Assuming the sale in the
Conversion of the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, and assuming the shares of Common Stock to be
awarded under the Stock Plans cost the Purchase Price of $10.00 per share,
the reduction to stockholders' equity of funding the Stock Plans would be
$170,000, $200,000, $230,000 and $264,500 respectively.
ESOP COMPENSATION EXPENSE
In November 1993, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 93-6, "Employers' Accounting
for Employee Stock Ownership Plans." SOP 93-6 requires an employer to record
compensation expense in an amount equal to the fair value of shares committed
to be released to employees from an employee stock ownership plan. If shares
of Common Stock appreciate in value over time, the adoption of SOP 93-6 may
increase compensation expense relating to the ESOP to be established in
connection with the Conversion as compared with prior guidance which required
the recognition of compensation expense based on the cost of shares acquired
by the ESOP. It is impossible to determine at this time the extent of such
impact on future net income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Impact of New Accounting
Standards."
COMPETITION
The Bank faces significant competition in its market area both in
attracting deposits and in originating loans. The Cincinnati metropolitan
area is a highly competitive market. The Bank faces direct competition from
a significant number of financial institutions operating in its market area,
many with a state-wide or regional presence, and, in some cases, a national
presence. This competition arises from commercial banks, savings banks,
mortgage banking companies, credit unions and other providers of financial
services, many of which are significantly larger than the Bank and,
therefore, have greater financial and marketing resources than those of the
Bank. See "-Potential Decreases in Earnings" and "Business of the Bank -
Market Area and Competition." As of December 31, 1995, the Bank estimates
that it represented less than 1% of the total assets and market share for
loans and deposits, among financial institutions serving the Cincinnati area.
23
<PAGE>
RECAPITALIZATION OF SAIF AND ITS IMPACT ON SAIF PREMIUMS
Deposits of the Bank are presently insured by the SAIF. Both the SAIF
and the Bank Insurance Fund ("BIF"), the deposit insurance fund that covers
most commercial bank deposits, are statutorily required to be recapitalized
to a 1.25% of insured reserve deposit ratio. Until recently, members of the
SAIF and BIF were paying average deposit insurance premiums of between 24 and
25 basis points. The BIF presently meets the required reserve ratio, whereas
the SAIF is not expected to meet or exceed the required level until 2002 at
the earliest, primarily due to the statutory requirement that SAIF members
make payments on bonds issued by the Financing Corporation ("FICO") which
were issued in the late 1980's to recapitalize the predecessor to the SAIF.
In August 1995, the FDIC adopted a new assessment rate schedule of 4 to
31 basis points for BIF members. Under the new schedule, approximately 91%
of BIF members paid the lowest assessment rate of 4 basis points. In
November 1995, the FDIC acted to lower the range of BIF premiums to a range
of 0 basis points (subject to a statutory minimum of $2,000) to 27 basis
points such that approximately 92% of BIF members will only be required to
pay the statutory minimum of $2,000 annually. With respect to SAIF member
institutions, the FDIC retained the existing assessment rate schedule
applicable to SAIF member institutions of 23 to 31 basis points. As long as
the premium differential continues, it may have adverse consequences for SAIF
members, including reduced earnings and an impaired ability to raise funds in
the capital markets. In addition, SAIF members, such as the Bank, will be
placed at a substantial competitive disadvantage to BIF members with respect
to pricing of loans and deposits and the ability to achieve lower operating
costs.
Congress has proposed legislation that would mitigate the effect of the
BIF/SAIF premium disparity. Such legislation would impose a one-time special
assessment on the amount of insured deposits held by SAIF-member
institutions, including the Bank, to recapitalize the SAIF fund. The amount
of the special assessment would be within the discretion of the FDIC, but has
been projected to be 85 to 90 basis points of deposits. The legislation
would also require that the BIF and SAIF be merged by January 1, 1998,
provided that subsequent legislation is adopted eliminating the savings
association charter and that the FICO payments be spread across all BIF and
SAIF members. The payment of the special assessment would have the effect of
immediately reducing the capital of the SAIF-member institutions by the
amount of the special assessment, net of any tax effect. In such event, the
Bank would remain in compliance with its regulatory capital requirements.
See "Regulatory Capital Compliance" and "Regulation and Supervision -
Insurance of Deposit Accounts." Management cannot predict whether
legislation imposing such a special assessment will be signed by the
President, or, if enacted, the amount of any special assessment or whether
ongoing SAIF premiums will be reduced to a level equal to that of BIF
premiums. Management also cannot predict whether the BIF and SAIF funds will
ultimately be merged.
In February 1996, representatives of the FDIC, the OTS and the Treasury
Department stated to Congress that, unless Congress adopts legislation to
strengthen the SAIF, SAIF's current problems could result in an erosion of
the SAIF deposit base, could cause a default on the FICO bonds and could
leave the SAIF unable to meet its obligations to insured depositors.
The Bank's premiums for FDIC deposit insurance totalled $79,773 for 1995.
A significant increase in SAIF insurance premiums or a significant one-time
special adjustment to recapitalize the SAIF would likely have an adverse effect
on the operating expenses and results of operations of the Bank. Based on the
Bank's deposit insurance assessment base as of December 31, 1995, an 85 to 90
basis point fee to recapitalize the SAIF would result in a $189,000 to $200,000
payment on an after-tax basis assuming a federal tax rate of 34%. If the Bank
had been required to pay a special assessment of 90 basis
24
<PAGE>
points on December 31, 1995, the Bank would have reported net loss of
approximately $170,000 for the year ended December 31, 1995.
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a
federally insured savings bank. Any change in the regulatory structure or
the applicable statutes or regulations, whether by the State of Ohio,
Congress or the FDIC could have a material impact on the Bank, its operations
or the Conversion. See "Regulation and Supervision."
Congress currently has under consideration various proposals to
eliminate the thrift charter. The bills presently pending in Congress would
require that all federal savings associations convert to national banks or
state banks by no later than January 1, 1998 and would treat all state
savings associations as state banks as of that date. Generally, the
activities of converted federal associations would be limited to those
permitted for banks. All savings and loan holding companies currently
regulated by the OTS, including the Company, would become bank holding
companies under the pending legislative proposals and would be subject to the
activities restrictions applicable to bank holding companies, subject to
certain limited grandfathering. The pending legislation would not affect
state savings bank charters such as the Bank's. However, the status of state
savings banks has been raised by the Chairman of the Senate Banking Committee
as an issue to be explored in Congress further. Consequently, it is possible
that future legislation could require the Bank to convert to a commercial
bank charter or otherwise enact changes that could restrict the Bank's
activities and otherwise disrupt operations. Management has no basis to
predict whether such legislation will become law.
Pending legislation would eliminate the percentage of taxable income
method of calculating the bad debt reserve deduction for financial
institutions and could require recapture of all post-1987 additions to an
institution's bad debt reserve. See "Federal and State Taxation - Federal
Taxation - Bad Debt Reserve." The outcome of this pending legislation and
the effect of the legislation on the bad debt reserve deduction of thrift
institutions such as the Bank is uncertain. Therefore, the Bank is unable to
determine the extent to which such legislation, if enacted, would affect its
business or require the recapture of the bad debt reserve. If legislation is
enacted which requires thrifts to recapture the bad debt reserve in
connection with conversion to a bank charter or otherwise, it could result in
the Bank's recognition of $1.1 million of taxable income which would be taxed
at the then applicable corporate tax rate. However, assuming the Bank were
to recapture its post-1987 bad debt deductions, it would not have a material
impact on the Bank's results of operations due to the Bank's establishment
of a deferred tax liability associated with its post-1987 bad debt deduction
reserve.
BENEFITS TO MANAGEMENT AND DIRECTORS
Subsequent to the Conversion, the Company intends to adopt Stock Programs
and Stock Option Plans for the benefit of directors, officers and employees of
the Company and the Bank. The adoption of the Stock Programs and Stock Option
Plans and initial awards thereunder will be subject to stockholder approval
which the Company intends to seek to obtain at the first meeting of
stockholders. Current FDIC regulations provide that a converted savings bank
may not implement a stock option plan or a non-tax-qualified employee stock
benefit plan in the one year period following conversion unless, among other
things: (1) no employee will receive more than 25% of the shares of any such
plan, (2) non-employee directors will not receive more than 5% of the stock
individually, or 30% in the aggregate of any such plan, (3) awards under such
plans will not vest at a rate in excess of 20% per year, (4) conversion stock
will not be used to fund such plans, (5) with respect to stock options, the
exercise price of options awarded under any such option plan will be no less
than the market price of the stock as of the date of
25
<PAGE>
the grant and (6) such plans are approved by the holders of a majority of the
total votes eligible to be cast at any duly called meeting of stockholders
held no earlier than six months after completion of the Conversion. It is
expected that shares or options awarded under these plans will be awarded at
no cost to the recipients.
The Company currently intends to adopt the Stock Programs and acquire
Common Stock on behalf of the Stock Programs in an amount equal to 4% of the
Common Stock issued in the Conversion, or 17,000 shares and 23,000 shares at
the minimum and maximum of the Estimated Price Range, respectively. These
shares will be acquired either through open market purchases, or from
authorized but unissued Common Stock. See "-Possible Dilutive Effect of
Stock Programs and Stock Options." Although no specific award determinations
have been made, the Company anticipates that, if stockholder approval is
obtained, it will provide awards to its directors and employees to the extent
permitted by applicable regulations which currently would limit awards to any
one individual officer to 4,250 and 5,750 shares at the minimum and maximum
of the Estimated Price Range, respectively (which would have a value of
$42,500 and $57,500 at the minimum and maximum of the Estimated Price Range,
respectively, assuming a market price of $10.00 per share). Further, no
non-employee director could be awarded more than 850 and 1,150 shares at the
minimum and maximum of the Estimated Price Range, respectively (which would
have a market value of $8,500 and $11,500 at the minimum and maximum of the
Estimated Price Range, respectively, assuming a market price of $10.00 per
share) individually and no more than 5,100 and 6,900 shares at the minimum
and maximum of the Estimated Price Range, respectively (which would have a
value of $51,000 and $69,000 at the minimum and maximum of the Estimated
Price Range, assuming a market price of $10.00 per share) could be awarded to
all non-employee directors in the aggregate. Under the terms of any Stock
Program adopted, an independent trustee will vote unallocated shares in the
same proportion as it receives instructions from recipients with respect to
allocated shares which have not been earned and distributed. The trustee
will not vote allocated shares which have not been distributed if it does not
receive instructions from the recipient. The specific terms of the Stock
Programs intended to be adopted and the amounts of awards thereunder have not
yet been determined by the Board of Directors, and any such determinations
will consider various factors, including but not limited to, the financial
condition of the Company, current and past performance of plan participants
and tax and securities law and regulation requirements. See "Management of
the Bank -Benefits - Stock Programs."
Subsequent to the Conversion, the Company currently intends to adopt an
Incentive Stock Option Plan and a Stock Option Plan for Outside Directors for
the benefit of directors, officers and employees of the Company and the Bank
(collectively, the "Stock Option Plans"). The adoption of the Stock Option
Plans and initial awards thereunder shall be subject to stockholder approval
which the Company will seek at the first meeting of stockholders. Although
no specific determinations have been made, subject to stockholder approval,
the Company anticipates that executive officers and directors will be granted
options to purchase an amount of authorized but unissued Common Stock or
treasury stock, if any, equal to 10% of the Common Stock (42,500 shares and
57,500 shares at the minimum and maximum of the Estimated Price Range or
options exercisable for $425,000 of Common Stock or $575,000 of Common Stock
at the minimum and maximum of the Estimated Price Range, respectively,
assuming no increase or decrease in the market price of the Common Stock from
the date of the Offering to the date of grant), and it will provide
individual awards under the Stock Option Plans to the extent permitted by
applicable regulations. Under current FDIC regulations, no executive officer
could receive options for greater than 10,625 and 14,375 shares, at the
minimum and maximum of the Estimated Price Range, respectively. Directors
would be limited to an aggregate of 12,750 or 17,250 options, at the minimum
and maximum of the Estimated Price Range, respectively which would have to be
distributed among the Bank's nine outside directors. The value of stock
options to the holder is dependent upon the market price of a company's
common stock. In this case, assuming the stock options are granted with an
exercise price of $10.00, the stock options would have no value unless the
Bank's Common Stock were to trade at a market price that was
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<PAGE>
above $10.00 per share. Under the Stock Option Plans, the Company intends to
grant stock options, the exercise prices of which will be equal to the fair
market value of the Common Stock at the date of grant. Such options will
permit such officers and directors to benefit from any increase in the market
value of the shares in excess of the exercise price at the time of exercise.
Officers and directors receiving such options will not be required to pay for
the shares until the date of exercise. The specific terms of the Stock
Option Plans intended to be adopted and amounts and awards thereunder have
not yet been determined by the Board of Directors and any such determinations
will consider various factors, including but not limited to, the financial
condition of the Company, current and past performance of award recipients
and tax and securities law and regulation requirements. See "Management of
the Bank -Benefits - Stock Option Plans."
Change in Control Provisions. Provisions in the employment agreements
and change in control agreements entered into with officers provide for
benefits and cash payments in the event of a change in control of the Company
or the Bank. The Stock Programs and Stock Option Plans intended to be adopted
by the Company and the Bank, subject to stockholder approval and the
conversion regulations, may provide for acceleration of vesting upon death,
disability or a change of control. The provisions which provide for
acceleration of vesting upon a change in control would have the effect of
increasing the cost of acquiring the Company or Bank, thereby discouraging
future attempts to take over the Company or the Bank. Based on current
salaries, cash payments to be paid in the event of a change in control
pursuant to the terms of the employment agreements and change in control
agreements would be approximately $394,000. However, the actual amount to be
paid in the event of a change in control of the Bank or the Company cannot be
estimated at this time because the actual amount is based on the average
salary of the employee and other factors existing at the time of the change
in control which cannot be determined at this time. See "Restrictions on
Acquisition of the Company and the Bank - Restrictions in the Company's
Articles of Incorporation," "Management of the Bank - Employment Agreements,"
and "-Change-in-Control Agreements," "-Benefits - Stock Option Plans," and
"-Benefits - Stock Programs."
POSSIBLE DILUTIVE EFFECT OF STOCK PROGRAMS AND STOCK OPTION PLANS
Following the Conversion, the Stock Programs, if approved by the
stockholders of the Company, will acquire an amount of shares equal to 4% of
the shares of Common Stock issued in the Conversion, either through open
market purchases or the issuance of authorized but unissued shares of Common
Stock from the Company. If the Stock Programs are funded by the issuance of
authorized but unissued shares, the interests of existing shareholders will
be diluted by approximately 3.8%. See "Pro Forma Data." If the Stock
Programs are funded by open market purchases, the acquisition of such shares
will be an expense to the Company, the amount of which cannot be determined
at present. Also following the Conversion, if the Stock Option Plans are
approved by the stockholders of the Company at the first meeting of
stockholders following the Conversion, directors, officers and employees will
be granted options to purchase Common Stock of the Company under the Stock
Option Plans in an amount equal to 10% of the Common Stock issued in the
Conversion. If all of the options intended to be granted under the Stock
Option Plans were to be exercised using authorized but unissued Common Stock
and the Stock Plans were funded by the issuance of authorized but unissued
shares, the voting interest of existing stockholders would be diluted by
approximately 12.3%.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Code of
Regulations, as well as certain federal regulations, will assist the Company in
maintaining its status as an independent, publicly owned corporation. The
Articles of Incorporation of the Company contain a supermajority provision which
provides that the holders of at least 75% of the voting shares of the Company
are required to approve
27
<PAGE>
certain matters, including amendments to the Articles of Incorporation or
Code of Regulation of the Company, mergers, acquisition of a majority of the
shares of the Company or a proposed sale, exchange, consolidation or transfer
of all or substantially all of the assets of the Company, if the Board of
Directors has recommended against the approval of such action. In addition,
the Articles of Incorporation contain other provisions that may make a change
in control more difficult. Such provisions include the prohibition for five
years from the date of consummation of the Conversion of any person, together
with associates and affiliates, from acquiring or voting in excess of 10% of
the outstanding shares of the Company. In addition, the Articles permit a
staggered board of directors and permit the board to issue additional shares
of stock. These provisions in the Company's governing instruments may
discourage potential proxy contests and other potential takeover attempts,
particularly those which have not been negotiated with the Board of
Directors, and thus, generally may serve to perpetuate current management and
may have the effect of discouraging a future takeover attempt that is not
approved by the Board of Directors but which individual Company stockholders
may deem to be in their best interests or in which stockholders may receive a
premium for their shares. See "Restrictions on Acquisition of the Company
and the Bank." In addition to the provisions in the Company's organizational
documents, certain regulatory restrictions may be imposed upon acquirors of
the Bank's or Company's stock, including restrictions which would require
regulatory approval prior to any such acquisition. See "Restrictions on
Acquisition of the Company and the Bank."
VOTING CONTROL OF OFFICERS AND DIRECTORS
Directors and executive officers of the Bank and the Company expect to
purchase approximately 4.08% or 3.02% of the shares of Common Stock
outstanding based upon the minimum and the maximum of the Estimated Price
Range, respectively. As a result, assuming approval by stockholders of the
Stock Programs and Option Plans, directors, executive officers and employees
have the potential to control the voting of approximately 23.7% or 22.7% of
the Company's Common Stock at the minimum and maximum of the Estimated Price
Range, respectively, thereby enabling them to prevent the approval of the
transactions requiring the approval of at least 75% of the Company's
outstanding shares of voting stock described hereinabove. As a result, this
potential voting control may preclude takeover attempts that certain
stockholders deem to be in their best interest and may tend to perpetuate
existing management. See "Restrictions on Acquisitions of the Company and
the Bank - Restrictions in the Company's Articles of Incorporation."
ABSENCE OF MARKET FOR COMMON STOCK
The Bank is a mutual savings bank and, therefore, has never issued
stock. Consequently, as of the date of this Prospectus and Proxy Statement,
no public market exists for the Common Stock to be issued in the Conversion.
The Bank has requested that Trident undertake to match offers to buy and
offers to sell the Common Stock, and Trident intends to list the Common Stock
over-the-counter through the National Daily Quotation Service "Pink Sheet"
published by the National Quotation Bureau, Inc. However, a public trading
market will depend upon the presence in the market place of both willing
buyers and willing sellers at any given time. Due to the relatively small
size of the offering, it is highly improbable that a stockholder base
sufficiently large to create an active trading market will develop and be
maintained. THEREFORE, A PURCHASER OF THE COMMON STOCK SHOULD HAVE A
LONG-TERM INVESTMENT INTENT AND SHOULD RECOGNIZE THAT THE ABSENCE OF AN
ACTIVE TRADING MARKET MAY MAKE IT DIFFICULT TO SELL THE COMMON STOCK AFTER
THE CONVERSION AND THERE CAN BE NO ASSURANCE THAT THE TRADING PRICE OF THE
COMMON STOCK WILL REMAIN AT OR ABOVE THE INITIAL PURCHASE PRICE. IN
ADDITION, THE AMOUNT SPENT BY A PURCHASER FOR COMMON STOCK IS AN INVESTMENT
IN SECURITIES, AND IS NOT OF AN INSURABLE TYPE. THEREFORE, A PURCHASER COULD
SUSTAIN A LOSS OF THE PRINCIPAL OF HIS OR HER INVESTMENT.
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<PAGE>
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% to reflect
regulatory considerations or changes in market and financial conditions
following the commencement of the Subscription and Community Offerings. In the
event that the Estimated Price Range is so increased, it is expected that the
Company will issue up to 661,250 shares of Common Stock at the Purchase Price
for an aggregate price of up to $6,612,500. An increase in the number of shares
issued will decrease a subscriber's pro forma net earnings per share and
stockholders' equity per share and will increase the Company's pro forma
consolidated stockholders' equity and net earnings. Such an increase will also
increase the Purchase Price as a percentage of pro forma stockholders' equity
per share and net earnings per share. See "Pro Forma Data."
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received a letter from RP Financial that states that, pursuant
to RP Financial's valuation, the subscription rights granted to Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members have no value.
However, such valuation is not binding on the Internal Revenue Service (the
"IRS"). If the subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members are deemed to have an
ascertainable value, receipt of such rights could be taxable to those Eligible
Account Holders, Supplemental Eligible Account Holders or Other Members who
receive and/or exercise the subscription rights in an amount equal to such
value. Additionally, the Bank could recognize a gain for tax purposes on such
distribution of subscription rights. Whether subscription rights are considered
to have ascertainable value is an inherently factual determination. See "The
Conversion - Effects of Conversion" and "-Tax Aspects."
ROLE OF FINANCIAL ADVISOR/BEST EFFORTS OFFERING
Trident will consult and advise the Bank and the Company in connection with
the Conversion and assist, on a best-efforts basis, in connection with the
solicitation of subscriptions and purchase orders for shares of Common Stock in
the Offerings. Trident has not prepared or delivered a fairness or other
similar opinion in connection with the Conversion. The engagement of Trident by
the Company and the Bank and the work performed thereto should not be construed
by purchasers of the Common Stock as constituting a recommendation relating to
such investment and should not be construed as a verification of completeness of
the information contained in this Prospectus. Consummation of the Conversion is
contingent upon, among other things, the sale of at least the minimum number of
shares being offered in the Offerings, however, Trident is not obligated to
purchase any Common Stock offered in the Offerings. See "The Conversion -
Marketing and Underwriting Arrangements."
LENOX BANCORP, INC.
The Company was organized in 1995 at the direction of the Board of
Directors of the Bank for the purpose of acquiring all of the capital stock to
be issued by the Bank in the Conversion. The Company has received approval from
the Office of Thrift Supervision ("OTS") to become a savings and loan holding
company and, as such, will be subject to regulation by the OTS. See "The
Conversion - General" and "Regulation and Supervision - Holding Company
Regulation." Upon consummation of the Conversion, the Company's assets will
consist of all of the outstanding shares of the Bank's capital stock issued to
the Company in the Conversion and that portion of the net proceeds of the
Conversion permitted by the FDIC to be retained by the Company. The Company
intends to use part of the net proceeds to make a loan directly to the ESOP to
enable the ESOP to purchase up to 8% of the Common Stock in the
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<PAGE>
Conversion. The Company will have no significant liabilities. See "Use of
Proceeds." The management of the Company is set forth under "Management of
the Company." Initially, the Company will neither own nor lease any property,
but will instead use the premises, equipment and furniture of the Bank. At
the present time, the Company does not intend to employ any persons other
than officers, but will utilize the support staff of the Bank from time to
time. Additional employees will be hired as appropriate to the extent the
Company expands its business in the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so, its
business activities through newly formed subsidiaries, or through acquisitions
of other financial institutions and financial services related companies. Such
activities may also be substantially engaged in by the Bank if the holding
company form of organization is not utilized. Although there are no current
arrangements, understandings or agreements, written or oral, regarding any such
opportunities or transactions, the Company will be in a position after the
Conversion, subject to regulatory limitations and the Company's financial
position, to take advantage of any such acquisition and expansion opportunities
that may arise. The initial activities of the Company are anticipated to be
funded by the proceeds permitted to be retained by the Company and earnings
thereon or, alternatively, through dividends from the Bank. See "Dividend
Policy" and "Regulation and Supervision - Limitations on Capital Distributions."
The Company's executive offices are located at the office of the Bank at
5255 Beech Street, St. Bernard, Ohio 45217. The Company's telephone number is
(513) 242-6900.
LENOX SAVINGS BANK
The Bank was originally chartered in 1887 as an Ohio building and loan
company for the primary purpose of serving the financial needs of the employees
of Procter & Gamble. The Bank later converted to an Ohio savings and loan
company and in November 1993, converted to an Ohio savings bank under its
current name. The Bank conducts its business from one office located in St.
Bernard, Ohio.
The Bank is primarily engaged in attracting deposits from the general
public in its primary market area and investing such deposits and other
available funds in mortgage loans secured by one- to four-family residences. At
December 31, 1995, the Bank had invested $30.7 million, or 91.9%, of its total
loan portfolio in one- to four-family mortgage loans. The Bank also invests in
consumer loans. Due to the close ties that have existed between the Bank and
Procter & Gamble, the Bank has a high concentration of borrowers and depositors
who are Procter & Gamble employees. See "Risk Factors - Lending and Deposit
Concentrations." The Bank has hired a mortgage loan originator to help it
attract borrowers and has also begun to market its products and services more
aggressively throughout its primary market area. In times of low mortgage
demand, the Bank has sought to invest available funds in short-term investment
securities including U.S. Government and Agency securities.
The Bank is subject to extensive regulation, supervision and examination by
the FDIC and the Division. As of December 31, 1995, the Bank exceeded all
regulatory capital requirements with Tier I Leverage Capital and Risk-based
Capital of $3.8 million and $ 3.8 million, respectively. Additionally, the
Bank's regulatory capital was in excess of the amount necessary to be
"well-capitalized" under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"). See "Regulation and Supervision." The Bank is a member
of the FHLB - Cincinnati, which is one of the twelve regional banks that
comprise the FHLB system.
The Bank's office is located at 5255 Beech Street, St. Bernard, Ohio
45217. The Bank's telephone number is (513) 242-6900.
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<PAGE>
REGULATORY CAPITAL COMPLIANCE
At December 31, 1995, the Bank exceeded all regulatory capital
requirements. See "Regulation and Supervision - Federal Regulation - Capital
Requirements." Set forth below is a summary of the Bank's compliance with
regulatory capital standards as of December 31, 1995, on a historical and pro
forma basis assuming that the indicated number of shares were sold as of such
date and receipt by the Bank of 50% of the net Conversion proceeds. For
purposes of the table below, the amount expected to be borrowed by the ESOP and
the cost of the shares expected to be acquired by the Stock Programs are
deducted from pro forma regulatory capital.
<TABLE>
PRO FORMA AT DECEMBER 31, 1995 BASED ON
-----------------------------------------------------------------------------------------
500,000 575,000
425,000 SHARES SHARES SHARES 661,250 SHARES
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF (MAXIMUM, AS
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED ADJUSTED, OF ESTIMATED
DECEMBER 31, 1995 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
------------------ ------------------ ----------------- ------------------ ----------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital... $3,848 8.92% $5,238 11.67% $5,523 12.21% $5,808 12.75% $6,136 13.35%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Leverage
Capital:
Capital
Level(3)..... $3,768 8.73% $5,158 11.49% $5,443 12.04% $5,728 12.57% $6,056 13.17%
Requirement... 1,726 4.00 1,795 4.00 1,809 4.00 1,823 4.00 1,839 4.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Excess........ $2,042 4.73% $3,363 7.49% $3,634 8.04% $3,905 8.57% $4,217 9.17%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Risk-based
Capital:
Capital
Level(3)(4).. $3,828 17.83% $5,218 23.92% $5,503 25.15% $5,788 26.37% $6,116 27.76%
Requirement... 1,718 8.00 1,745 8.00 1,751 8.00 1,756 8.00 1,763 8.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Excess........ $2,110 9.83% $3,473 15.92% $3,752 17.15% $4,032 18.37% $4,353 19.76%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
_____________________
(1) As adjusted to give effect to an increase in the number of shares
which could occur due to an increase in the Estimated Price Range of
up to 15% due to regulatory considerations and changes in the market
and general financial and economic conditions following the
commencement of the Subscription and Community Offerings.
(2) Leverage capital levels are shown as a percentage of total adjusted
assets. Risk-based capital levels are shown as a percentage of risk-
weighted assets.
(3) For purposes of the table, it has been assumed that the ESOP and Stock
Programs will acquire 8% and 4%, respectively, of the Common Stock
issued in the Conversion.
(4) Assumes net proceeds are invested in assets that carry a 20.0% risk-
weighting.
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<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Conversion is completed, it is presently anticipated
that the net proceeds will be between $3.8 million and $5.3 million (or $6.2
million if the Estimated Price Range is increased by 15%). See "Pro Forma Data"
and "The Conversion - Stock Pricing" as to the assumptions used to arrive at
such amounts. The Company will be unable to utilize any of the net proceeds of
the Offerings until the close of the Offerings.
The Company currently expects to purchase all of the outstanding capital
stock of the Bank to be issued upon Conversion in exchange for up to 50% of the
net Conversion proceeds. The remaining net proceeds will be retained by the
Company. The portion of the net proceeds used by the Company to acquire all of
the capital stock of the Bank will be added to the Bank's general funds to be
used for general corporate purposes, including investment in one- to four-family
residential mortgage loans and other loans, investment in federal funds, short-
term, investment grade marketable securities and mortgage-backed securities and
to fund the Stock Programs. The Bank may also use such funds for the expansion
of its facilities, and to expand operations through acquisitions of other
financial institutions, branch offices or other financial services companies.
The net proceeds retained by the Company may also be used to support the future
expansion of operations through branch acquisitions and the acquisition of other
financial institutions or diversification into other banking related businesses
and for other business or investment purposes, including possibly the payment of
dividends and the repurchase of the Company's Common Stock. The Company has no
current arrangements, understandings or agreements regarding any such
transactions. The Company also expects that it may use net proceeds to expand
its lending and investing activities. The net proceeds retained by the Company
will initially be invested primarily in overnight interest-bearing deposits and
short-term, high grade marketable securities. The Company intends to use a
portion of the net proceeds to make a loan directly to the ESOP to enable the
ESOP to purchase up to 8% of the Common Stock in the Conversion. Based upon the
issuance of 425,000 shares or 575,000 shares at the minimum and maximum of the
Estimated Price Range, the amount of the loan to the ESOP would be $340,000 or
$460,000, respectively (or $529,000 if the Estimated Price Range is increased by
15%) to be repaid over a 10 year period at an interest rate of 8.75%. See
"Management of the Bank - Benefits - Employee Stock Ownership Plan and Trust."
Upon completion of the Conversion, the Board of Directors of the Company
will, subject to statutory and regulatory requirements, have the authority to
adopt stock repurchase plans. Based upon facts and circumstances which may
arise following Conversion and subject to applicable regulatory requirements,
the Board of Directors may determine to repurchase stock in the future. Such
facts and circumstances may include but not be limited to: (i) market and
economic factors such as the price at which the stock is trading in the market,
the volume of trading, the attractiveness of other investment alternatives in
terms of the rate of return and risk involved in the investment, the ability to
increase the book value and/or earnings per share of the remaining outstanding
shares, and an improvement in the Company's return on equity; (ii) the avoidance
of dilution to stockholders by not having to issue additional shares to cover
the exercise of stock options or to fund employee stock benefit plans; and (iii)
any other circumstances in which repurchases would be in the best interests of
the Company and its shareholders. In the event the Company determines to
repurchase stock, such repurchases may be made at market prices which may be in
excess of the Purchase Price in the Conversion.
Any stock repurchases will be subject to the determination of the Board of
Directors that both the Company and the Bank will be capitalized in excess of
all applicable regulatory requirements after any such repurchases and that such
capital will be adequate, taking into account, among other things, the level of
non-performing and other risk assets, the Company and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment and tax and other considerations. Any
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<PAGE>
stock repurchased by the Company would have the effect of reducing
stockholders' equity by the aggregate price of the stock repurchased and, to
the extent the per share purchase price of the repurchased stock is greater
than the then per share book value of the Common Stock at the time of such
repurchase, such stock repurchases would have a dilutive effect on
stockholders' equity on a per share basis. If the holding company form is
used and the Company retains 50% of the net Conversion proceeds, it is
unlikely that the Bank would repurchase any of its conversion stock.
Any portion of the net proceeds in excess of the amount permitted to be
retained by the Company, or all of the net proceeds if the holding company
format is not utilized in the Conversion, will be added to the Bank's general
funds to be used for general corporate purposes to provide affordable home and
business financing opportunities to the community, including investment in one-
to four-family residential mortgage loans, consumer loans and possibly other
loans, investment in federal funds, short-term, high grade marketable securities
and mortgage-backed securities and funding of the Stock Programs. The Bank may
also use such funds for the expansion of its facilities, and to expand
operations through acquisitions of other financial institutions, branch offices
or other financial services companies. Neither the Bank nor the Company has yet
determined the approximate amount of net proceeds to be used for each of the
purposes mentioned above. Under applicable conversion regulations, the Bank
would be prohibited from repurchasing its own stock for a period of one year
after conversion, except that repurchases of up to 5% of its outstanding common
stock may be repurchased where compelling and valid business reasons are
established. Stock repurchases by the Bank following such one year period would
be reviewed and approved by the FDIC on a case-by-case basis. If the holding
company form is used and the Company retains 50% of the net Conversion proceeds,
it is unlikely that the Bank would repurchase any of its conversion stock.
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. In the future, the Board of Directors of the Company
may consider a policy of paying cash dividends on the Common Stock. However, no
decision has been made with respect to such dividends, if any. Declarations of
dividends by the Board of Directors will depend upon a number of factors,
including the amount of the net proceeds retained by the Company in the
Conversion, investment opportunities available to the Company or the Bank,
capital requirements, regulatory limitations, the Company's and the Bank's
financial condition and results of operations, tax considerations and general
economic conditions. No assurances can be given, however, that any dividends
will be paid, or, if commenced, will continue to be paid. See "Dividend
Policy."
The Company is subject to the requirements of Ohio law with respect to the
payment of dividends, which prohibit the payment of dividends if the Company is
insolvent or if there is reasonable ground to believe that the payment would
render the Company insolvent. Since the Company initially will have no
significant source of income other than dividends from the Bank and earnings
from the net proceeds retained by the Company, the payment of dividends by the
Company may be dependent, in part, upon dividends from the Bank, which are
subject to various tax and regulatory restrictions on the payment of dividends.
The Bank will be prohibited from paying a dividend if such dividend would
reduce the Bank's capital below regulatory requirements. The FDIC also has
authority to prohibit a bank from paying dividends if, in its opinion, the
payment of dividends would constitute an unsafe or unsound practice in light of
the financial condition of the bank. The Bank will be prohibited by Ohio law
from paying a
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<PAGE>
dividend if such payment will render the Bank insolvent. The Bank must get
Division approval to pay a dividend in excess of the sum of net profits of
the current year plus the retained net profits of the two preceding fiscal
years, less the sum of any required transfers to surplus. The Bank's ability
to pay dividends will also be limited by the requirement of the Plan for the
establishment of a liquidation account. The Bank cannot pay dividends in
amounts which would cause its regulatory capital to be reduced below the
amount required for the liquidation account. See "Regulation and Supervision
- -Dividend Limitations" and "The Conversion - Effects of Conversion - Effect
on Liquidation Rights."
MARKET FOR THE COMMON STOCK
The Bank is a mutual savings bank and, therefore, has never issued stock.
Consequently, as of the date of this Prospectus and Proxy Statement, no public
market exists for the Common Stock to be issued in the Conversion. The Bank has
requested that Trident undertake to match offers to buy and offers to sell the
Common Stock, and Trident intends to list the Common Stock over-the-counter
through the National Daily Quotation Service "Pink Sheet" published by the
National Quotation Bureau, Inc. However, a public trading market will depend
upon the presence in the market place of both willing buyers and willing sellers
at any given time. Due to the relatively small size of the offering, it is
highly improbable that a stockholder base sufficiently large to create an active
trading market will develop and be maintained. THEREFORE, A PURCHASER OF THE
COMMON STOCK SHOULD HAVE A LONG-TERM INVESTMENT INTENT AND SHOULD RECOGNIZE THAT
THE ABSENCE OF AN ACTIVE TRADING MARKET MAY MAKE IT DIFFICULT TO SELL THE COMMON
STOCK AFTER THE CONVERSION AND MAY HAVE AN ADVERSE EFFECT ON THE PRICE OF THE
COMMON STOCK.
34
<PAGE>
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Bank's executive officers and directors propose to purchase, assuming shares
of Common Stock are issued at the minimum and maximum of the Estimated Price
Range and that sufficient shares will be available to satisfy their
subscriptions. The table also sets forth the total expected beneficial
ownership of Common Stock as to all directors and executive officers as a
group.
<TABLE>
<CAPTION>
AS A PERCENT OF SHARES OFFERED
----------------------------------
AT THE MINIMUM AT THE MAXIMUM
NUMBER OF THE ESTIMATED OF THE ESTIMATED
NAME AMOUNT OF SHARES(1) PRICE RANGE PRICE RANGE(2)
- ---- -------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Gail R. Behymer $ 25,000 2,500 .58% .44%
Henry E. Brown 10,000 1,000 .24 .17
Richard C. Harmeyer 8,000 800 .19 .14
Curtis L. Jackson 2,500 250 .06 .04
Wyvette D. Jordan 10,000 1,000 .24 .17
Robert R. Keller 25,000 2,500 .58 .44
Richard O. Plunk 3,000 300 .07 .05
William P. Riekert 20,000 2,000 .47 .35
Reba St. Clair 5,000 500 .12 .09
Virginia M. Porowski 20,000 2,000 .47 .35
Diane P. Irwin 15,000 1,500 .36 .26
William T. Bird 30,000 3,000 .70 .52
-------- ------ ---- ----
All Directors and Executive $173,500 17,350 4.08% 3.02%
Officers as a group -------- ------ ---- ----
(12 persons) -------- ------ ---- ----
</TABLE>
____________________
(1) Includes proposed subscriptions, if any, by associates. Does not
include subscription orders by the ESOP. Intended purchases by the
ESOP are expected to be 8% of the shares issued in the Conversion.
See "Management of the Bank-Directors' Compensation" and "-Executive
Compensation."
(2) Reflects the maximum number of shares which may be purchased based on
an offering of 575,000 shares.
35
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Bank at December 31, 1995, and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion, based upon
the sale of the number of shares indicated in the table and the other
assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
--------------------------------------------------------
661,250
425,000 500,000 575,000 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
BANK ESTIMATED ESTIMATED ESTIMATED ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
---------- ------------ ------------ ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits(2)............................ $33,669 $33,669 $33,669 $33,669 $33,669
FHLB advances and other borrowings..... 5,328 5,328 5,328 5,328 5,328
------- ------- ------- ------- ------
Total deposits and borrowed funds.... $38,997 $38,997 $38,997 $38,997 38,997
------- ------- ------- ------- ------
------- ------- ------- ------- ------
Stockholders' equity:
Common Stock, without par value,
2,000,000 shares authorized; shares
to be issued as reflected............ $ -- $ -- $ -- $ -- $ --
Additional paid-in capital(3)........ -- 3,800 4,550 5,300 6,163
Retained earnings(4)(5).............. 3,848 3,848 3,848 3,848 3,848
Less:
Common Stock acquired by ESOP(6)..... -- (340) (400) (460) (529)
Common Stock acquired by
the Stock Programs(7).............. -- (170) (200) (230) (265)
------- ------- ------- ------- ------
Total stockholders' equity............. $ 3,848 $ 7,138 $ 7,798 $ 8,458 $ 9,217
------- ------- ------- ------- ------
------- ------- ------- ------- ------
</TABLE>
- ---------------
(1) As adjusted to give effect to an increase in the number of shares
which could occur due to an increase in the Estimated Price Range up
to 15% due to regulatory considerations and changes in the market and
general financial and economic conditions following the commencement
of the Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro
forma deposits by the amount of such withdrawals.
(3) No effect has been given to the issuance of additional shares of
Common Stock pursuant to the Company's Stock Option Plans or Stock
Programs intended to be adopted by the Company and presented for
approval by stockholders at the first meeting of stockholders
following the Conversion. If approved by the stockholders of the
Company, an amount equal to 10% of the shares of Common Stock issued
in the Conversion will be reserved for issuance upon the exercise of
options to be granted under the Stock Option Plans. See "Risk Factors
- Possible Dilutive Effect of Stock Programs and Stock Option Plans,"
"Management of the Bank - Benefits - Stock Option Plans."
(4) The retained earnings of the Bank will be substantially restricted
after the Conversion. See "The Conversion - Liquidation Rights" and
"Regulation and Supervision."
(5) Includes (in thousands) $81 of net unrealized gain on available for
sale securities.
(6) Assumes that 8% of the shares offered for sale in the Conversion will
be purchased by the ESOP and that the funds used to acquire such
shares will be borrowed from the Company. The Common Stock acquired
by the ESOP is reflected as a reduction of stockholders' equity. See
"Management of the Bank - Benefits - Employee Stock Ownership Plan and
Trust."
(7) Assumes that an amount equal to 4% of the shares of Common Stock
issued in the Conversion is purchased by the Stock Programs subsequent
to the Conversion through open market purchases. The Common Stock
purchased by the Stock Programs is reflected as a reduction of
stockholders' equity. Implementation of the Stock Programs is subject
to the approval of the Company's stockholders at the first meeting
after the Conversion. The issuance of authorized but unissued shares
of the Company's Common Stock to the Stock Programs instead of funding
the Stock Programs through open market purchases would dilute the
voting interests of existing stockholders by approximately 3.8%. See
"Management of the Bank - Benefits - Stock Programs."
36
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $3.8 million and $5.3 million (or $6.2 million
in the event the Estimated Price Range is increased by 15%) based upon the
assumption that Conversion expenses, including the marketing fees paid to
Trident, will be approximately $450,000. Actual Conversion expenses may vary
from those estimated.
Pro forma consolidated net earnings of the Company for the year ended
December 31, 1995 has been calculated as if the Common Stock had been sold at
the beginning of the period and the net proceeds had been invested at a blended
reinvestment rate of 5.63%. The blended reinvestment rate assumes that the
approximately 50% of net proceeds retained by the Company are invested at 5.14%,
equal to the one-year Treasury rate at December 31, 1995, and the remainder of
the net proceeds are invested by the Bank at 6.12%, the arithmetic average of
the weighted average yield earned by the Bank on its interest-earning assets and
the weighted average rate paid on its deposits during such period. The effect
of withdrawals from deposit accounts for the purchase of Common Stock has not
been reflected. The pro forma blended after-tax yield for the Company and the
Bank is assumed to be 3.72% for the year ended December 31, 1995, based on an
effective tax rate of 34%. Historical and pro forma per share amounts have been
calculated by dividing historical and pro forma amounts by the indicated number
of shares of Common Stock, as adjusted to give effect to the purchase of shares
by the ESOP. No effect has been given in the pro forma stockholders' equity
calculations for the assumed earnings on the net proceeds. As discussed under
"Use of Proceeds," the Company intends to retain 50% of the net Conversion
proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company computed in accordance with GAAP. The pro forma stockholders' equity is
not intended to represent the fair market value of the Common Stock and may be
greater than amounts that would be available for distribution to stockholders in
the event of liquidation.
The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the year ended December 31, 1995 based on the
assumptions set forth above and in the table and should not be used as a basis
for projections of market value of the Common Stock following the Conversion.
The tables below give effect to the Stock Programs, which are expected to be
adopted by the Company following the Conversion and presented to stockholders
for approval at the Company's first annual meeting of stockholders. See
footnote 3 to the tables. No effect has been given in the tables to the
possible issuance of additional shares reserved for future issuance pursuant to
the Stock Option Plans to be adopted by the Board of Directors of the Company,
subject to stockholder approval, nor does book value give any effect to the
liquidation account to be established for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders or the bad debt reserve in
liquidation. See footnote 4 to the tables below, "The Conversion - Liquidation
Rights," and "Management of the Bank - Benefits - Stock Option Plans."
37
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------
425,000 500,000 575,000 661,250
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00 PER
PER SHARE PER SHARE PER SHARE SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF RANGE) OF RANGE) OF RANGE) OF RANGE)(6)
----------- ----------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross Proceeds............................. $4,250 $5,000 $5,750 $6,613
Less: Offering expenses and commissions.... 450 450 450 450
------ ------ ------ ------
Estimated net proceeds..................... 3,800 4,550 5,300 6,163
Less: Shares purchased by ESOP ............ (340) (400) (460) (529)
Shares purchased by Stock Programs .. (170) (200) (230) (265)
------ ------ ------ ------
Estimated net proceeds, as adjusted...... $3,290 $3,950 $4,610 $5,369
------ ------ ------ ------
------ ------ ------ ------
Consolidated net earnings:
Historical(1)............................ $ 29 $ 29 $ 29 $ 29
Pro forma earnings on net
proceeds, as adjusted.................. 122 147 171 200
Pro forma ESOP adjustment(2)............. (22) (26) (30) (35)
Pro forma Stock Programs adjustment(3)... (22) (26) (30) (35)
------ ------ ------ ------
Pro forma net earnings................. $ 107 $ 124 $ 140 $ 159
------ ------ ------ ------
------ ------ ------ ------
Per share net earnings:
Historical(1)............................ $ 0.07 $ 0.06 $ 0.05 $ 0.05
Pro forma earnings on net
proceeds, as adjusted.................. 0.32 0.33 0.33 0.33
Pro forma ESOP adjustment(2)............. (0.06) (0.06) (0.06) (0.06)
Pro forma Stock Programs adjustment(3)... (0.06) (0.06) (0.06) (0.06)
------ ------ ------ ------
Pro forma net earnings per share....... $ 0.27 $ 0.27 $ 0.26 $ 0.26
------ ------ ------ ------
------ ------ ------ ------
Stockholders' equity:
Historical............................... $3,848 $3,848 $3,848 $3,848
Estimated net proceeds................... 3,800 4,550 5,300 6,163
Less: Common Stock acquired
by ESOP(2) ........................ (340) (400) (460) (529)
Common Stock acquired
by Stock Programs(3)............... (170) (200) (230) (265)
------ ------ ------ ------
Pro forma stockholders' equity(3)(4)(5) $7,138 $7,798 $8,458 $9,217
------ ------ ------ ------
------ ------ ------ ------
Stockholders' equity per share(2):
Historical............................. $ 9.05 $ 7.70 $ 6.69 $ 5.82
Estimated net proceeds................. 8.94 9.10 9.22 9.32
Less: Common Stock acquired
by ESOP(2)..................... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by Stock
Programs(3).................... (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
Pro forma stockholders' equity
per share(3)(4)(5)................. $16.79 $15.60 $14.71 $13.94
------ ------ ------ ------
------ ------ ------ ------
Offering price as a percentage of pro forma
stockholders' equity per share(2) ....... 59.56% 64.10% 67.98% 71.74%
Offering price to pro forma net
earnings per share....................... 37.04x 37.04x 38.46x 38.46x
</TABLE>
38
<PAGE>
- ------------
(1) Historical net earnings reflect rental expense of $11,000. Effective July
1, 1995 the Bank entered into a lease through December 31, 1999 requiring
the payment of $105,000 in rent. Consequently, in the fiscal years ended
December 31, 1996 - 2002, the Bank's net earnings will be reduced by
$21,000 per year.
(2) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. For purposes of this table, the
funds used to acquire such shares are assumed to have been borrowed by the
ESOP from the Company. The amount borrowed is reflected as a liability and
as a reduction of stockholders' equity. The Bank intends to make annual
contributions to the ESOP in an amount at least equal to the principal and
interest requirement of the debt. The Bank's total annual payment of the
ESOP debt is based upon 10 equal annual installments of principal, with an
assumed annual interest rate at 8.75%. The pro forma net earnings assumes:
(i) that the Bank's contribution to the ESOP is equivalent to the principal
payments required for the year ended December 31, 1995 and was made at the
end of the period; (ii) that 3,400, 4,000, 4,600 and 5,290 shares at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, were committed to be released during the year ended December
31, 1995 at an average fair value of $10.00 per share in accordance with
SOP 93-6; and (iii) only the ESOP shares committed to be released were
considered outstanding for purposes of net earnings per share calculations;
and (iv) for the purposes of stockholders' equity per share calculations,
all shares purchased by the ESOP were considered outstanding. See
"Management of the Bank - Benefits - Employee Stock Ownership Plan and
Trust."
(3) Gives effect to the Stock Programs expected to be adopted by the Company
following the Conversion and presented for approval at the first meeting of
stockholders. If the Stock Programs are approved by stockholders, the
Stock Programs intend to acquire an amount of Common Stock equal to 4% of
the shares of Common Stock issued in the Conversion, or 17,000, 20,000,
23,000 and 26,450 shares of Common Stock at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Price Range, respectively,
either through open market purchases, if permissible, or from authorized
but unissued shares of Common Stock or treasury stock of the Company, if
any. In calculating the pro forma effect of the Stock Programs, it is
assumed that the required stockholder approval has been received, that the
shares were acquired by the Stock Programs at the beginning of the period
presented in open market purchases at the Purchase Price and that .8% of
the amount contributed was an amortized expense during such period. The
issuance of authorized but unissued shares of the Company's Common Stock to
the Stock Programs instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 3.8% and pro forma net
earnings per share would be $0.28, $0.27, $0.27 and $0.26 at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively, and
pro forma stockholders' equity per share would be $16.54, $15.38, $14.43
and $13.80 at the minimum, midpoint, maximum and 15% above the maximum of
the range, respectively. There can be no assurance that stockholder
approval of the Stock Programs will be obtained, or that the actual
purchase price of the shares will be equal to the Purchase Price. See
"Management of the Bank - Benefits - Stock Programs."
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plans expected to be adopted by the
Company following the Conversion. The Company expects to present the Stock
Option Plans for approval at the Company's first meeting of stockholders.
If the Stock Option Plans are approved by stockholders, an amount equal to
10% of the Common Stock issued in the Conversion, or 42,500, 50,000, 57,500
and 66,125 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively, will be reserved for
future issuance upon the exercise of options to be granted under the Stock
Option Plans. The issuance of Common Stock pursuant to the exercise of
options under the Stock Option Plans will result in the dilution of
existing stockholders' interests. Assuming stockholder approval of the
Stock Option Plans and all options were exercised at the end of the period
at an exercise price of $10.00 per share, the pro forma net earnings per
share would be $0.28, $0.28, $0.27 and $0.27, respectively, and the pro
forma stockholders' equity per share would be $16.18, $15.09, $14.28 and
$13.58, respectively. See "Management of the Bank - Benefits - Stock
Option Plans."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion -
Liquidation Rights" and "Regulation and Supervision - FDIC Regulations -
Dividend Limitations."
(6) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
due to regulatory considerations and changes in the market and general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
39
<PAGE>
LENOX SAVINGS BANK
STATEMENTS OF INCOME
The following Statements of Income of the Bank for the years ended
December 31, 1995, 1994 and 1993, have been audited by Clark, Schaefer,
Hackett & Co., independent certified public accountants, whose report thereon
appears elsewhere herein. These statements should be read in conjunction
with the Financial Statements and Notes thereto included elsewhere in the
Prospectus and Proxy Statement.
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and dividend income:
Loans...................................... $2,438 $2,130 $2,387
Mortgage-backed securities................. 67 274 515
Investments and interest-bearing deposits.. 449 297 246
Federal Home Loan Bank and Federal Home
Loan Mortgage Corporation dividends....... 27 25 21
------ ------ ------
Total interest income................. 2,981 2,726 3,169
------ ------ ------
Interest expense:
Deposits................................... 1,649 1,577 1,816
Borrowed money and capitalized leases...... 199 27 11
------ ------ ------
Total interest expense................ 1,848 1,604 1,827
------ ------ ------
Net interest income................... 1,133 1,122 1,342
Provision (credit) for loan losses........... (2) -- 6
------ ------ ------
Net interest income after
provision for loan losses............ 1,135 1,122 1,336
------ ------ ------
Other income:
Service fee income......................... 102 84 86
Gain (loss) on sale of investments......... -- (14) 58
------ ------ ------
Total other income.................... 102 70 144
------ ------ ------
General, administrative & other expenses:
Compensation and employee benefits......... 427 407 361
Occupancy and equipment.................... 215 171 161
Federal deposit insurance premiums......... 80 86 87
Franchise taxes............................ 48 49 45
Other...................................... 428 333 315
------ ------ ------
Total general, administrative and
other expenses....................... 1,198 1,046 969
------ ------ ------
Income before income taxes................... 39 146 511
Federal income taxes......................... 10 38 166
------ ------ ------
Net income........................ $ 29 $ 108 $ 345
------ ------ ------
------ ------ ------
</TABLE>
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has not yet engaged in any business and, accordingly, has no
results of operations. The Bank's results of operations are dependent
primarily on net interest income, which is the difference between the
interest income earned on its interest-earning assets, such as loans and
investments, and the interest expense on its interest-bearing liabilities,
such as deposits and borrowings. The Bank also generates non-interest income
such as service fee income. The Bank's general, administrative and other
expenses primarily consist of employee compensation, occupancy and equipment
expenses, federal deposit insurance premiums, franchise taxes and other
operating expenses. The Bank's results of operations are also significantly
affected by general economic and competitive conditions, particularly changes
in market interest rates, government policies and actions of regulatory
agencies. The Bank exceeded all of its regulatory capital requirements at
December 31, 1995. See "Regulatory Capital Compliance" for a discussion of
the historical and pro forma capital of the Bank and capital requirements.
See also "Regulation and Supervision - Capital Requirements."
MANAGEMENT STRATEGY
The Bank's net interest income has been adversely affected by changes in
interest rates largely because of the composition of its loan portfolio. In
1992 and 1993, the Bank began experiencing a significant amount of
prepayments in its loan portfolio as a result of the declining interest rate
environment. Many of the Bank's loans were refinanced into new ARM loans
offered by the Bank which carried initial rates that were below market rates.
Additionally, in the past, the Bank had originated ARM loans tied to a
lagging market index, some of which had interest rate margins as low as 50
basis points above the lagging market index. See "Business of the Bank -
Lending Activities." Further, some of the ARM loans have annual interest
rate caps of 1% or less. As a result, by 1994, when interest rates began to
rise, the Bank had approximately $5.0 million of 3-year ARM loans that had
been originated at low rates and had not yet repriced and $9.0 million of ARM
loans that were tied to a lagging index, many of which were repricing
downward in accordance with the lagging market index, even though the Bank's
cost of funds was increasing. The composition of the Bank's loan portfolio,
coupled with the majority of the Bank's deposits having maturities of one
year or less, made the Bank vulnerable to increases in interest rates and
adversely affected earnings. The Bank has significantly changed its lending
policies and has taken other action to improve its profitability as described
below. See "Risk Factors - Potential Impact of Changes in Interest Rates"
and "Business of the Bank - Lending Activities." The Bank's current
strategic plan is to enhance its long-term profitability, reduce the level of
interest rate risk and improve market share.
ENHANCING LONG-TERM PROFITABILITY.
Emphasizing the Origination of One- To- Four-Family Residential Mortgage
Loans. The Bank seeks to enhance long-term profitability through emphasizing
the origination of one- to four-family residential loans for its own
portfolio to customers living in the Bank's primary market area, which
includes Hamilton County, Ohio, as well as Warren, Butler and Clermont
counties, Ohio, and Boone, Campbell and Kenton counties, Kentucky. One- to
four-family residential mortgage loans have exceeded 91% of the Bank's total
loan portfolio in each of the five years ended December 31, 1995 and totalled
$30.7 million or 91.9% of the Bank's total loan portfolio at December 31,
1995. The Bank has hired a mortgage loan originator to attract potential
borrowers and has begun marketing its lending products throughout its primary
lending area. As a result of the Bank's emphasis on originating loans
secured by one- to four-family, owner-occupied, primary residences that meet
the Bank's underwriting standards, the Bank has maintained high asset
quality. The Bank's ratio of non-performing loans and real estate owned
41
<PAGE>
to total assets did not exceed .67% at any fiscal year end during the past
five years and averaged .34% over the past five fiscal years. At December
31, 1995, this ratio was .21%. The Bank had no real estate owned at that
date.
Increasing Non-Interest Income. The Bank also intends to enhance
profitability by continuing to seek means of increasing non-interest income
through the generation of transaction fees and commissions. In July 1995,
the Bank expanded the services available to customers by contracting with
Money Concepts, a company that provides certain investment services at the
offices of the Bank. The Bank receives a commission on business generated by
Money Concepts, which the Bank expects will enhance the Bank's non-interest
income.
Reducing Non-Interest Expense. Finally, the Bank intends to seek to
reduce costs. The Bank's ratio of non-interest expense to average assets was
2.57% for the year ended December 31, 1994 and was 2.88% for the year ended
December 31, 1995. Management is currently seeking means to reduce
non-interest expense by renegotiating agreements relating to its ATMs such
that the costs borne by the Bank related to the continuing operation of the
ATMs will be reduced or by eliminating some of its ATMs and other expenses to
the extent possible while maintaining an efficient and effective product
delivery system. Management expects that operating expenses will increase in
future periods as a result of the Bank's new lease arrangement with Procter &
Gamble (See "Summary - Lenox Savings Bank" and "Risk Factors - Potential
Decreases in Earnings") and as a result of its conversion from mutual to
stock form due to increased regulatory and reporting requirements and as a
result of proposed stock benefit programs that are likely to be adopted
following the Conversion.
MANAGEMENT OF INTEREST RATE RISK. The principal objective of the Bank's
interest rate risk management function is to evaluate the interest rate risk
included in certain balance sheet accounts; determine the level of risk
appropriate given the Bank's business focus, operating environment, capital
and liquidity requirements and performance objectives; establish prudent
asset concentration guidelines and manage the risk consistent with
Board-approved guidelines. Through such management, the Bank seeks to reduce
the vulnerability of its operations due to changes in interest rates and to
manage the ratio of interest rate sensitive assets to interest rate sensitive
liabilities within specified maturities or repricing dates. The Bank's
interest rate risk strategy primarily consists of: 1) emphasizing the
attraction and retention of core deposits, which tend to be a more stable
source of funding; 2) emphasizing the origination of short-term consumer
loans, the origination of which is largely dependent on the market demand for
such loans; and 3) investing in securities which have shorter maturities and
matching such securities with FHLB advances with similar maturities.
Furthermore, the Bank seeks to maintain a balance between its fixed-rate and
ARM loans, such that the Bank's loan portfolio is comprised of approximately
comparable amounts of each. At December 31, 1995, 44% of the Bank's one- to
four-family mortgage loans were fixed rate loans. At December 31, 1995, the
Bank's one year cumulative interest sensitivity gap was 2.54%. See
"-Interest Rate Sensitivity Analysis."
IMPROVE MARKET SHARE. The Bank intends to analyze options for
increasing its market share in the communities it serves, including increased
advertising and promotion in its local community. In addition, the Bank may
consider expansion through the acquisition or establishment of branch offices
and, if appropriate, the acquisition of smaller financial institutions. The
Bank has no current understandings or agreements for the acquisition of any
specific financial institution or the acquisition or establishment of any
branch offices.
INTEREST RATE SENSITIVITY ANALYSIS
The matching of the repricing characteristics of assets and liabilities
may be analyzed by examining the extent to which such assets and liabilities
are "interest rate sensitive" and by monitoring an institution's interest
rate sensitivity "gap." An asset or liability is said to be interest rate
sensitive
42
<PAGE>
within a specific time period if it matures or re-prices within that time
period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets anticipated, based upon certain
assumptions, to mature or re-price within a specific time period and the
amount of interest-bearing liabilities anticipated, based upon certain
assumptions, to mature or re-price within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities maturing or re-pricing
within a specific time frame. A gap is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets maturing or re-pricing within that same time frame.
Accordingly, in a rising interest rate environment, an institution with a
negative gap would not be in as favorable a position, as compared to an
institution with a positive gap, to invest in higher yielding assets. This
may result in the yield on its assets increasing at a slower pace than the
increase in the cost of its interest-bearing liabilities. During a period of
falling interest rates, an institution with a negative gap would tend to have
its assets repricing at a slower rate than its interest-bearing liabilities,
which, consequently, may result in its net interest income growing at a
faster rate then an institution with a positive gap.
The Bank maintains a high level of short-term certificates of deposit.
These accounts typically react more quickly to changes in market interest
rates than the Bank's investments in mortgage-backed and related securities
and mortgage loans because of the shorter maturity and re-pricing
characteristics of deposits. As a result, generally, sharp increases in
interest rates may adversely affect earnings while decreases in interest
rates may beneficially affect earnings.
In managing its interest rate risk the Bank makes every effort to
provide a more equal match between the maturity of its liabilities and the
maturity or repricing of its investments. In monitoring this process the
Bank regularly conducts a comprehensive analysis of the interest rate risk
profile and inherent profitability of the Bank's balance sheet. The Bank
utilizes a discounted cash flow analysis arriving at a mark-to-market
comparison of assets and liabilities to book values and in calculating the
net present value of the Bank's equity position. The primary focus is on
managing market value and total return. In addition, but to a much lesser
degree, the Bank will review its asset-liability gap position as an
indication of how it is faring on matching its asset/liability
maturity-repricing profile.
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1995, that are
expected to reprice or mature in each of the future time periods shown, based
on certain assumptions. Except as stated below, the assets and liabilities
shown that reprice or mature during a particular period were determined in
accordance with the earlier of term to repricing or the contractual terms of
the asset or liability. All mortgage-backed securities, and mortgages
secured by one- to four-family residences are assumed to prepay at a constant
prepayment rate of 14%, which was chosen based upon a consensus of prepayment
rates that apply to various weighted average coupons over various weighted
average maturities and which are published by the larger brokerage houses who
deal in mortgage-backed and related securities. Additionally, all variable
rate deposit accounts, which include statement savings and NOW accounts, are
assumed to run-off at a rate of 5% for up to 3 months, 5% from 3 months to 6
months, 10% from over 6 months to 1 year, 52.5% from over 1 year to 3 years,
and the remainder or 100% from over 3 years to 5 years. The liability
assumptions for variable rate deposit accounts were derived partly from
industry methodology standards of valuing core deposits and a blend of the
Bank's own historical experience. Management believes that all of the above
assumptions are reasonable.
43
<PAGE>
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1995, based on
the information and assumptions set forth in the notes below.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
--------------------------------------------------------------------------------
THREE FOUR ONE TO THREE TO FIVE TO MORE
MONTHS MONTHS TO THREE FIVE TEN THAN
OR LESS ONE YEAR YEARS YEARS YEARS TEN YEARS TOTAL
------- --------- ------ -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest bearing deposits................... $ 262 $ -- $ -- $ -- $ -- $ -- $ 262
Investments................................. 250 455 750 852 2,446 1,828 6,581
Mortgage-backed securities.................. 130 306 390 131 33 34 1,024
Loans receivable, net(1).................... 3,957 13,714 7,392 3,166 2,578 2,577 33,384
------- ------- ------- ------- ------- ------- -------
Total interest-earning assets............. $ 4,599 $14,475 $ 8,532 $ 4,149 $ 5,057 $ 4,439 $41,251
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Certificate accounts........................ $ 3,114 $ 8,023 $ 6,181 $ 5,148 $ -- $ -- $22,466
Money market savings accounts............... 149 411 2,424 -- -- -- 2,984
Passbook accounts........................... 284 783 2,423 2,193 -- -- 5,683
NOW accounts................................ 127 349 1,082 978 -- -- 2,536
FHLB advances............................... 3,406 1,319 305 63 46 189 5,328
Capitalized lease obligations............... 3 8 5 -- -- -- 16
------- ------- ------- ------- ------- ------- -------
Total..................................... $ 7,083 $10,893 $12,420 $ 8,382 $ 46 $ 189 $39,013
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Interest-rate sensitivity gap................. $(2,484) $ 3,582 $(3,888) $(4,233) $ 5,011 $ 4,250 $ 2,238
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Cumulative interest rate sensitivity gap...... $(2,484) $ 1,098 $(2,790) $(7,023) $(2,012) $ 2,238
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Cumulative interest rate sensitivity gap
as a percentage of total assets.............. (5.76)% 2.54% (6.47)% (16.28)% (4.66)% 5.19%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Cumulative net interest-earning assets as a
percentage of interest-bearing liabilities... 64.93 % 106.11% 90.82 % 81.89 % 94.82 % 105.74%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
______________________________
(1) For purposes of the gap analysis, loans receivable, net are not reduced for
the allowance for loan losses.
44
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in
different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as ARM
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their ARM loans may decrease in the
event of an interest rate increase.
As shown by the table above, increases in interest rates will result in
net decreases in the Bank's net portfolio value, while decreases in interest
rates will result in smaller net increases in the Bank's net portfolio value.
See "Risk Factors - Potential Effects of Changes in Interest Rates."
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid
on them.
AVERAGE BALANCE SHEET
The following tables set forth certain information relating to the Bank
at December 31, 1995 and for the years ended December 31, 1995, 1994 and
1993. The yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods shown
except where noted otherwise. Average balances are derived from average
month-end balances. Management does not believe that the use of average
monthly balances instead of average daily balances has caused a material
difference in the information presented. The yields and costs include fees
which are considered adjustments to yields.
45
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
AT DECEMBER 31,1995 1995 1994 1993
------------------- ---------------------- ----------------------- ---------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------- ---- ------- -------- ---- ------- -------- ---- ------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest bearing deposits . . . . . . . . $ 262 5.18% $ 473 $ 24 5.07% $ 2,256 $ 82 3.63% $ 1,240 $ 28 2.26%
Investments . . . . . . . . . . . . . . . 6,639 7.26 6,601 452 6.83 4,401 240 5.45 4,392 239 5.44
Mortgage-backed securities. . . . . . . . 1,083 8.79 827 66 7.98 3,574 274 7.67 5,963 515 8.64
Loans receivable, net . . . . . . . . . . 33,384 7.58 32,279 2,438 7.56 29,142 2,130 7.31 29,263 2,387 8.16
------- ---- ------- ----- ---- ------- ------ ----- ------- ------ ----
Total interest-earning assets . . . . . 41,368 7.55 40,180 2,980 7.42 39,373 $2,726 6.92 40,858 $3,169 7.76
Non-interest-earning assets. . . . . . . . 1,781 1,413 1,302 892
------- ------- ------- -------
Total assets. . . . . . . . . . . . . . $43,149 $41,593 $40,675 $41,750
------- ------- ------- -------
------- ------- ------- -------
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Deposits. . . . . . . . . . . . . . . . . $33,669 4.87% $34,259 $1,649 4.81% $36,100 $1,577 4.37% $37,551 $1,816 4.84%
FHLB advances . . . . . . . . . . . . . . 5,328 6.09 3,199 197 6.16 398 23 5.78 124 5 4.03
Capitalized lease obligations . . . . . . 16 7.50 26 2 7.69 51 4 7.84 76 6 7.89
------- ---- ------- ----- ---- ------- ------ ---- ------- ------ ----
Total interest-bearing liabilities. . . 39,013 5.04 37,484 1,848 4.93 36,549 $1,604 4.39 37,751 $1,827 4.84
Non-interest-bearing liabilities . . . . . 288 319 412 532
------- ------- ------- -------
Total liabilities . . . . . . . . . . . 39,301 37,803 $36,961 $38,283
Retained earnings. . . . . . . . . . . . . 3,848 3,790 3,714 3,467
------- ------- ------- -------
Total liabilities and retained
earnings. . . . . . . . . . . . . . . $43,149 $41,593 $40,675 $41,750
------- ------- ------- -------
------- ------- ------- -------
Net interest income/interest rate spread. . 2.51% $1,132 2.49% $1,122 2.53% $1,342 2.92%
---- ------ ---- ------ ----- ------ -----
---- ------ ---- ------ ----- ------ -----
Net interest-earning assets . . . . . . . . $2,355 $2,824 $3,107
------ ------ ------
------ ------ ------
Net interest margin . . . . . . . . . . . . 2.82% 2.85% 3.28%
---- ---- ----
---- ---- ----
Ratio of interest-earning assets to
interest-bearing liabilities. . . . . 106.03% 107.19% 107.73% 108.23%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
46
<PAGE>
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate), (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume), and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
COMPARED TO COMPARED TO
YEAR ENDED DECEMBER 31, 1994 YEAR ENDED DECEMBER 31, 1993
---------------------------- ----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
-------------------- -------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest earning deposits . . . . . . $ (81) $ 23 $ (58) $ 23 $ 31 $ 54
Investments . . . . . . . . . . . . . 140 71 211 -- 1 1
Mortgage-backed securities. . . . . . (219) 11 (208) (206) (35) (241)
Loans receivable, net . . . . . . . . 35 74 309 (10) (247) (257)
----- ---- ----- ----- ----- ----
Total interest income. . . . . . . 75 179 254 (193) (250) (443)
INTEREST-BEARING LIABILITIES:
Deposits. . . . . . . . . . . . . . . (83) 155 72 (70) (169) (239)
FHLB advances . . . . . . . . . . . . 172 2 174 11 7 18
----- ---- ----- ----- ----- ----
Capitalized lease obligations . . . . (2) -- (2) (2) -- (2)
Total interest expense . . . . . . 87 157 244 (61) (162) (223)
----- ---- ----- ----- ----- ----
Net change in net interest income. . . $ (12) $ 22 $ 10 $(132) $ (88) $(220)
----- ---- ----- ----- ----- ----
----- ---- ----- ----- ----- ----
</TABLE>
47
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994.
GENERAL. The Bank's net income for the year ended December 31, 1995,
decreased by $79,000, or 73%, compared to the year ended December 31, 1994,
primarily due to general, administrative and other expenses increasing $153,000.
Interest expense for the year ended December 31, 1995 was $1.85 million compared
to $1.60 million for the year ended December 31, 1994, primarily as a result of
the Bank's increased FHLB advances which were used to finance purchases of
United States government agency securities, increased mortgage lending and to
replace deposit runoff resulting from increased competition for deposits. At
December 31, 1995, the investment portfolio of the Bank was $6.1 million
compared to $4.2 million for the period ended December 31, 1994, a 46.3%
increase. The Bank also experienced a decrease in deposits due to increased
competition from other savings institutions and other financial investments such
as stock mutual funds. At December 31, 1995, the Bank had $33.7 million in
deposits, a decrease of 5.2%, when compared to $35.5 million at December 31,
1994.
INTEREST INCOME. Interest income for the year ended December 31, 1995 was
$2.98 million compared to $2.72 million for the year ended December 31, 1994,
an increase of approximately $255,000 or 9.4%. The increase in interest income
was primarily due to an increase in the Bank's yield on average interest-earning
assets, which for the year ending December 31, 1995 was 7.42% compared to 6.92%
for the year ending December 31, 1994. In addition, the Bank experienced a
significant increase in the Bank's loans receivable and a corresponding increase
in interest income. The average balance of loans receivable at December 31,
1995 was $32.3 million compared to $29.1 million at December 31, 1994, an
increase of $3.2 million or 11.0%. Interest income from loans receivable
increased $308,000 for the year ending December 31, 1995, to $2.44 million,
compared to $2.13 million for the year ended December 31, 1994, a 14.5%
increase. Interest from investments, mortgage-backed securities and interest-
bearing deposits decreased $54,000, or 9.1%, to $542,000 for the year ended
December 31, 1995, compared with $596,000 for the year ended December 31, 1994.
INTEREST EXPENSE. Interest expense increased by $244,000, or 15.21%, from
$1.60 million for the year ended December 31, 1994 to $1.85 million for the year
ended December 31, 1995. The increase resulted primarily from an increase on
the average rate paid on interest-bearing liabilities of 54 basis points, from
4.39% to 4.93% for the respective periods, which was primarily due, among other
factors, to the Federal Reserve Board's increase in short-term rates throughout
calendar year 1994. Interest expense on deposit accounts increased $72,000, or
4.6%, from $1.58 million for the year ended December 31, 1994 to $1.65 million
for the year ended December 31, 1995. Additionally, the Bank's interest
expense on advances from the FHLB increased by $174,000 from $23,000 for the
year ended December 31, 1994, to $197,000 for the year ended December 31, 1995.
The Bank generally has relied upon a combination of deposits, borrowed funds and
retained earnings to fund loan originations and other assets. However, in
recent years, as the Bank's deposit base has declined, largely reflecting the
competition for deposits in the Bank's market area and customers' interest in
seeking higher yielding investments for their funds, the Bank has begun to rely
upon FHLB advances as a source of funds as well. The FHLB advances are
currently comprised primarily of fixed rate, term advances with terms generally
of less than one year. In the future the Bank may decide to attempt to attract
deposits by raising the interest rates offered by the Bank; however, currently
the Bank believes that using short-term FHLB advances is less costly than
raising rates offered on its deposit accounts. See "Business of the Bank -
Borrowings" for a discussion of the reasons for the increase in borrowings.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased $2,000
for the year ended December 31, 1995 from no provision during the year ended
December 31, 1994. As a result, the allowance for loan losses at December 31,
1995, totalled $60,000. See "Business of the Bank - Non-Accrual and Past-Due
Loans - Allowance for Loan Losses." The Bank closely monitors its mortgage and
48
<PAGE>
consumer loan portfolios and maintains the allowance for loan losses through the
provision for loan losses, at a level which the Bank believes to be adequate
based on an evaluation of the collectibility of loans, prior loan loss
experience and general economic conditions. While management uses the best
information available to establish the allowance for loan losses, future
adjustments to the allowances may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's control. The
decreased provision for the year ended December 31, 1995 reflects management's
evaluation of the risks inherent in its loan portfolio. Total nonperforming
loans decreased from $93,000, or .29% of gross loans, at December 31, 1994 to
$89,000, or .27% of gross loans, at December 31, 1995. As a result of the
$4,000 decrease in nonperforming loans from December 31, 1994 to December 31,
1995 and the $2,000 decrease in the provision for loan losses, the ratio of
allowance for loan losses to nonperforming loans remained at approximately 67%
at December 31, 1995.
OTHER INCOME. Other income increased $32,000 or 45.7% from $70,000 for the
year ended December 31, 1994 to $102,000 for the year ended December 31, 1995.
The increase was primarily due to an increase in service fee income of $18,000
or 21.4% from $84,000 for the year ended December 31, 1995 to $102,000 for the
year ended December 31, 1995. In addition, for the year ended December 31, 1994
the Bank recorded a loss of $14,000 on the sale of a mortgage-backed mutual fund
while no losses were recorded on the sale of securities for the year ended
December 31, 1995.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $153,000, or 14%, from $1.04 million for the year ended December 31,
1994 to $1.20 million for the year ended December 31, 1995, primarily due to
increases in salaries and other employee benefits and other administrative
expenses of $115,000, or 15%, from $740,000 for the year ended December 31, 1994
to $855,000 for the year ended December 31, 1995. The increases in salary
expense primarily were due to the Bank's hiring of a Chief Financial
Officer/Treasurer and a Mortgage Loan Originator. The increase in other
operating expense for the year ended December 31, 1995 as compared to the year
ended December 31, 1994 was due to the Bank's increase in expense and attorney's
fees for a lawsuit brought against the Bank that was settled in 1995, which
totalled $104,000. In addition, general and administrative expense increased
due to lease payments the Bank agreed to pay Procter & Gamble. Such payments
increase general and administrative expense by approximately $21,000 per year.
In addition, in an effort to reduce costs the Bank switched data processing
providers and eliminated four of the Bank's ten ATMs in 1995.
INCOME TAX EXPENSE. Income tax expense decreased by $28,000, or 73%, from
$38,000 for the year ended December 31, 1994 to $10,000 for the year ended
December 31, 1995. The decrease was due to a decrease of pre-tax earnings of
$107,000, or 73% from $146,000 for the year ended December 31, 1994 to $39,000
for the year ended December 31, 1995. The effective tax rates for the years
ended December 31, 1994 and 1995 were 26% and 26%, respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
GENERAL. The Bank's net income for 1994 decreased by $237,000, or 69%,
from $345,000 for 1993 to $108,000 for 1994. The decrease primarily was due to
a $221,000 decrease in net interest income before provision for loan losses, a
$74,000 decrease in other income and a $76,000 increase in general,
administrative and other expenses. The balance of mortgage-backed securities
decreased from $5.6 million at December 31, 1993 to $787,000 at December 31,
1994, an 86% reduction, which decrease was due to the Bank's sale of a mortgage-
backed security mutual fund, the proceeds of which were used to fund the Bank's
growth of its one- to four-family mortgage loan portfolio and to purchase United
States government agency securities. The Bank's deposits decreased during
fiscal 1994 due to increased competition. At December 31, 1994, the Bank had
$35.5 million in deposits compared with $38.1 million
49
<PAGE>
at December 31, 1993, a 7% reduction. The Bank's borrowings increased during
the year as a result of an increase in advances from the FHLB by $217,000
from $184,000 at December 31, 1993 to $402,000 at December 31, 1994.
INTEREST INCOME. Interest income decreased by $444,000, or 14%, from $3.17
million for 1993 to $2.73 million for 1994. The decrease resulted from a 84
basis point decrease in the weighted average yield on interest-earning assets
from 7.76% for 1993 to 6.92% for 1994. The fall in yield on interest-earning
assets can be attributed to the composition of the Bank's mortgage loan
portfolio and an increase in prepayments on the Bank's mortgage loan portfolio
in 1993 and 1994. Since the early 1980's, the Bank had instituted a policy of
making one and three year ARM loans. As interest rates decreased, seasoned ARM
loans were refinanced and new ARM loans were originated with initial rates below
the fully indexed rate. During 1994, the Bank's three-year ARM loans, which had
not yet adjusted above the initial rates, caused the level of interest income to
fall substantially. Additionally, interest income from mortgage-backed
securities decreased by $241,000, or 47%, from $515,000 for 1993 to $274,000 for
1994. This decrease is attributable to the Bank's sale of its interest in a
mortgage-backed security mutual fund to fund the growth of its one- to four-
family mortgage loan portfolio and to purchase United States Government agency
securities. The average balance of mortgage-backed securities decreased by $2.4
million, or 40%, from $6.0 million in 1993 to $3.6 million in 1994. See
"-Management Strategy."
INTEREST EXPENSE. Interest expense decreased by $223,000, or 12%, from
$1.83 million for 1993 to $1.60 million for 1994. The decrease resulted
primarily from a 45-basis point decrease in the average rate paid on interest-
bearing liabilities, from 4.84% during 1993 to 4.39% during 1994, due to the
lower interest rate environment that prevailed until the middle of 1994. Total
interest-bearing liabilities decreased $1.20 million, or 6%, from $37.8 million
in 1993 to $36.5 million in 1994. This decrease can be attributed to increased
competition not only from other banks and savings and loans, but other
investments such as stocks and stock mutual funds. Interest expense on deposit
accounts decreased $239,000 or 13%, from $1.82 million from 1993 to $1.58
million for 1994, primarily due to a 47-basis point decrease in the average rate
paid on deposit accounts from 4.84% for 1993 to 4.37% for 1994, and a decrease
in the average balance of deposit accounts of $1.45 million, or 4%, from $37.6
million for 1993 to $36.1 million for 1994. Although there can be no assurance
that deposits will not decrease in the future, management does not expect
deposits to continue to decrease. Interest expense on FHLB advances increased
in 1994 to $23,000, from $5,000 in 1993. This was due to an increase in FHLB
advances which increased from an average balance of $124,000 in 1993 to $398,000
in 1994.
PROVISION FOR LOAN LOSSES. The provision for loan losses was not increased
in 1994 compared to an increase of $6,000 in 1993. The Bank's allowance for
estimated loan losses remained at $66,000, or 0.23% of gross loans at December
31, 1993 and 0.21% at December 31, 1994. Total nonperforming loans decreased
from $110,000, or 0.39% of gross loans, at December 31, 1993 to $93,000, or
0.29% of gross loans, at December 31, 1994. As a result of the $17,000 decrease
in nonperforming loans, from December 31, 1993 to December 31, 1994, the ratio
of allowance for estimated loan losses to nonperforming loans increased from 60%
at December 31, 1993 to 71% at December 31, 1994.
OTHER INCOME AND EXPENSE. Other income decreased by $74,000, from $144,000
for 1993 to $70,000 in 1994. The decrease was primarily due to a net loss on
the sale of investments of $14,000 in 1994 compared to a gain of $58,000 in
1993.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $77,000, from $969,000 for 1993 to $1.05 million in 1994. Salaries
and employee benefits increased $46,000 from 1993 to 1994 due to salary
increases in the ordinary course of business and the creation of a new officer
position.
50
<PAGE>
INCOME TAXES. Income tax expense decreased by $128,000, from an expense of
$166,000 for 1993 to an expense of $38,000 for 1994. The decrease was due to a
change in the level of pre-tax earnings of $365,000 from pre-tax earnings of
$511,000 in 1993 to $146,000 in pre-tax earnings in 1994. The effective tax
rate for the fiscal year ended December 31, 1993 was 32% compared to 26% for the
fiscal year ended December 31, 1994.
CUMULATIVE EFFECT OF CHANGE IN METHOD OF ACCOUNTING FOR SECURITIES. The
Bank adopted SFAS No. 115 on January 1, 1994. At January 1, 1994, the
cumulative effect of the adoption of this standard would have been to increase
retained earnings by approximately $214,000. See "-Impact of New Accounting
Standards." The Bank held all investments at December 31, 1994 as held to
maturity, carried at amortized cost.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and interest
payments on loans and FHLB advances. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions, and competition. Due to the declining interest rate environment in
1992 and 1993 and management's determination not to aggressively price its
deposit products, the Bank experienced a decline in its level of deposits. The
FDIC requires savings banks to maintain a level of investments in specified
types of liquid assets sufficient to protect and ensure the safety and soundness
of the savings bank. The Bank will maintain a minimum level of liquidity, as
defined by the FDIC, such that the total of cash and marketable investment
securities divided by total deposits and short-term liabilities will exceed 25%.
The Bank's liquidity ratios were 25%, 28% and 31% at December 31, 1995, 1994 and
1993, respectively.
The primary investment activity of the Bank is the origination of one- to
four-family mortgage loans and consumer loans, and the purchase of investments.
During the years ended December 31, 1995, 1994 and 1993, the Bank originated
mortgage loans in the amounts of $6.2 million, $8.5 million and $8.8 million,
respectively, and consumer loans in the amount of $2.1 million, $2.1 million and
$1.7 million, respectively.
The Bank's Consolidated Statements of Cash Flows included in the
accompanying Financial Statements shows that the Bank's cash and cash
equivalents ("cash") decreased substantially in 1994 as a result of the decrease
in the Bank's deposits that occurred in fiscal 1994 and management's strategy to
enhance earnings by increasing its investment primarily in loans and, to a more
limited extent, in agency securities. See the Bank's Financial Statements and
Notes thereto appearing elsewhere in this Prospectus and Proxy Statement.
The FDIC has adopted risk-based capital ratio guidelines to which the Bank
is subject. The guidelines establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations. Risk-based capital ratios are determined
by allocating assets and specified off-balance sheet commitments to four risk-
weighted categories, with higher levels of capital being required for the
categories perceived as representing greater risk.
These guidelines divide a bank's capital into two tiers. The first tier
("Tier 1") includes common equity, certain non-cumulative perpetual preferred
stock (excluding auction rate issues), retained earnings and minority interests
in equity accounts of consolidated subsidiaries, less goodwill and certain other
intangible assets (except mortgage servicing rights and purchased credit card
relationships, subject to certain limitations). Supplementary ("Tier II")
capital includes, among other items, cumulative perpetual and long-term limited-
life preferred stock, mandatory convertible securities, certain hybrid capital
instruments, term subordinated debts and the allowance for loan and lease
losses, subject to certain
51
<PAGE>
limitations, less required deductions. Banks are required to maintain a
total risk-based capital ratio of 8%, of which 4% must be Tier I capital.
The FDIC may, however, set higher capital requirements when a bank's
particular circumstances warrant. Banks experiencing or anticipating
significant growth are expected to maintain a Tier I leverage ratio,
including tangible capital positions, well above the minimum levels.
In addition, the FDIC established guidelines prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3%
for banks that meet certain specified criteria, provided that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points. At December 31,
1995, the Bank maintained a leverage ratio of 8.7% and total capital to risk
weighted assets ratio of 17.8%. See Note 9 to the Financial Statements
appearing elsewhere in this Prospectus and Proxy Statement.
The Bank's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Bank's operating, financing, lending
and investing activities during any given period. At December 31, 1995, cash
and short-term investments totaled $1.4 million. See "Use of Proceeds."
At December 31, 1995 the Bank had outstanding loan commitments (including
undisbursed loan proceeds) of $246,000. The Bank anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificates of deposit which are scheduled to mature in one year or less from
December 31, 1995, totaled $11.11 million.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Bank's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates
have a greater impact on the Bank's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114").
Under the provisions of SFAS No. 114, a loan is considered impaired when, based
on current information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. SFAS No. 114 requires creditors to measure impairment of a loan
based on the present value of expected future cash flows discounted at the
loan's effective interest rate. If the measure of the impaired loan is less
than the recorded investment in the loan, a creditor shall recognize an
impairment by recording a valuation allowance with a corresponding charge to bad
debt expense. This statement also applies to restructured loans and eliminates
the requirement to classify loans that are in-substance foreclosures as
foreclosed assets except for loans where the creditor has physical possession of
the underlying collateral, but not legal title. SFAS No. 114 applies to
financial statements for fiscal years beginning after December 15, 1994. In
October, 1994, the Financial Accounting Standards Board ("FASB") issued SFAS No.
118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures," ("SFAS No. 118") which amends SFAS No. 114 to allow a creditor to
use existing methods for recognizing interest income on impaired loans. The
Bank will be required to adopt SFAS
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<PAGE>
No. 114 for the year ending December 31, 1995 and does not anticipate that
the implementation of SFAS No. 114, and its amendment, SFAS No. 118, will
have a material impact on its results of operations or financial position.
In November 1993, the American Institute of Certified Public Accountants
("AICPA") issued SOP 93-6, "Employers' Accounting for Employee Stock Ownership
Plans" ("SOP 93-6") which is effective for fiscal years beginning after December
15, 1993. SOP 93-6 will apply to the Bank for its fiscal year beginning January
1, 1996. SOP 93-6 requires the application of its guidance for shares acquired
by ESOPs after June 30, 1992 but not yet committed to be released as of the
beginning of the year SOP 93-6 is adopted. SOP 93-6 will, among other things,
change the measure of compensation expense recorded by employers for leveraged
ESOPs from the cost of ESOP shares to the fair value of ESOP shares. Under SOP
93-6, the Company will recognize compensation cost equal to the fair value of
the ESOP shares during the periods in which they become committed to be
released. To the extent that the fair value of the Bank's ESOP shares differ
from the cost of such shares, this differential will be charged or credited to
equity. Employers with internally leveraged ESOPs such as the Company will not
report the loan receivable from the ESOP as an asset and will not report the
ESOP debt from the employer as a liability. See "Management of the Bank -
Benefits - Employee Stock Ownership Plan and Trust."
In December, 1991, the FASB issued SFAS No. 107, "Disclosures About Fair
Value of Financial Statements," ("SFAS No. 107"), which would require disclosure
of fair value information about financial instruments, whether or not recognized
in the balance sheet, for which it is practicable to estimate that value. SFAS
No. 107 excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. The Bank adopted SFAS No. 107 for the year
ended December 31, 1995. Management does not anticipate that the implementation
of SFAS No. 107 will have a material impact on the results of operations or
financial position of the Bank.
In October, 1994, the FASB issued SFAS No. 119 "Disclosures about
Derivative Financial Instruments and Fair Value of Financial Instructions"
("SFAS No. 119"). SFAS No. 119 requires disclosures about the amounts, nature
and terms of derivative financial instruments which do not result in off-
balance-sheet risk of accounting loss. It requires that a distinction be made
between financial instruments held or issued for trading purposes (including
dealing and other trading activities measured at fair value with gains and
losses recognized in earnings) and financial instruments held or issued for
purposes other than trading. SFAS No. 119 is effective for financial statements
issued for fiscal years ended after December 31, 1995. Management does not
expect any material impact from the adoption of SFAS 119.
In May 1993, the FASB issued SFAS No. 115. SFAS No. 115 requires that
investments be classified as "held to maturity," "available for sale" or
"trading securities." The statement defines investments in securities as "held
to maturity" based upon a positive intent and ability to hold those securities
to maturity. Investments held to maturity would be reported at amortized cost.
Debt and equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as "trading securities" and
would be reported at fair value, with unrealized gains and losses included in
operations. Equity and debt securities not classified as "held to maturity" or
"trading securities" are classified as "available for sale" and would be
recorded at fair value, with unrealized gains and losses excluded from
operations and reported as a separate component of stockholders' equity. The
Bank adopted SFAS No. 115 effective January 1, 1994. The adoption of SFAS No.
115 resulted in the reclassification of certain securities from the held for
investment portfolio to the securities available for sale portfolio, and had the
impact of increasing retained earnings by approximately $214,000 as of January
1, 1994. All securities classified as "available for sale at January 1, 1994
were subsequently sold during 1994. The Bank held all investments at December
31, 1995 and December 31, 1994 as held to maturity carried at amortized cost.
Management reclassified its entire portfolio of investments and mortgage-backed
53
<PAGE>
securities from held to maturity to available-for-sale at December 31,1995. See
Note 1 to the Financial Statements.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This statement requires that a mortgage banking enterprise
recognize as separate assets rights to service mortgage loans for others,
however those servicing rights are acquired. A mortgage banking enterprise that
acquires mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing rights
retained would allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans based on their relative fair value. Statement
No. 122 is effective for fiscal years beginning after December 15, 1995.
Management does not expect an impact from the adoption of this standard, because
the Bank does not presently originate mortgage loans for sale.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed of. The standard requires an impairment loss to be recognize when the
carrying amount of the asset exceeds the fair value of the asset. The fair
value of the asset is the amount at which the asset could be bought or sold in a
current transaction between willing parties, that is, other than in a forced
liquidation sale. An entity that recognizes an impairment loss shall disclose
additional information in the financial statements related to the impaired
asset. All long-lived assets and certain identifiable intangibles to be
disposed of and for which management has committed to a plan to dispose of the
assets, whether by sale or abandonment, shall be reported at the lower of the
carrying amount or fair value less cost to sell. Subsequent revisions in
estimates of fair value less cost to sell shall be reported as adjustments to
the carrying amount of assets to be disposed of, provided that the carrying
amount of the asset does not exceed the carrying amount of the asset before an
adjustment was made to reflect the decision to dispose of the asset. The
statement requires additional disclosure in the footnotes regarding assets to be
disposed of.
In December 1994, the Accounting Standards Division of the AICPA approved
SOP 94-6, "Disclosure of Certain Significant Risks and Uncertainties." SOP 94-6
requires disclosure in the financial statements beyond those now being required
or generally made in the financial statements about the risks and uncertainties
existing as of the date of those financial statements in the following areas:
nature of operations, use of estimates in the preparation of financial
statements, certain significant estimates, and current vulnerability due to
certain concentrations. The standard is effective for financial statements
issued for fiscal year ending December 15, 1995. The required disclosures were
made in the December 31, 1995 financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards for
stock-based employee compensation plans. This Statement encourages all entities
to adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
income and, if presented, earnings per share, as if this Statement had been
adopted. The accounting requirements of this Statement are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year ending after December 15, 1994. Management of the
Bank has not completed an analysis of the potential effects of this Statement on
its financial condition or results of operations.
54
<PAGE>
BUSINESS OF THE BANK
GENERAL
The Bank is an Ohio-chartered mutual savings bank. The Bank is located
in St. Bernard, Ohio and serves its primary area, which includes all of
Hamilton County as well as Warren, Butler and Clermont counties, Ohio, and
Boone, Campbell and Kenton counties, Kentucky. Although the Bank has a high
concentration of borrowers and depositors who are Procter & Gamble employees
living in Hamilton County, the Bank has taken steps to diversify its customer
base through advertising and hiring a mortgage broker. See "Risk Factors
- -Lending and Deposit Concentrations," "-Lending Activities" and "-Source of
Funds." At December 31, 1995, the Bank had total assets, liabilities and net
retained earnings of approximately $43.1 million, $39.3 million and $3.8
million, respectively.
The Bank's principal business consists of the acceptance of retail
deposits and the investment of those deposits, together with funds generated
from operations and borrowings, primarily in one- to four-family residential
mortgage loans. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Management Strategy." The Bank's
revenues are derived principally from interest on its mortgage, and consumer
loans, and, to a lesser extent, interest and dividends on its investment
securities. The Bank's primary sources of funds are deposits, principal and
interest payments and principal prepayments on loans, and to a lesser extent,
FHLB advances.
MARKET AREA AND COMPETITION
The Bank primarily originates one- to four-family residential mortgage
loans within its primary market area. The Bank's deposit gathering and
lending markets are concentrated in Hamilton County, Ohio, however, the Bank
also offers loans in Warren, Butler and Clermont counties, Ohio. In
addition, the Bank recently amended the Bank's lending policy to include
Boone, Campbell and Kenton counties, Kentucky. The Bank's high concentration
of lending to and deposit gathering from Procter & Gamble employees has
resulted in the Bank directly competing with institutions throughout the
Cincinnati area, and most recently directly with a Cincinnati commercial bank
that has contracted with Procter & Gamble to open a branch office at a
Procter & Gamble facility. See "Risk Factors - Potential Decreases in
Earnings."
The Cincinnati area, which includes Hamilton County, has a stable
economic base supported by a variety of industries and employment sectors.
Cincinnati is the second largest metropolitan area in the state of Ohio.
Although Cincinnati's economy was founded on manufacturing, which remained
the dominant employment sector throughout much of the twentieth century,
manufacturing industries now trail services and wholesale and retail trade in
terms of employment. Following the national trend, service industries were
the fastest growing employment sector through the 1980s and are now the
largest employment sector in the Cincinnati metropolitan area with 26% of the
labor force, led by health, business, and legal services. The second largest
employment sector is the wholesale and retail trade sector (25.6%). Although
less prominent, manufacturing remains a large employment sector, and accounts
for 20% of the labor force employment in such industries as transportation
equipment, food products, industrial machinery and chemicals.
Cincinnati is the chosen headquarters for many Fortune 500 companies,
including Procter & Gamble, E.W. Scripps, Federated Department Stores and
Cincinnati Milacron. Many other companies among the Fortune 500 have also
established operations in Cincinnati, including Ford Motor Corp. and General
Electric. Overall, Cincinnati's popularity among large employers has served
to increase the size and stability of the Cincinnati economy.
55
<PAGE>
The Cincinnati area's increasingly diverse economic mix provides the
metropolitan area with a strong degree of economic stability, which has
served to lessen the impact the national recession has had on the Cincinnati
area. Employment increases in the service and wholesale/retail trade
industries, coupled with less dependence on manufacturing employment has
further insulated the economy from recessionary trends. Hamilton County, the
location of Cincinnati, has benefitted the most from this economic
diversification as evidenced by its lower rate of unemployment relative to
Ohio and U.S. averages.
The Bank faces significant competition both in making loans and in
attracting deposits. The Bank's competitors are the financial institutions
operating in its primary market area, many of which are significantly larger
and have greater financial resources than the Bank. The Bank's competition
for loans comes principally from commercial banks, savings and loan
associations, mortgage banking companies, credit unions and insurance
companies. Its most direct competition for deposits has historically come
from savings and loan associations and commercial banks. The Cincinnati area
is the home to many commercial banks and savings institutions. As of
December 31, 1995, the Bank estimates that it represented less than 1% of the
total assets and market share for loans and deposits, among financial
institutions serving the Cincinnati area. In addition, the Bank faces
increasing competition for deposits from non-bank institutions such as
brokerage firms and insurance companies in such areas as short-term money
market funds, corporate and government securities funds, mutual funds and
annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
LENDING ACTIVITIES
GENERAL
Historically, the principal lending activity of the Bank has been the
origination of long-term fixed-rate and adjustable rate one- to four-family
mortgage loans. To a lesser extent, the Bank originates consumer loans. At
December 31, 1995, the Bank had invested $30.7 million, or 91.9% of its total
loan portfolio in one- to four-family mortgage loans. The Bank has hired a
mortgage loan originator to help it attract borrowers and has also begun to
market its products and services more aggressively throughout its primary
market area. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Management Strategy." As of December
31, 1995, the Bank exceeded all regulatory capital requirements. See
"Regulatory Capital Compliance."
LOAN PORTFOLIO COMPOSITION
The Bank's loan portfolio consists primarily of one- to four-family
loans. The types of loans that the Bank may originate are subject to federal
and state law and regulations. Interest rates charged by the Bank on loans
are affected by the demand for such loans and the supply of money available
for lending purposes and the rates offered by competitors. These factors
are, in turn, affected by, among other things, economic conditions, monetary
policies of the federal government, including the Federal Reserve Board and
legislative tax policies.
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<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and in percentages of the respective portfolios
at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------------- ----------------- ---------------- ---------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ ------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family(1)..... $30,633 91.76% $29,265 92.60% $26,112 92.58% $26,466 91.91% $27,309 93.04%
Construction(2)............ 53 .16 -- -- 107 .38 291 1.01 72 .25
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans.. 30,686 91.92 29,265 92.60 26,219 92.96 26,757 92.92 27,381 93.29
OTHER LOANS:
Consumer loans(3).......... 2,817 8.44 2,465 7.80 2,213 7.85 2,450 8.51 2,195 7.48
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans.............. 33,503 100.36 31,730 100.40 28,432 100.81 29,207 101.43 29,576 100.77
------- ------- ------- ------- -------
LESS:
Deferred loan fees......... 43 .13 59 .19 80 .29 166 .58 121 .41
Loans in process........... 16 .05 -- -- 82 .29 188 .65 44 .15
Allowance for loan losses.. 60 .18 66 .21 66 .23 57 .20 60 .21
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total reductions......... 119 .36 125 .40 228 .81 411 1.43 225 .77
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
TOTAL LOANS RECEIVABLE, NET.. $33,384 100.00% $31,605 100.00% $28,204 100.00% $28,796 100.00% $29,351 100.00%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
</TABLE>
- ------------
(1) Includes second mortgage loans on residential one- to four-family
properties.
(2) Construction loans are originated for the construction of residential one-
to four-family homes. The Bank approves the borrowers for the end loan
financing on all construction loans it originates.
(3) Includes loans secured by automobiles, boats, common stock, savings
accounts and unsecured loans.
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<PAGE>
LOAN MATURITY
The following table shows the maturity of the Bank's loans at December 31,
1995. The table does not include principal repayments. Principal repayments
totaled $6.5 million, $7.4 million and $11.3 million for the years ended
December 31, 1995, 1994 and 1993, respectively. At December 31, 1995, all
loans held by the Bank were classified as held to maturity. The table does
not include the effect of future loan prepayment activity. While the Bank
cannot project future loan prepayment activity, the Bank anticipates that in
periods of stable interest rates, prepayment activity would be lower than
prepayment activity experienced in periods of declining interest rates. In
general, the Bank originates adjustable and fixed-rate one- to four-family
loans with maturities from 15 to 30 years, one- to four-family loans with
balloon features which mature from 5 to 7 years and consumer loans with
maturities of up to 5 years.
AT DECEMBER 31, 1995
------------------------------------
ONE- TO
FOUR- TOTAL LOANS
FAMILY(1) CONSUMER(2) RECEIVABLE
--------- ----------- ------------
(IN THOUSANDS)
Amounts due:
One year or less......................$ 11 $ 142 $ 153
After one year:
More than one year to three years... 284 1,137 1,421
More than three years to five years. 1,284 1,538 2,822
More than five years to ten years... 4,080 -- 4,080
More than 10 years to twenty years.. 9,296 -- 9,296
More than twenty years.............. 15,731 -- 15,731
Total due after December 31, 1996. 30,675 2,675 33,350
------- ------ -------
Total amount due.................. 30,686 2,817 33,503
------- ------ -------
Less:
Undisbursed loan funds.............. 16
Deferred loan fees, net............. 43
Allowance for loan losses........... 60
-------
Total loans, net.................... $33,384
=======
- ------------
(1) Includes second mortgage loans on residential one- to four-family
properties and constructions loans originated to fund the construction of
residential one- to four-family mortgage loans.
(2) Includes loans secured by automobiles, boats, common stock, savings
accounts and unsecured loans.
58
<PAGE>
The following table sets forth at December 31, 1995, the dollar amount
of gross loans receivable, contractually due after December 31, 1996, and
whether such loans have fixed interest rates or adjustable interest rates.
DUE AFTER DECEMBER 31, 1996
--------------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- -------
(IN THOUSANDS)
One- to four-family........... $14,392 $16,283 $30,675
Consumer...................... 2,675 -- 2,675
------- ------- -------
Total loans.................. $17,067 $16,283 $33,350
------- ------- -------
------- ------- -------
LOAN ORIGINATIONS
The following tables set forth the Bank's loan originations, purchases,
sales and principal repayment information for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Gross loans:
Loans receivable, beginning of period.... $31,671 $28,270 $28,854
Loans originated:
One- to four-family(1)................. 6,201 8,524 8,835
Consumer(2)............................ 2,096 2,149 1,655
Principal repayments..................... (6,524) (7,375) (11,266)
Other changes, net....................... -- 103 192
Increase (decrease) in loans receivable 1,773 3,401 (584)
------- ------- -------
Loans receivable, end of period.......... $33,444 $31,671 $28,270
------- ------- -------
------- ------- -------
- ------------
(1) Includes second mortgage loans and construction loans on residential one-
to four- family properties.
(2) Includes loans secured by automobiles, boats, common stock, savings
accounts and unsecured loans.
59
<PAGE>
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Bank offers both fixed-rate
and adjustable-rate mortgage loans secured by one- to four-family residences,
primarily owner-occupied, located in the Bank's primary market area, with
maturities up to thirty years. Substantially all of such loans are secured
by property located in Hamilton County, Ohio. See "Risk Factors - Lending
and Deposit Concentrations."
At December 31, 1995, the Bank's total loans, net outstanding were $33.4
million, of which $30.7 million or 91.9% of the Bank's total loan portfolio
were one- to four-family residential mortgage loans. Of the one- to
four-family residential mortgage loans outstanding at that date, 44% were
fixed-rate loans, and 56% were ARM loans. Currently, the interest rate for
the Bank's ARM loans are tied to the one and three year Constant Maturity
Index ("CMI"). However, in the past, the Bank's index was based upon the
monthly national median cost of funds as reported by the OTS, which lags
behind CMI and the one year U.S. Treasury index and which results in those
loans repricing at interest rates that may be higher or lower than the
prevailing market rates. Approximately $9.0 million of the Bank's ARM loans,
or 52% of the Bank's total ARM loans, are based on that index, which
adversely affects the Bank's results of operations in an increasing rate
environment because loans may be repricing at a rate that is slower than the
Bank's cost of funds. In addition, approximately $3.0 million of the loans
tied to the lagging market index bear margins as little as 50 basis points
above the lagging market index. The Bank does not intend to offer one-to
four-family ARM loans based on a lagging index in the future and has
standardized the margin it uses, which is currently at least 2.75%. The Bank
currently offers a number of adjustable-rate mortgage loan programs with
interest rates which adjust either annually or every 3-year period. Such
interest rate adjustments are limited to a 2% annual adjustment cap and a 5%
and 6% life-of-the-loan cap for the Bank's 15 year ARMs and 30 year ARMs,
respectively. The Bank also offers mortgage loans with balloon features. In
general, these loans may be refinanced on the balloon date if the customer
completes a new loan application and meets all of the underwriting criteria
required of new customers. The Bank currently has no mortgage loans that are
subject to negative amortization. Finally, the Bank offers a limited amount
of construction loans for the construction of one- to four-family homes that
will serve as the primary residence of the borrower. These loans are only
made, however, when the Bank will provide the end loan financing.
The origination of adjustable-rate residential mortgage loans, as opposed
to fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. At the same time, the marketability of the underlying
property may be adversely affected. Periodic and lifetime caps on adjustable-
rate mortgage loans help to reduce these risks but also limit the interest rate
sensitivity of such loans.
The Bank's policy is to originate one- to four-family residential mortgage
loans in amounts up to 80% of the lower of the appraised value or the selling
price of the property securing the loan and up to 95% of the appraised value or
selling price if private mortgage insurance is obtained. Mortgage loans
originated by the Bank generally include due-on-sale clauses which provide the
Bank with the contractual right to deem the loan immediately due and payable in
the event the borrower transfers ownership of the property without the Bank's
consent. Due-on-sale clauses are an important means of adjusting the rates on
the Bank's fixed-rate mortgage loan portfolio and the Bank has generally
exercised its rights under these clauses.
The Bank also offers second mortgage loans based upon a lagging market
index, the monthly national median cost of funds as reported by the OTS. The
second mortgage loans are originated as fixed rate loans for the first five
years and thereafter adjust on an annual basis. At December 31, 1995, the Bank
had second mortgage loans totalling $903,000.
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<PAGE>
CONSUMER LENDING. The Bank's portfolio of consumer loans consists of a
combination of automobile, boat and common stock and savings secured loans.
The Bank also offers unsecured loans up to $5,000 for a maximum three year
term. As of December 31, 1995, consumer loans amounted to $2.8 million or
8.4% of the Bank's total loan portfolio. Consumer loans are generally
originated in the Bank's primary market area and generally have maturities of
one to five years. The consumer loans secured by common stock are originated
with terms up to five years and the loan amounts are limited to 80% of the
value of the common stock securing the loan. The Bank reviews the loans
secured by common stock on a monthly basis and requires that borrowers pledge
additional collateral in the event fluctuations in the market value of the
pledged common stock results in the value of the collateral dropping below
the required loan to value ratio of 80%.
Consumer loans are shorter term and generally contain higher interest
rates than residential mortgage loans. Management believes the consumer loan
market has been helpful in improving its spread between average loan yield
and costs of funds and at the same time improved the matching of its rate
sensitive assets and liabilities.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's credit history and an assessment
of the applicant's ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income may be
determined by verification of gross monthly income from primary employment,
and additionally from any verifiable secondary income. Creditworthiness of
the applicant is of primary consideration; however, the underwriting process
also includes a comparison of the value of the collateral in relation to the
proposed loan amount.
Consumer loans entail greater risks than one- to four-family residential
mortgage loans, particularly consumer loans that are secured by rapidly
depreciable assets such as automobiles or that are unsecured. In such cases,
repossessed collateral for a defaulted loan may not provide an adequate
source of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections are dependent on the borrower's continuing
financial stability, and therefore are more likely to be adversely affected
by job loss, divorce, illness or personal bankruptcy. See "Risk Factors -
Lending and Deposit Concentrations" for a discussion of the risks associated
with lending to numerous employees of a single corporation. Finally, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered
on such loans in the event of a default. At December 31, 1995, the Bank had
11 consumer loans totalling $23,000 that were 90 days or more delinquent.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors
authorizes the lending activity of the Bank, establishes the lending policies
of the Bank and reviews properties offered as security. Consumer loans
conforming to the Bank's loan policy may be approved by the President, the
Chief Operating Officer or the consumer loan officer. All other loans in
amounts up to $200,000 may be approved by two of the Bank's executive
officers. Loans over $200,000 must be approved by the Board of Directors.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and
certain other information is verified by an independent credit agency. If
necessary, additional financial information may be required. An appraisal of
real estate intended to secure a proposed loan generally is required to be
performed by an appraiser designated and approved by the Bank. For proposed
mortgage loans, the Board annually approves independent appraisers used by
the Bank and approves the Bank's appraisal policy. The Bank's policy is to
obtain title and hazard insurance on all mortgage loans.
61
<PAGE>
DELINQUENCIES AND CLASSIFIED ASSETS. Management and the Board of
Directors perform a monthly review of all delinquent loans. The procedures
taken by the Bank with respect to delinquencies vary depending on the nature
of the loan and period of delinquency. The Bank generally requires that
delinquent mortgage loans be reviewed and that a written late charge notice
be mailed no later than the 15th day of delinquency. The Bank's policies
provide that telephone contact will be attempted to ascertain the reasons for
delinquency and the prospects of repayment. When contact is made with the
borrower at any time prior to foreclosure, the Bank will attempt to obtain
full payment or work out a repayment schedule with the borrower to avoid
foreclosure. It is the Bank's policy to place all loans that are delinquent
by three or more payments on non-accrual status, resulting in the Bank no
longer accruing interest on such loans and reversing any interest previously
accrued but not collected. A non-accrual loan may be restored to accrual
status when delinquent principal and interest payments are brought current
and future monthly principal and interest payments are expected to be
collected. Property acquired by the Bank as a result of foreclosure on a
mortgage loan is classified as "real estate owned" and is recorded at the
lower of the unpaid principal balance or fair value less costs to sell at the
date of acquisition and thereafter. Upon foreclosure, the Bank generally
would require an appraisal of the property and, thereafter, appraisals of the
property on an annual basis and external inspections on at least a quarterly
basis.
The Bank's Classification of Assets Policy requires that the Bank
utilize an internal asset classification system as a means of reporting
problem and potential problem assets. The Bank currently classifies problem
and potential problem assets as "Substandard," "Doubtful" or "Loss" assets.
An asset is considered Substandard if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the
distinct possibility that the insured institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as Doubtful have all
of the weaknesses inherent in those classified Substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectible and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted.
Assets which do not currently expose the insured institution to sufficient
risk to warrant classification in one of the aforementioned categories but
possess weaknesses are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by
management. General valuation allowances, which is a regulatory term,
represent loss allowances which have been established to recognize the
inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies one or more assets, or portions thereof, as
Loss, it is required either to establish a specific allowance for losses
equal to 100% of the amount of the asset so classified or to charge off such
amount.
The FDIC, in conjunction with the other federal banking agencies,
recently adopted an interagency policy statement on the allowance for loan
and lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment
and establishment of adequate allowances and guidance for banking agency
examiners to use in determining the adequacy of general valuation guidelines.
Generally, the policy statement recommends that institutions have effective
systems and controls to identify, monitor and address asset quality problems;
that management has analyzed all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management
has established acceptable allowance evaluation processes that meet the
objectives set forth in the policy statement. As a result of the declines in
local and regional real estate market values
62
<PAGE>
and the significant losses experienced by many financial institutions, there
has been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
institutions by the FDIC. While the Bank believes that it has established an
adequate allowance for loan losses, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the Bank
to materially increase at that time its allowance for loan losses, thereby
negatively affecting the Bank's financial condition and earnings at that
time. Although management believes that adequate specific and general loan
loss allowances have been established, actual losses are dependent upon
future events and, as such, further additions to the level of specific and
general loan loss allowances may become necessary.
The President of the Bank reviews the Bank's loans on a monthly basis and
classifies loans on a quarterly basis and reports the results of her review to
the Board of Directors. The Bank classifies loans in accordance with the
management guidelines described above. At December 31, 1995, the Bank had no
real estate owned as a result of foreclosure ("REO"). At December 31, 1995, the
Bank had $109,000 of assets classified as Special Mention, $39,000 of assets
classified as Substandard, and $2,000 classified as Doubtful or Loss.
63
<PAGE>
The following table sets forth delinquencies in the Bank's loan portfolio
as of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
----------------------------------------- ----------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------- ------------------- ------------------- -------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.................... 4 $116 2 $66 5 $161 2 $88
Consumer............................... 10 20 11 23 3 15 3 5
-- ---- -- --- - ---- - ---
Total.............................. 14 $136 13 $89 8 $176 5 $93
-- ---- -- --- - ---- - ---
-- ---- -- --- - ---- - ---
Delinquent loans to total gross loans.. .41% .27% .56% .29%
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1993
-----------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------- -------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family.................... 5 $161 3 $109
Consumer............................... 3 8 2 1
- ---- - ----
Total.............................. 8 $169 5 $110
- ---- - ----
- ---- - ----
Delinquent loans to total gross loans.. .60% .39%
</TABLE>
64
<PAGE>
NON-ACCRUAL AND PAST-DUE LOANS. The following table sets forth
information regarding loans contractually past due 90 days or more. At such
date, there were no accruing loans past due 90 days or more. If all
non-accrual loans had been performing in accordance with their original term
and had been outstanding from the earlier of the beginning of the period or
origination, the Bank would have recorded interest income of $3,146, $7,470,
$5,008, $3,119, and $8,273 for the years ended December 31, 1995, 1994, 1993,
1992 and 1991. The Bank had no troubled debt restructurings within the
meaning of SFAS No. 15 at any of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual one- to four-family loans
delinquent 90 days or more................. 66 $88 $109 $148 $270
Non-accrual consumer loans
delinquent 90 days or more................. 23 5 1 -- 4
--- --- ---- ---- ----
Total non-performing loans.................. 89 93 110 148 274
Total investment in REO..................... -- -- -- -- --
--- --- ---- ---- ----
Total non-performing assets............... $89 $93 $110 $148 $274
--- --- ---- ---- ----
--- --- ---- ---- ----
Non-performing loans to total loans......... .27% .29% .39% .51% .93%
Non-performing assets to total assets....... .21% .23 .26 .35 .67
</TABLE>
65
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risks inherent in its
loan portfolio and the general economy. The allowance for loan losses is
maintained at an amount management considers adequate to cover estimated
losses in loans receivable which are deemed probable and estimable based on
information available to management at such time. While management believes
the Bank's allowance for loan losses is sufficient to cover losses inherent
in its loan portfolio at this time, no assurances can be given that the
Bank's level of allowance for loan losses will be sufficient to cover future
loan losses incurred by the Bank or that future adjustments to the allowance
for loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. The allowance
is based upon a number of factors, including asset classifications, economic
trends, industry experience and trends, industry and geographic
concentrations, estimated collateral values, management's assessment of the
credit risk inherent in the portfolio, historical loan loss experience, and
the Bank's underwriting policies. As of December 31, 1995, the Bank's
allowance for loan losses was .18% of total loans as compared to .21% as of
December 31, 1994. The Bank had $89,000 of nonperforming loans at December
31, 1995 and $93,000 at December 31, 1994. The Bank will continue to monitor
and modify its allowances for loan losses as conditions dictate. Various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's valuation allowance. These agencies may
require the Bank to establish additional valuation allowances, based on their
judgments of the information available at the time of the examination.
At December 31, 1995, the Bank had no REO. For a description of how the
Bank would treat REO, see the Financial Statements and Notes thereto
appearing elsewhere in this Prospectus and Proxy Statement.
66
<PAGE>
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the table.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of period ............... $66 $66 $57 $60 $53
Provision (credit) for loan losses............ (2) -- 6 4 8
Charge-offs:
Consumer.................................... 5 1 -- 10 17
--- --- --- --- ---
Total charge-offs......................... 5 1 -- 10 17
Recoveries:
Consumer ................................... 1 1 3 3 16
--- --- --- --- ---
Total recoveries.......................... 1 1 3 3 16
--- --- --- --- ---
Net charge-offs............................... 4 -- (3) 7 1
--- --- --- --- ---
Balance at end of period...................... $60 $66 $66 $57 $60
--- --- --- --- ---
--- --- --- --- ---
Ratio of net loan charge-offs
during the period to average
loans outstanding during period.............. .01% --% (.01)% .02% --%
Ratio of allowance for loan losses
to gross loans at end of period.............. .18 .21 .23 .20 .20
Ratio of allowance for loan losses
to non-performing loans
at end of period............................. 66.87 71.17 59.86 38.39 21.79
</TABLE>
67
<PAGE>
The following tables set forth the Bank's allocation of allowance for loan
losses by loan category, the percent of the allocated allowance to the total
allowance and the percent of each specific loan category to total loans. The
portion of the allowance for loan losses allocated to each loan category does
not represent the total available for future losses which may occur within the
loan category since the total allowance for loan losses is a valuation reserve
applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1995 1994 1993
--------------------------------- ------------------------------- ---------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS IN ALLOWANCE LOANS IN ALLOWANCE LOANS IN EACH
TO TOTAL EACH CATEGORY TO TOTAL EACH CATEGORY TO TOTAL CATEGORY
AMOUNT ALLOWANCE TO TOTAL LOANS AMOUNT ALLOWANCE TO TOTAL LOANS AMOUNT ALLOWANCE TO TOTAL LOANS
------ --------- -------------- ------ --------- -------------- ------ --------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family . . . $20 38.33% 91.59% $20 30.30% 92.23% $20 30.30% 92.22%
Consumer. . . . . . . . . 40 66.67 8.41 46 69.70 7.77 46 69.70 7.78
--- ------ ------ --- ------ ------ --- ------- -------
Total allowance for
loan losses . . . . . $60 100.00% 100.00% $66 100.00% 100.00% $66 100.00% 100.00%
--- ------ ------ --- ------ ------ --- ------- -------
--- ------ ------ --- ------ ------ --- ------- -------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1992 1991
--------------------------------- -------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS IN ALLOWANCE LOANS IN
TO TOTAL EACH CATEGORY TO TOTAL EACH CATEGORY
AMOUNT ALLOWANCE TO TOTAL LOANS AMOUNT ALLOWANCE TO TOTAL LOANS
------ --------- -------------- ------ --------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family . . . $20 35.09% 91.61% $20 33.33% 92.58%
Consumer. . . . . . . . . 37 64.91 8.39 40 66.67 7.42
--- ------ ------ --- ------ ------
Total allowance for
loan losses . . . . . $57 100.00% 100.00% $60 100.00% 100.00%
--- ------ ------ --- ------ ------
--- ------ ------ --- ------ ------
</TABLE>
68
<PAGE>
INVESTMENT ACTIVITIES
Federal and state regulations require the Bank to maintain a prudent amount
of liquid assets to protect the safety and soundness of the Bank. Therefore,
the investment policy of the Bank as established by the Board of Directors
attempts to provide and maintain liquidity, generate a favorable return on
investments without incurring undue interest rate and credit risk and complement
the Bank's lending activities. The Bank's policies generally limit investments
to government and federal agency-backed securities and other non-government
guaranteed securities, including corporate debt obligations, that are investment
grade. The Bank's policies provide the authority to invest in U.S. Treasury and
U.S. Government guaranteed securities, securities backed by federal agencies
such as Federal National Mortgage Association ("FNMA"), Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal Farm Credit Bureau, mortgage-
backed securities which are backed by federal agency securities, obligations of
state and political subdivisions with at least an "A" rating, certificates of
deposit purchased through the FHLB and securities issued by mutual funds which
invest in securities consistent with the Bank's allocable investments. The
Bank's policies provide that the Chief Financial Officer is authorized to
execute all transactions within specified limits which are reviewed by the Board
of Directors on a monthly basis and are currently $500,000. From time to time
the Board of Directors may authorize the Chief Financial Officer to exceed the
policy limitations.
At December 31, 1995, the Bank had a total of $7.98 million in certificates
of deposit, other interest earning deposits, corporate notes, federal funds and
other investment and mortgage-backed securities. At December 31, 1995, all
investment and mortgage-backed securities were classified as available for sale.
Included in this total, at December 31, 1995, the Bank had $5.6 million in U.S.
Government and agencies securities and $1.1 million in mortgage-backed
securities. Investments in mortgage-backed securities involve a risk that
actual prepayments will exceed prepayments estimated over the life of the
security which may result in a loss of any premium paid for such instruments
thereby reducing the net yield on such securities. In addition, if interest
rates increase, the market value of such securities may be adversely affected
which, in turn, would adversely affect stockholders' equity to the extent such
securities are held for sale. The Bank may invest in mortgage-backed securities
in the future, but has not invested in mortgage-backed securities in recent
years. The Bank also had $250,000 invested in Student Loan Marketing
Association ("SLMA") multiple step-up callable notes with an amortized cost and
estimated fair value of $250,000 and $250,080, respectively. These notes are
callable periodically at the option of the issuer, but if not called, have a
predetermined upward adjustment of the interest rates. The notes at
December 31, 1995 had a remaining maturity of 39 months and a weighted average
rate of 6%.
69
<PAGE>
The following table sets forth certain information regarding the carrying
and market values of the Bank's federal funds sold and other short-term
investments and investment securities at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1995 1994 1993
----------------- ---------------- ----------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ----- --------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit(1) . . . . . . . . $ 151 $ 151 $ 488 $ 488 $ 1,251 $ 1,251
Other interest-earning deposits. . . . . . 164 164 195 195 273 273
Investment securities:
Corporate notes. . . . . . . . . . . . . 455 456 1,159 1,150 -- --
Federal funds. . . . . . . . . . . . . . 97 97 204 204 2,400 2,400
FHLB stock . . . . . . . . . . . . . . . 407 407 381 381 360 360
U.S. government obligations . . . . . . 5,567 5,625 2,997 2,926 300 305
Mutual Funds . . . . . . . . . . . . . . 1 1 1,000 1,000 2,750 2,828
FHLMC preferred stock. . . . . . . . . . -- -- -- -- 21 267
Mortgage-backed securities . . . . . . . 1,024 1,082 787 799 5,582 5,666
------ ------ ------ ------ ------- -------
Total. . . . . . . . . . . . . . . . . $7,866 $7,983 $7,211 $7,143 $12,937 $13,350
------ ------ ------ ------ ------- -------
------ ------ ------ ------ ------- -------
</TABLE>
____________________________
(1) Includes certificates of deposit with original maturities of greater
than 90 days.
70
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
certificates of deposit, other interest-bearing deposits and investment
securities as of December 31, 1995.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
----------------- ------------------ ------------------ ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of Deposit(1)....... $ -- -- $ 79 5.87 $ 72 6.10 $ -- -- $ 151 5.98
Other interest-bearing deposits.. 164 5.10 -- -- -- -- -- -- 164 5.10
Investment securities:
U.S. government obligations.... 250 5.19 1,447 6.00 3,928 7.74 -- -- 5,625 7.18
Federal funds.................. 97 5.30 -- -- -- -- -- -- 97 5.30
Mutual funds................... 1 5.51 -- -- -- -- -- -- 1 5.51
Corporate notes................ 456 8.84 -- -- -- -- -- -- 456 8.84
FHLB stock..................... -- -- -- -- -- -- 407 7.10 407 7.10
Mortgage-backed securities..... -- -- -- -- -- -- 1,082 8.79 1,082 8.79
---- ------ ------ ------ ------
Total........................ $968 6.91 $1,526 5.99 $4,000 7.71 $1,489 8.33 $7,983 7.40
---- ------ ------ ------ ------
---- ------ ------ ------ ------
</TABLE>
_____________________________
(1) Includes certificates of deposit with original maturities of greater than
90 days.
71
<PAGE>
SOURCE OF FUNDS
GENERAL. Deposits, loan repayments and prepayments, and cash flows
generated from operations are the primary source of the Bank's funds for use
in lending, investing and for other general purposes. The Bank also relies
upon advances from the FHLB.
DEPOSITS. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. For the year ended December 31, 1995, certificates
of deposit constituted 68.01% of total average deposits.
The Bank's current deposit products include savings, NOW accounts, money
market and certificate of deposit accounts ranging in term from thirty days
to five years. Included in the Bank's certificate of deposit accounts are
certificates of deposit with balances in excess of $100,000 (jumbo
certificates), and Individual Retirement Accounts ("IRAs").
Deposits are obtained primarily from residents of Hamilton County, Ohio.
The Bank seeks to attract deposit accounts by offering a variety of products,
competitive rates, and service hours. Although a substantial amount of the
Bank's depositors are past and present Procter & Gamble employees, the Bank
has sought to attract new depositors through traditional methods of
advertising, including print media advertising. See "Risk Factors - Lending
and Deposit Concentrations." The Bank does not generally advertise outside
of its market area or utilize the services of deposit brokers. Management
believes that an insignificant number of deposit accounts are held by
non-residents of the Bank's primary market area.
The Bank sets interest rates on its deposits on a weekly basis, based
upon a number of factors, including: the previous week's deposit flow; a
current survey of a selected group of competitors' rates for similar
products; external data which may influence interest rates; investment
opportunities and loan demand; and scheduled maturities.
The following table presents the deposit activity of the Bank for the
periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
Balance beginning of period........ $35,526 $38,120 $38,744
Net increase (decrease)
before interest credited........ (3,506) (4,171) (2,440)
Interest credited................ 1,649 1,577 1,816
------- ------- -------
Balance end of period.......... $33,669 $35,526 $38,120
------- ------- -------
------- ------- -------
72
<PAGE>
At December 31 , 1995, the Bank had $4.0 million in certificate accounts
in amounts of $100,000 or more maturing as follows:
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- ------ ------------
(DOLLARS IN THOUSANDS)
Three months or less............... $ 102 5.18%
Over three through nine months..... 364 5.79
Over six through 12 months......... 405 5.69
Over 12 months..................... 3,150 6.38
------
Total............................ $4,021 6.22
------
------
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------- ----------------------------- -----------------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------- -------- -------- ------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement savings
accounts................ $ 5,805 16.94% 2.68% $ 6,406 17.75% 2.64% $ 6,316 16.82% 3.07%
NOW and Money
Market accounts......... 5,155 15.05 2.47 6,091 16.87 2.64 5,807 15.46 3.05
Total certificate
accounts................ 23,299 68.01 5.87 23,603 65.38 5.28 25,428 67.72 5.68
------- ------ ------- ------ ------- ------
Total average
deposits................. $34,259 100.00% 4.81% $36,100 100.00% 4.37% $37,551 100.00% 4.84
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
</TABLE>
73
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1995, 1994 and
1993.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31, 1995 AT DECEMBER 31,
-------------------------------------------------------------- ---------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS 1995 1994 1993
--------- --------- ----------- ---------- ---------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts(1):
0 to 4.00%................ $ -- $ -- $ -- $ -- $ -- $ -- $ 1,506 $ 8,212
4.01 to 5.00%............. 519 88 190 -- -- 797 6,229 4,263
5.01 to 6.00%............. 7,202 2,333 1,247 1,405 785 12,972 9,377 5,811
6.01 to 7.00%............. 2,829 1,659 663 1,881 912 7,944 3,942 843
7.01 to 8.00%............. 587 -- -- -- 166 753 1,166 1,678
8.01 to 9.00%............. -- -- -- -- -- -- 1,231 2,771
Over 9.01%................ -- -- -- -- -- -- 259 1,435
------- -------
Total................... $11,137 $4,080 $2,100 $3,286 $1,863 $22,466 $23,710 $25,013
------- ------ ------ ------ ------ ------- ------- -------
------- ------ ------ ------ ------ ------- ------- -------
</TABLE>
_________________________
(1) Certificates of deposit include IRA accounts of $9,899, $10,666 and
$11,575 as of December 31, 1995, 1994 and 1993, respectively.
74
<PAGE>
BORROWINGS
At December 31, 1995, the Bank had $5.3 million in outstanding advances
from the FHLB and had no other borrowings. The FHLB advances are used by the
Bank to fund assets, including loan originations. The majority of FHLB
advances bear fixed rates and have terms of one year or less. The maximum
amount that the FHLB will advance to member institutions, including the Bank,
fluctuates from time to time in accordance with current regulations. The
Bank may obtain additional advances from the FHLB as part of its operating
strategy.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
AT OR FOR THE YEAR
ENDED DECEMBER 31,
------------------------
1995 1994 1993
------ ----- -----
FHLB advances:
Average balance outstanding.................. $3,199 $ 398 $ 118
Maximum amount outstanding at any
month-end during the period................. 5,806 417 300
Balance outstanding at end of period......... 5,327 402 184
Weighted average interest rate during
the period.................................. 6.16% 5.78% 4.24%
Weighted average interest rate at end of
period...................................... 6.09% 5.99% 5.68%
PROPERTIES
The Bank conducts its business through its office located in St.
Bernard, Ohio. The Company believes that the Bank's current facilities are
adequate to meet the present and immediately foreseeable needs of the Bank
and the Company. In prior years, the Bank has not been required to pay rent
for the office that the Bank has operated from. In 1995, the lessor
negotiated for lease payments through December 31, 1999 totalling $105,000.
The lease payments will be lower in the first years and increase in later
years to cover the total amount of the lease. See Note 4 to the Notes to
Financial Statements included elsewhere herein. There are no renewal
options, and the Bank may need to renegotiate at the end of the term. See
"Risk Factors - Potential Decreases in Earnings." The following table sets
forth certain information relating to the Bank's office.
ORIGINAL NET BOOK VALUE
DATE OF PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1995
- --------------------------- ------- -------- ---------- -----------------
5255 Beech Street
St. Bernard, Ohio 45217.... Leased 1995 2000 $288,000
75
<PAGE>
In addition, at December 31, 1995 the Bank had a capitalized lease
obligation related to 3 of its ATMs. See Note 6 to the Notes to Financial
Statements appearing elsewhere in this Prospectus and Proxy Statement. At
December 31, 1995, the Bank had a total of 6 ATMs. The Bank is currently in
the process of renegotiating the agreements it has with Procter & Gamble
relating to the ATMs located at Procter & Gamble facilities. The Bank
expects that as the agreements are renegotiated, it will either reduce the
costs borne by the Bank related to the continuing operation of the ATMs or
eliminate them.
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition or results of operations.
See Note 13 to the Bank's Financial Statements and Notes thereto included
elsewhere in this Prospectus and Proxy Statement for more information
regarding a settled claim relating to an employment matter.
PERSONNEL
As of December 31, 1995, the Bank had 10 full-time employees and 2
part-time employees. The employees are not represented by a collective
bargaining unit, and the Bank considers its relationship with its employees
to be good. See "Management of the Bank - Benefits" for a description of
certain compensation and benefit programs offered to the Bank's employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank will report their income on a
calendar year basis using the accrual method of accounting and will be
subject to federal income taxation in the same manner as other corporations
with some exceptions, including particularly the Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Bank or the Company. The Bank has not been audited
by the IRS or the Ohio Department of Revenue during the past five years.
BAD DEBT RESERVE. Savings institutions such as the Bank which meet
certain definitional tests primarily relating to their assets and the nature
of their business ("qualifying thrifts") are permitted to establish a reserve
for bad debts and to make annual additions thereto, which additions may,
within specified formula limits, be deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, may be
computed using an amount based on the Bank's actual loss experience, or a
percentage equal to 8% of the Bank's taxable income, computed with certain
modifications and reduced by the amount of any permitted addition to the
non-qualifying reserve. Use of the percentage of taxable income method of
calculating the Bank's deductible addition to its bad debt reserve has the
effect of reducing the marginal rate of federal tax on the Bank's income to
32.2%, exclusive of any minimum or environmental tax, as compared to the
generally applicable maximum corporate federal income tax rate of 35%. The
Bank's deduction with respect to non-qualifying loans must be computed under
the experience method which allows a deduction based on the Bank's actual
loss experience over a period of several years. Each year the Bank selects
the most favorable way to calculate the deduction attributable to an addition
to the tax bad debt reserve.
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The Bank presently satisfies the qualifying thrift definitional tests.
If the Bank failed to satisfy such tests in any taxable year, it would be
unable to make additions to its bad debt reserve under the percentage of
taxable income method. Instead, the Bank would be required to make additions
to the bad debt reserves using the experience method and might additionally
be required to recapture at least a portion of its bad debt reserve over a
multi-year period. Among other things, the qualifying thrift definitional
tests require the Bank to hold at least 60% of its assets as "qualifying
assets." Qualifying assets generally include cash, obligations of the United
States or any agency or instrumentality thereof, certain obligations of a
state or political subdivision thereof, loans secured by interests in
improved residential real property or by savings accounts, student loans and
property used by the Bank in the conduct of its banking business. The Bank's
ratio of qualifying assets to total assets exceeded 60% through December 31,
1995. Although there can be no assurance that the Bank will satisfy the 60%
test in the future, management believes that this level of qualifying assets
can be maintained by the Bank.
The amount of the addition to the allowance for losses on qualifying
real property loans under the percentage of taxable income method cannot
exceed the amount necessary to increase the balance of the reserve for losses
on qualifying real property loans at the close of the taxable year to 6
percent of the balance of the qualifying real property loans outstanding at
the end of the taxable year. Also, if the qualifying thrift uses the
percentage of taxable income method, then the qualifying thrift's aggregate
addition to its reserve for losses on qualifying real property loans cannot,
when added to the addition to the reserve for losses on non-qualifying loans,
exceed the amount by which (i) 12 percent of the amount that the total
deposits or withdrawable accounts of depositors of the qualifying thrift at
the close of the taxable year exceeds (ii) the sum of the qualifying thrift's
surplus, undivided profits and reserves at the beginning of such year. As of
December 31, 1995, neither the 6 percent of qualifying loans limitation nor
the overall 12 percent of deposits limitation would have restricted the
Bank's deduction for additions to its bad debt reserve. At December 31,
1995, the Bank's bad debt reserve for tax purposes was $1.1 million.
Legislation has been proposed that would generally repeal, effective for
taxable years beginning after 1995, the above-described bad debt deduction
rules available to thrift institutions such as the Company, but would
generally retain the experience method for thrift institutions having assets
with average adjusted bases of $500 million or less. The proposed tax
legislation would not require the recapture of bad debt reserve deductions
taken prior to 1988, but would require the recapture of at least some of the
bad debt reserve deductions taken by an affected thrift institution after
1987. The balance of pre-1988 bad debt reserves would continue to be subject
to provisions of present law referred to below that require recapture in the
case of certain excess distributions to shareholders. Bad debt reserve
deductions required to be recaptured would generally be taken into account
ratably over the six-taxable year period beginning with the first taxable
year beginning on such a date to be specified in the legislation. However,
if an institution maintains its residential loans at a level equal to the
average level of such loans for a period preceding such specified date, the
institution would be permitted to defer recapture of its reserves for two
years. The Company is not able to predict whether or in what form the
proposed tax legislation will be enacted or the effect that such enactment
would have on the Company's federal income tax liability. In addition, there
may be an impact on state and city income tax liability as a result of the
enactment of the proposed legislation.
DISTRIBUTIONS. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method, or (ii) from the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount
distributed will be included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits,
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distributions in redemption of stock, and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. Thus, any dividends to the Company that would reduce
amounts appropriated to the Bank's bad debt reserve and deducted for federal
income tax purposes would create a tax liability for the Bank. The amount of
additional taxable income created from an Excess Distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if, after the Conversion, the Bank makes a
"non-dividend distribution," then approximately one and one-half times the
amount so used would be includable in gross income for federal income tax
purposes, assuming a 34% corporate income tax rate (exclusive of state and
local taxes). See "Regulation and Supervision" and "Dividend Policy" for
limits on the payment of dividends of the Bank. The Bank does not intend to
pay dividends that would result in a recapture of any portion of its bad debt
reserve.
Under pending legislative proposals, if the Bank makes a non-dividend
distribution, as defined above, an amount, as computed above, will be
included in the Bank's taxable income, but the maximum amount of reserves
subject to such inclusion will be the balance of the Bank's bad debt reserves
as of December 31, 1987, or a lesser amount if the Bank's loan portfolio has
decreased since December 31, 1987.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code of 1986,
as amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction
using the percentage of taxable income method over the deduction that would
have been allowable under the experience method is treated as a preference
item for purposes of computing the AMTI. Only 90% of AMTI can be offset by
net operating loss carryovers of which the Bank currently has none. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). In addition,
for taxable years beginning after December 31, 1986 and before January 1,
1996, an environmental tax of .12% of the excess of AMTI (with certain
modifications) over $2.0 million is imposed on corporations, including the
Bank, whether or not an Alternative Minimum Tax ("AMT") is paid. The Bank
does not expect to be subject to the AMT, but may be subject to the
environmental tax liability.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the
same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from
unaffiliated corporations with which the Company and the Bank will not file a
consolidated tax return, except that if the Company or the Bank own more than
20% of the stock of a corporation distributing a dividend then 80% of any
dividends received may be deducted.
OHIO TAXATION
The Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed
Ohio taxable income and 8.9% of computed Ohio taxable income in excess of
$50,000 or (ii) 0.582% times taxable net worth.
In computing its tax under the net worth method, the Company may exclude
100% of its investment in the capital stock of the Bank after the Conversion,
as reflected on the balance sheet of the Company, in computing its taxable
net worth as long as it owns at least 25% of the issued and outstanding
capital stock of the Bank. The calculation of the exclusion from net worth
is based on the ratio of the
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excludable investment (net of any appreciation or goodwill included in such
investment) to total assets multiplied by the net value of the stock. As a
holding company, the Company may be entitled to various other deductions in
computing taxable net worth that are not generally available to operating
companies.
A special litter tax is also applicable to all corporations, including
the Company, subject to the Ohio corporation franchise tax other than
"financial institutions." If the franchise tax is paid on the net income
basis, the litter tax is equal to .11% of the first $50,000 of computed Ohio
taxable income and .22% of computed Ohio taxable income in excess of $50,000.
If the franchise tax is paid on the net worth basis, the litter tax is equal
to .014% times taxable net worth.
The Bank is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of the Bank's book
net worth determined in accordance with GAAP. As a "financial institution,"
the Bank is not subject to any tax based upon net income or net profits
imposed by the State of Ohio.
REGULATION AND SUPERVISION
GENERAL
The Bank is an Ohio chartered savings bank, a member of the FHLB system,
and its deposit accounts are insured up to applicable limits by the FDIC
through the SAIF. The Bank is subject to extensive regulation, examination
and supervision by the FDIC and the Superintendent of the Division. The Bank
must file reports with the Superintendent and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with,
or acquisitions of, other financial institutions. There are periodic
examinations by the Superintendent and the FDIC to test the Bank's compliance
with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution
can engage and is intended primarily for the protection of the insurance fund
and depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate
loan loss reserves for regulatory purposes. Any change in such policies,
whether by the Superintendent, the FDIC or the Congress, could have a
material adverse impact on the Company, the Bank and their operations.
Assuming that the holding company form of organization is utilized, the
Company, as a holding company, will also be required to file certain reports
with, and otherwise comply with the rules and regulations of the OTS and of
the Securities and Exchange Commission (the "SEC") under the federal
securities laws. Certain of the regulatory requirements applicable to the
Bank and to the Company are referred to below or elsewhere herein. If the
holding company form of organization is not utilized, the regulations herein
regarding holding companies will not be applicable to the Bank.
As an insured depository institution, the Bank is subject to the
Community Reinvestment Act ("CRA") and to various statutes and implementing
regulations promulgated by the FRB including, without limitation, relating to
equal credit opportunity, reserves, electronic fund transfers, truth in
lending, availability of funds, and truth in savings. As lenders whose loans
are secured by real property and as owners of real property, financial
institutions, including the Bank, may be subject to potential liability under
various statutes and regulations applicable to property owners generally,
including statutes and regulations relating to the environmental condition of
real property. The Bank is also subject to the usury laws of Ohio and other
states in which it makes loans. In Ohio, there are generally no maximum
interest rates applicable to first mortgage loans secured by the borrower's
residence. There are limitations on
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interest rates for other loans, such as consumer loans, and limitations on
the amounts of fees which may be changed in connection with such loans.
The FDIC has extensive enforcement authority over insured Ohio-chartered
savings banks, including the Bank. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue
cease and desist orders or to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws
and regulations and unsafe or unsound practices.
The FDIC has authority to appoint a conservator or receiver for an
insured savings bank under certain circumstances. The grounds for
appointment of a conservator or receiver for a state savings bank on the
basis of an institution's financial condition include: (i) insolvency, in
that the assets of the savings bank are less than its liabilities to
depositors and others; (ii) substantial dissipation of assets or earnings
through violations of law or unsafe or unsound practices; (iii) existence of
an unsafe or unsound condition to transact business; (iv) likelihood that the
savings bank will be unable to meet the demands of its depositors or to pay
its obligations in the normal course of business; and (v) insufficient
capital, or the incurring or likely incurring of losses that will deplete
substantially all the institution's capital with no reasonable prospect of
replenishment of capital without federal assistance.
DIVISION REGULATION
The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings banks in accordance with the laws of the State of
Ohio. Ohio law prescribes the permissible investments and activities of Ohio
savings banks, including the types of lending that such banks may engage in
and the investments in real estate, subsidiaries and corporate or government
securities that such banks may make. The ability of Ohio savings banks to
engage in these state-authorized investments generally is subject to various
limitations under FDIC regulations and oversight by the FDIC.
Any mergers involving, or acquisitions of control of, Ohio savings banks
are subject to the prior approval of the Ohio Superintendent. The Ohio
Superintendent may initiate certain supervisory measures or formal
enforcement actions against Ohio savings banks. Ultimately, if the grounds
provided by law exist, the Superintendent may place an Ohio savings bank in
conservatorship or receivership.
The Ohio Superintendent conducts regular examinations of the Bank
approximately once a year. The Ohio Superintendent imposes assessments on
Ohio savings banks based on the savings bank's asset size to cover the cost
of supervision and examination.
In addition to being governed by the laws of Ohio specifically governing
savings banks, the Bank is also governed by Ohio corporate law, to the extent
such law does not conflict with the laws specifically governing savings banks.
Since the enactment of the Federal Deposit Insurance Corporation
Improvement Act of 1991, all state-chartered savings banks and their
subsidiaries have generally been limited to activities and equity investments
of the type and in the amount authorized for national banks, notwithstanding
state law. The FDIC is authorized to permit such institutions to engage in
state authorized activities or investments that do not meet this standard
(other than non-subsidiary equity investments) for institutions that meet all
applicable capital requirements if it is determined that such activities or
investments do not pose a significant risk to the SAIF. All non-subsidiary
equity investments must be divested by December 19, 1996, pursuant to an
FDIC-approved divestiture plan. The FDIC restrictions on state-chartered
institutions have not affected the operations of the Bank.
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FDIC REGULATIONS
CAPITAL REQUIREMENTS. The FDIC has adopted risk-based capital
guidelines to which the Bank is subject. The guidelines establish a
systematic analytical framework that makes regulatory capital requirements
more sensitive to differences in risk profiles among banking organizations.
Risk-based capital ratios are determined by allocating assets and specified
off-balance sheet items to four risk-weighted categories ranging from 0% to
100%, with higher levels of capital being required for the categories
perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The
first tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and
the allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total
risk-based capital ratio of 8%, of which at least 4% must be Tier I capital.
The FDIC may, however, set higher capital requirements on individual
institutions when particular circumstances warrant. Savings banks
experiencing or anticipating significant growth are expected to maintain
capital ratios, including tangible capital positions, well above the minimum
levels.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified
in the regulations). These regulations provide for a minimum Tier I leverage
ratio of 3% for banks that meet certain specified criteria, including that
they have the highest examination rating and are not experiencing or
anticipating significant growth. All other banks are required to maintain a
Tier I leverage ratio of 3% plus an additional cushion of at least 100 to 200
basis points.
The following is a summary of the Bank's regulatory capital at December
31, 1995:
GAAP Capital to Total Assets................ 8.9%
Total Capital to Risk-Weighted Assets....... 17.8%
Tier I Leverage Ratio....................... 8.7%
In August 1995, the FDIC, along with the other federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital and economic value to changes in interest rate
risk in assessing a bank's capital adequacy. According to the agencies,
applicable considerations include the quality of the bank's interest rate
risk management process, the overall financial condition of the bank and the
level of other risks at the bank for which capital is needed. Institutions
with significant interest rate risk may be required to hold additional
capital. The agencies have also issued for public comment a proposed policy
statement containing a framework to measure a bank's exposure to interest
rate risk using a supervisory model. The model applies a series of interest
rate risk weights to a bank's reported repricing and maturity balances.
These weightings estimate the price sensitivity of an institution's reported
balances to a 200 basis point increase and decrease in interest rates. The
sum of these balances, along with certain price sensitivity information that
a bank may be required to self-report, would result in a net risk-weighted
exposure for the bank. The agencies indicated an intent to ultimately adopt
explicit minimum requirements for interest rate risk into their risk-based
capital standards based on the proposed framework. Unless otherwise required
by the agencies, a bank with less than $300 million in assets, such as the
Bank, would be exempt from the policy statement if one of the two highest
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examination ratings is received and specified percentages of the
institution's loans and securities reprice or mature within certain time
frames. In December 1995, the banking agencies reported that the proposed
policy statement required additional analysis and deferred action pending
such analysis.
Banking regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
Management is unable to predict whether and when higher capital requirements
would be imposed and, if so, to what levels and on what schedule.
DIVIDEND LIMITATIONS. The FDIC has authority to use its enforcement
powers to prohibit a savings bank from paying dividends if, in its opinion,
the payment of dividends would constitute an unsafe or unsound practice.
Under Ohio law, the Company and the Bank are prohibited from paying a
dividend which would result in insolvency. Ohio Law requires the Bank to
obtain Division approval before payment of dividends in excess of net profits
for the current and two prior fiscal years, with certain adjustments.
Federal law prohibits the payment of dividends by a bank that will result in
the bank failing to meet applicable capital requirements on a PRO FORMA
basis. The Plan provides for establishment of a liquidation account, and the
Bank will not be able to pay dividends which would impair the liquidation
account. See "Dividend Policy."
STANDARDS FOR SAFETY AND SOUNDNESS. Federal law requires each federal
banking agency to prescribe for depository institutions under its
jurisdiction standards relating to, among other things, internal controls;
information systems and audit systems; loan documentation; credit
underwriting; interest rate risk exposure; asset growth; compensation, fees
and benefits; and such other operational and managerial standards as the
agency deems appropriate. The federal banking agencies adopted a final
regulation and Interagency Guidelines Prescribing Standards for Safety and
Soundness ("Guidelines") to implement these safety and soundness standards.
The Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. The Guidelines address
internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset growth;
and compensation, fees and benefits. The agencies also proposed asset
quality and earnings standards which, if adopted in final, would be added to
the Guidelines. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the
agency may require the institution to submit to the agency an acceptable plan
to achieve compliance with the standard, as required by the FDI Act. The
final regulation establishes deadlines for the submission and review of such
safety and soundness compliance plans.
PROMPT CORRECTIVE REGULATORY ACTION
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes
five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. At December 31, 1995, the Bank was categorized as "well
capitalized."
The FDIC has adopted regulations to implement the prompt corrective
action legislation. Among other things, the regulations define the relevant
capital measures for the five capital categories. An institution is deemed
to be "well capitalized" if it has a total risk-based capital ratio of 10% or
greater, a Tier I risk-based capital ratio of 6% or greater, and a leverage
ratio of 5% or greater, and is not subject to a regulatory order, agreement
or directive to meet and maintain a specific capital level for any capital
measure. An institution is deemed to be "adequately capitalized" if it has a
total risk-based capital ratio of 8% or greater, a Tier I risk-based capital
ratio of 4% or greater, and generally a leverage ratio of 4%
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or greater. An institution is deemed to be "undercapitalized" if it has a
total risk-based capital ratio of less than 8%, a Tier I risk-based capital
ratio of less than 4%, or a leverage ratio of less than 4%. An institution
is deemed to be "significantly undercapitalized" if it has a total risk-based
capital ratio of less than 6%, a Tier I risk-based capital ratio of less than
3%, or a leverage ratio of less than 3%. An institution is deemed to be
"critically undercapitalized" if it has a ratio of tangible equity (as
defined in the regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a
capital restoration plan. A bank's compliance with such plan is required to
be guaranteed by any company that controls the undercapitalized institutions.
If an "undercapitalized" bank fails to submit an acceptable plan, it is
treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" banks are subject to one or more of a number of additional
restrictions, including an order by the FDIC to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets and
cease receipt of deposits from correspondent banks or dismiss directors or
officers, and restrictions on interest rates paid on deposits, compensation
of executive officers and capital distributions by the parent holding
company. "Critically undercapitalized" institutions also may not, beginning
60 days after becoming "critically undercapitalized," make any payment of
principal or interest on certain subordinated debt or extend credit for a
highly leveraged transaction or enter into any material transaction outside
the ordinary course of business. In addition, "critically undercapitalized"
institutions are subject to appointment of a receiver or conservator.
Generally, subject to a narrow exception, the appointment of a receiver or
conservator is required for a "critically undercapitalized" institution
within 90 days after it obtains such status.
TRANSACTIONS WITH AFFILIATES
Under current federal law, transactions between depository institutions
and their affiliates are governed by Sections 23A and 23B of the Federal
Reserve Act. An affiliate of a savings bank is any company or entity that
controls, is controlled by, or is under common control with the savings bank.
In a holding company context, at a minimum, the parent holding company of a
savings bank and any companies which are controlled by such parent holding
company are affiliates of the savings bank. Generally, Section 23A limits
the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of
such savings bank's capital stock and surplus, and contains an aggregate
limit on all such transactions with all affiliates to an amount equal to 20%
of such capital stock and surplus. The term "covered transaction" includes
the making of loans or other extensions of credit to an affiliate; the
purchase of assets from an affiliate, the purchase of, or an investment in,
the securities of an affiliate; the acceptance of securities of an affiliate
as collateral for a loan or extension of credit to any person; or issuance of
a guarantee, acceptance, or letter of credit on behalf of an affiliate.
Section 23A also establishes specific collateral requirements for loans or
extensions of credit to, or guarantees, acceptances on letters of credit
issued on behalf of an affiliate. Section 23B requires that covered
transactions and a broad list of other specified transactions be on terms
substantially the same, or no less favorable, to the savings bank or its
subsidiary as similar transactions with nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings
bank with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers
and stockholders who control, directly or indirectly, more than 10% of a
savings bank, and certain related interests of any of the foregoing, may not
exceed, together with all other outstanding loans to such persons and
affiliated entities, the savings bank's total capital and surplus.
Institutions of less than $100 million in deposits may increase this limit to
up to two times capital and surplus under certain conditions. Section 22(h)
also prohibits loans above amounts prescribed by the appropriate federal
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banking agency to directors, executive officers, and shareholders who control
more than 10% of a savings bank, and their respective affiliates, unless such
loan is approved in advance by a majority of the board of directors of the
savings bank. Any "interested" director may not participate in the voting.
The loan amount (which includes all other outstanding loans to such person)
as to which such prior board of director approval is required, is the greater
of $25,000 or 5% of capital and surplus or any loans over $500,000. Further,
pursuant to Section 22(h), loans to directors, executive officers, and
principal shareholders must be made on terms substantially the same as
offered in comparable transactions to other persons. Section 22(g) of the
Federal Reserve Act places additional limitations on loans to executive
officers.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which
an institution is assigned is based on a supervisory evaluation provided to
the FDIC by the institution's primary federal regulator and information which
the FDIC determines to be relevant to the institution's financial condition
and the risk posed to the deposit insurance funds. An institution's
assessment rate depends on the capital category and supervisory category to
which it is assigned. Assessment rates currently range from 23 basis points
to 31 basis points. The FDIC is authorized to raise the assessment rates in
certain circumstances. See "Risk Factors - Recapitalization of SAIF and Its
Impact on SAIF Premiums." The FDIC has exercised this authority several
times in the past and may raise insurance premiums in the future. If such
action is taken by the FDIC, it could have an adverse effect on the earnings
of the Bank. Additionally, the FDIC has recently adopted a reduction in the
insurance premium to be paid on deposit accounts maintained by BIF insured
financial institutions from a minimum of $2,000 a year for well-capitalized
banks in the highest supervisory subcategory to a range of 4 basis points to
31 basis points per $100 of deposits for other banks but continued to a range
of 23 basis points to 31 basis points for SAIF insured institutions, such as
the Bank. See "Risk Factors - Recapitalization of SAIF and Its Impact on
SAIF Premiums."
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by
the FDIC or the Division. The management of the Bank does not know of any
practice, condition or violation that might lead to termination of deposit
insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and
hold shares of capital stock in the FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Bank was in compliance
with this requirement with an investment in FHLB stock at December 31, 1995,
of $406,900. FHLB advances must be secured by specified types of collateral,
and all long-term advances may be obtained only for the purpose of providing
funds for residential housing finance. At December 31, 1995, the maximum
aggregate amount of outstanding advances which the Bank could borrow from the
FHLB was approximately $10.7 million.
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The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1995, 1994 and
1993, dividends from the FHLB to the Bank amounted to $26,593, $21,025 and
$15,742, respectively. If dividends were reduced, or interest on future FHLB
advances increased, the Bank's net interest income would likely also be reduced.
Further, there can be no assurance that the impact of recent, or future,
legislation on the FHLBs will not also cause a decrease in the value of the FHLB
stock held by the Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $52.0 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $52.0
million, the reserve requirement is $1.6 million plus 10% (subject to adjustment
by the Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $52.0 million. The first $4.3 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained
in the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
HOLDING COMPANY REGULATION
The Company, if utilized, will be a non-diversified unitary savings and
loan holding company within the meaning of the HOLA. As such, the Company will
be required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a qualified thrift
lender for purposes of the federal regulations. Upon any non-supervisory
acquisition by the Company of another savings association, the Company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. The HOLA limits
the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the BHC Act, subject to the
prior approval of the OTS, and to other activities authorized by OTS regulation.
Recently proposed legislation would treat all savings and loan holding companies
as bank holding companies and, subject to limited grandfathering, restrict the
activities of such companies to those permissible for bank holding companies.
See "Risk Factors - Financial Institution Regulation and Possible Legislation."
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The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring control of
another savings institution, or holding company thereof, without prior written
approval of the OTS; and from acquiring or retaining, with certain exceptions,
more than 5% of the voting stock of a non-subsidiary holding company or savings
association. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of the Common Stock to be issued pursuant to the Conversion. Upon completion of
the Conversion, the Company's Common Stock will be registered with the SEC under
the Exchange Act. The Company will then be subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of the Company may
be resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
In the event that the holding company form of organization is not utilized,
shares of the Bank's common stock to be issued and sold in the Conversion are
exempt from registration under Section 3(a)(5) of the Securities Act. Prior to
the sale of all shares of its common stock, the Bank will register its capital
stock under Section 12(g) of the Exchange Act. Upon such registration, the
proxy rules, tender offer rules, insider trading restrictions, annual and
periodic reporting and other requirements of the Exchange Act will also be
applicable to the Bank but under the jurisdiction of the FDIC. The Bank is
required by the FDIC to maintain said registration for a period of at least
three years following Conversion.
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MANAGEMENT OF THE COMPANY
The Board of Directors of the Company, which currently consists of 10
directors, is divided into three classes, each of which contains approximately
one-third of the Board. The directors shall be elected by the stockholders of
the Company for staggered three year terms, or until their successors are
elected and qualified. One class of directors, consisting of Richard Harmeyer,
Robert R. Keller and Curt L. Jackson, has a term of office expiring at the first
annual meeting of stockholders, a second class, consisting of Richard O. Plunk,
William P. Riekert, Jr. and Henry E. Brown, has a term of office expiring at the
second annual meeting of stockholders, and a third class, consisting of Wyvette
D. Jordan, Gail R. Behymer, Reba St. Clair and Virginia M. Porowski, has a term
of office expiring at the third annual meeting of stockholders. Their names and
biographical information are set forth under "Management of the Bank -
Directors."
The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names.
NAME POSITION HELD WITH COMPANY
-------------------- ------------------------------------------
Virginia M. Porowski President and Chief Executive Officer
William T. Bird Treasurer and Chief Financial Officer
Diane P. Irwin Vice President and Chief Operating Officer
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.
Information concerning the principal occupations, employment and compensation of
the directors and officers of the Company during the past five years is set
forth under "Management of the Bank - Biographical Information."
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MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank. All of the persons set forth below are also directors of
the Company since its organization in 1995.
<TABLE>
<CAPTION>
TERM
NAME AGE(1) POSITIONS HELD WITH THE BANK DIRECTOR SINCE EXPIRES
- -------------------- ------ ------------------------------ -------------- -------
<S> <C> <C> <C> <C>
Richard O. Plunk 49 Chair of the Board 1986 1997
Wyvette D. Jordan 52 Vice Chair 1987 1998
Virginia M. Porowski 37 President and Chief Executive 1996 1998
Officer and Director
Gail R. Behymer 55 Director 1993 1998
Richard C. Harmeyer 56 Director and Secretary 1993 1999
Robert R. Keller 54 Director 1987 1999
William P. Riekert, Jr. 59 Director and Assistant Secretary 1991 1997
Henry E. Brown 50 Director 1995 1997
Curtis L. Jackson 32 Director 1995 1999
Reba St. Clair 35 Director 1995 1998
</TABLE>
___________________________
(1) As of December 31, 1995.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Bank who are not also directors.
NAME AGE(1) POSITIONS HELD WITH THE BANK
--------------- ----- ------------------------------------------
Diane P. Irwin 40 Vice President and Chief Operating Officer
William T. Bird 33 Treasurer and Chief Financial Officer
_____________________________
(1) As of December 31, 1995.
The executive officers of the Bank will retain their respective offices
in the converted Bank until the annual meeting of the Board of Directors of
the Bank, held immediately after the first annual meeting of stockholders
subsequent to Conversion, and until their successors are elected and qualified
or until they are removed or replaced. Officers are re-elected by the Board
of Directors annually.
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BIOGRAPHICAL INFORMATION
DIRECTORS
REBA ST. CLAIR was appointed as Director of the Bank in February 1995.
She is currently a finance manager for Procter & Gamble, where over the past
twelve years, she has held various management positions in finance, purchasing
and distribution services. A graduate of Knox College, she served nine years
as an officer in the United States Army. Ms. St. Clair is also an active
member of a number of civic organizations.
GAIL R. BEHYMER has served as Director of the Bank since 1993. He
served one year on the Board Advisory Committee for the Bank prior to his
appointment as Director. Mr. Behymer holds a B.S. and an MBA degree from the
University of Cincinnati. He has worked for Procter & Gamble for 34 years,
with a background in construction and facilities management. His most recent
assignment has been in managing Procter & Gamble's Winton Hill research
facility.
ROBERT R. KELLER has served as Director of the Bank since 1987. He
served one year on the Board Advisory Committee for the Bank prior to his
appointment to the Board. Mr. Keller attended the University of Cincinnati
with a degree in industrial management. Mr. Keller retired from Procter &
Gamble in June 1995 after 36 years. He held a variety of jobs in the
manufacturing area and, at retirement, was managing the Ivorydale Railroad.
Mr. Keller served 18 years as a member of Procter & Gamble's Disability Board.
Mr. Keller also serves on the Administrative Board of the Westwood Methodist
Church.
CURTIS L. JACKSON has served as Director of the Bank since February
1995. He served on the Board Advisory Committee for the Bank prior to his
appointment as a Director. Mr. Jackson holds a B.S. degree in Accounting from
Northern Kentucky University. He has worked for Procter & Gamble for nine
years and is currently a Group Manager in Finance and Accounting. Mr. Jackson
also serves as a Board of Trustee and Treasurer for the Hamilton Christian
Center.
WYVETTE D. JORDAN has served as Director of the Bank since 1987. Ms.
Jordan retired from Procter & Gamble's Ivorydale Plant in September 1994,
having worked as a Cashier/Expense Accountant for 22 years. Prior to working
at Procter & Gamble, she taught for three years at the Opportunities
Industrialization Center as a Business Science instructor. She is presently
involved with the Holydale Civic Association and is a volunteer at nursing
homes in her community.
RICHARD O. PLUNK has served as Director of the Bank since 1986. He has
served as Chair of the Board since 1991. Mr. Plunk holds an M.B.A. with a
major in Financial Accounting from the University of Pennsylvania. Mr. Plunk
has been part of Procter & Gamble's Comptrollers Division for 21 years. He
has held positions as an internal auditor, financial analyst, plant accounting
manager, inventory control section supervisor, systems project manager, and
group manager of a large cost accounting department.
HENRY E. BROWN has served as Director since February 1995 and served on
the Board Advisory Committee prior to his appointment as a Director. Mr.
Brown has a B.S. degree in Civil Engineering from the University of Missouri-
Rolla. He has spent 27 years with Procter & Gamble's Central Engineering
Division. Mr. Brown currently is a trustee of Seven Hills Neighborhood
Houses, Inc. and is a Vice President and Director of the Greater Cincinnati
Metropolitan YMCA.
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WILLIAM P. RIEKERT, JR. has served as Director of the Bank since 1991.
He served three years on the Board Advisory Committee prior to his appointment
as Director. Mr. Riekert retired from Procter & Gamble in December 1991 after
working 30 years in the Package Soap and Detergent division. He has extensive
real estate sales and management experience and serves as a director at the
Vine Street Hill Cemetery Association.
RICHARD C. HARMEYER has served as Director of the Bank since 1993 and
has held the Office of Treasurer and currently holds the Office of Secretary.
He served one year on the Board Advisory Committee prior to his appointment as
Director. Mr. Harmeyer has a B.S. degree in Industrial Management from the
University of Cincinnati. He is currently the Ivorydale Area Resource Manager
for Procter & Gamble, where over the past 35 years has held a variety of line
management and human resource management positions. Mr. Harmeyer previously
served over 20 years as a Director for the St. James Parish Credit Union
holding the offices of President, Vice President and Secretary. Mr. Harmeyer
has also managed real estate investment properties for the past 18 years.
VIRGINIA M. POROWSKI joined the Bank in 1986 and has served as President
and CEO since 1994 and Executive Managing Officer since 1989. Ms. Porowski
has served as a director of the Bank since February 5, 1996. Prior to joining
the Bank, Ms. Porowski worked at Hunter Savings as a Branch Manager. Ms.
Porowski has over 15 years experience in the banking industry. Ms. Porowski
is also a Trustee for the Tri State League of Financial Institutions.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
DIANE P. IRWIN joined the Bank in 1987 and currently serves as Vice
President and Chief Operating Officer. Ms. Irwin holds a Masters Degree in
Business Administration.
WILLIAM T. BIRD joined the Bank in 1994 as Chief Financial
Officer/Treasurer. Prior to joining the Bank, Mr. Bird was an Asset/Liability
Management consultant with Performance Analysis by Sendero.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK
The Board of Directors meets twice a month and may have additional
special meetings upon the request of the Chairman of the Board. During the
fiscal year ended December 31, 1995, the Board of Directors of the Bank met 27
times. No director attended fewer than 75% of the total number of Board
meetings and committee meetings of which such director was a member held
during this period.
The Board of Directors of the Bank has established numerous committees,
including an Audit Committee, which consists of Directors Behymer, Keller,
Jackson, Riekert and Jordan. The Audit Committee met 1 time in fiscal 1995.
The purpose of this committee is to provide assurance that financial
disclosures made by management portray the Bank's financial condition and
results of operations. The committee also maintains a liaison with the
outside auditors and reviews the adequacy of internal controls. The committee
meets at least annually and on an as-needed basis.
DIRECTORS' COMPENSATION
FEE ARRANGEMENTS. Currently, directors of the Bank who have served as
directors of the Bank for one year or more receive a fee of $1,400 per
quarter. The Chairman of the Board and the Board Secretary receive an annual
fee of $2,080 and of $1,660, respectively, in addition to any Board or
committee fees. The Bank maintains a Director Emeritus Program whereby
retired members of the Board of Directors may serve as Director Emeritus.
There is currently one Director Emeritus. Directors Emeritus
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are not provided with any voting rights at Board meetings and receive a fee
of $100 for each Board meeting attended.
EXECUTIVE COMPENSATION
CASH COMPENSATION. The following table sets forth the cash compensation
paid by the Bank for services rendered in all capacities during the year ended
December 31, 1995 to the President. There were no executive officers of the
Bank who received compensation in excess of $100,000.
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<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
----------------------------------------------- ---------------------- -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
OTHER
NAME AND ANNUAL RESTRICTED LTIP ALL OTHER
PRINCIPAL COMPENSATION STOCK AWARDS OPTIONS PAYOUTS COMPENSATION
POSITIONS(2) YEAR SALARY($) BONUS($) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
------------ ---- --------- -------- ------------ ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Virginia M. Porowski 1995 $60,891 $ 236 $ -- $ -- -- $ -- $1,962
President and Chief 1994 57,939 840 -- -- -- -- 2,242
Executive Officer 1993 52,389 1,120 -- -- -- -- 2,090
</TABLE>
_________________________
(1) Under Annual Compensation, the column titled "Salary" does not include
directors fees.
(2) For 1995, there were no (a) perquisites over the lesser of $50,000 or
10% of the individual's total salary and bonus for the year;
(b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term
incentive plans prior to settlement or maturation; (d) tax payment
reimbursements; or (e) preferential discounts on stock. For 1995, the
Bank had no restricted stock or stock related plans in existence.
(3) Does not include awards pursuant to the Stock Programs, which may be
granted in conjunction with the first meeting of stockholders of the
Company, subject to FDIC, Division and stockholder approval, as such
awards were not earned, vested or granted in fiscal 1995. For a
discussion of the terms of the Stock Programs, see "-Benefits - Stock
Programs." For 1995, the Bank had no restricted stock plans in
existence.
(4) Does not include options, which may be granted in conjunction with the
first meeting of stockholders of the Company, subject to FDIC, Division
and stockholder approval, as such options were not earned or granted in
1995. For a discussion of the terms of the grants and vesting of
options, see "- Benefits - Stock Option Plan."
(5) For 1995, there were no payouts or awards under any long-term incentive
plan.
(6) Reflects 401(k) contributions from the Bank.
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EMPLOYMENT AGREEMENTS
Upon the Conversion, the Bank and the Company each intend to enter into
an employment agreement (collectively, the "Employment Agreements") with
Virginia M. Porowski (the "Executive"). The Employment Agreement is intended
to ensure that the Bank and the Company will be able to maintain a stable and
competent management base after the Conversion. The continued success of the
Bank and the Company depends to a significant degree on the skills and
competence of Ms. Porowski.
The proposed Employment Agreements provide for a three-year term. The
Bank Employment Agreement provides that, commencing on the first anniversary
date and continuing each anniversary date thereafter, the Board of Directors
may extend the agreement for an additional year so that the remaining term
shall be three years, unless written notice of non-renewal is given by the
Board of Directors after conducting a performance evaluation of the
Executive. In the case of the Company Employment Agreement, the term of the
agreement shall be extended on a daily basis unless written notice of
non-renewal is given by the Board. The Employment Agreement provides that
the Executive's base salary will be reviewed annually. The Agreement
provides a base salary for Ms. Porowski of $62,500. In addition to the base
salary, the Agreement provides for, among other things, participation in
stock benefit plans and other fringe benefits applicable to executive
personnel. The Agreement provides for termination by the Bank or the Company
for cause as defined in each such Agreement at any time. In the event the
Bank or the Company chooses to terminate the Executive's employment for
reasons other than for cause, or in the event of the Executive's resignation
from the Bank and the Company only upon: (i) failure to re-elect the
Executive to her current offices; (ii) a material change in the Executive's
functions, duties or responsibilities; (iii) a relocation of the Executive's
principal place of employment by more than 25 miles; (iv) liquidation or
dissolution of the Bank or the Company; or (v) a breach of the Agreement by
the Bank, or the Company, the Executive or, in the event of death, her
beneficiary would be entitled to receive an amount equal to the remaining
base salary payments due to the Executive and the contributions that would
have been made on the Executive's behalf to any employee benefit plans of the
Bank or the Company during the remaining term of the Agreement. The Bank and
the Company would also continue the Executive's life, health and disability
coverage for the remaining term of the Agreement.
Under the Agreement, if voluntary (upon the trigger of one of the
factors set forth above) or involuntary termination follows a change in
control of the Bank or the Company, the Executive or, in the event of death,
her beneficiary, would be entitled to a severance payment equal to the
greater of: (i) the payments due for the remaining terms of the agreement;
or (ii) three times the average of the five preceding taxable years'
compensation. The Bank and the Company would also continue the Executive's
life, health, and disability coverage for thirty-six months. Notwithstanding
that both agreements provide for a severance payment in the event of a change
in control, the Executive would only be entitled to receive a severance
payment under one Agreement.
Payments to the Executive under the Bank's Employment Agreement will be
guaranteed by the Company in the event that payments or benefits are not paid
by the Bank. Payment under the Company's Employment Agreement would be made
by the Company. All reasonable costs and legal fees paid or incurred by the
Executive pursuant to any dispute or question of interpretation relating to
the Agreements shall be paid by the Bank or Company, respectively, if the
Executive is successful on the merits pursuant to a legal judgment,
arbitration or settlement. The Employment Agreements also provide that the
Bank and Company shall indemnify the Executive to the fullest extent
allowable under federal and Ohio law, respectively.
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CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Company and the Bank intend to enter into
three-year Change in Control Agreements ("CIC Agreements") with Diane P.
Irwin and William T. Bird. The Bank CIC Agreements provide that commencing
on the first anniversary date and continuing on each anniversary thereafter,
the Bank's CIC Agreements may be renewed by the Board of Directors for an
additional year unless written notice of non-renewal is given by the Board of
Directors. The Company CIC Agreements provide for automatic daily extensions
such that the remaining term of the Agreements shall be equal to the original
terms unless written notice of non-renewal is given by the Board of
Directors. The CIC Agreements with the Company will provide that in the event
voluntary or involuntary termination follows a change in control of the Bank
or the Company, the officer would be entitled to receive a severance payment
equal to three times the officer's average annual compensation for the five
years preceding termination. The Bank's CIC Agreement has a similar change
in control provision; however, the officer would only be entitled to receive
a severance payment under one agreement. The Bank and Company would also
continue the officer's life, health and disability coverage for 3 years from
the date of termination. Payments to the officer under the Bank's CIC
Agreements will be guaranteed by the Company in the event that payments or
benefits are not paid by the Bank.
INSURANCE AND PENSION PLANS
All full-time employees of the Bank are covered as a group for
comprehensive hospitalization, including major medical, dental, long-term
disability, accidental death and dismemberment insurance and group term life
insurance. The Bank also maintains a defined benefit pension plan and 401(k)
for the benefit of its employees. See Note 10 to the Notes to Financial
Statements included herein.
BENEFITS
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank has established an
ESOP and related trust in connection with the Conversion for the benefit of
its eligible employees. It is anticipated that the ESOP will purchase up to
8% of the Common Stock issued in the Conversion. The ESOP intends to borrow
from the Company an amount equal to 100% of the purchase price of the Common
Stock the ESOP will acquire. The loan will have a term of 10 years. The
interest rate on the loan is expected to be 8.75%. The Common Stock acquired
with the proceeds of the loan will be pledged as collateral for the loan.
The loan will be repaid principally from annual contributions to the ESOP
made by the Bank or the Company. Although the ESOP provides that
contributions to the plan are discretionary, the Bank or the Company intend
to make annual contributions in an amount at least sufficient to allow the
ESOP to meet the principal and interest requirements on the loan.
To be eligible to participate in the ESOP an employee must complete at
least twelve consecutive months of service for the Bank during which the
employee performs at least 1,000 hours of service for the Bank. The benefits
provided to participants under the ESOP is the vested portion of the benefits
credited to their account at the time of termination of employment. Benefits
under the ESOP generally will be the stock acquired with the ESOP loan. The
shares of Common Stock acquired with the loan will initially be pledged as
collateral for the loan and held in a suspense account. However, a number of
shares of the pledged Common Stock will be released from the collateral
pledge annually and allocated among the accounts of active ESOP participants.
The number of shares so released will be proportional to the amount of
principal and interest paid on the ESOP loan for the year. The released
shares will be allocated among the accounts of active participants on the
basis the participant's compensation for the year. Active participants are
those who have completed at least 1,000 hours of service during the year and
are actively employed on the last day of the year, or who have terminated
employment due to death,
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<PAGE>
disability or retirement during the year. ESOP participants generally become
20% vested in the benefits credited to their accounts following the
completion of three years of credited service with the Bank. The
participants' vested interest in their account increases by 20% for each year
of credited service thereafter until becoming 100% vested after the
completion of seven years of credited service. Participants also become
immediately vested upon the termination of employment due to death,
disability, retirement or upon the occurrence of a change in control. As
contributions to the ESOP are not fixed, it is not possible to currently
determine the benefits payable to participants under the ESOP.
In connection with the establishment of the ESOP, a Committee of the
Board of Directors was appointed to administer the ESOP (the "ESOP
Committee"). An unrelated corporate trustee for the ESOP will be appointed
prior to the Conversion and continue thereafter. The ESOP Committee may
instruct the trustee regarding investment of funds contributed to the ESOP.
The ESOP trustee, subject to its fiduciary duty, must vote all allocated
shares held in the ESOP in accordance with the instructions of the
participating employees. Under the ESOP, unallocated shares will be voted in
a manner calculated to most accurately reflect the instructions it has
received from participants regarding the allocated stock as long as such vote
is in accordance with the provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
STOCK OPTION PLANS. Following Conversion, the Board of Directors of the
Company intends to adopt the 1996 Incentive Stock Option Plan (the "Incentive
Option Plan") and the 1996 Stock Option Plan for Outside Directors (the
"Directors' Option Plan") (collectively, the "Stock Option Plans"). The
adoption of the Stock Option Plans and awards thereunder will be subject to
stockholder approval which the Bank shall seek at the first meeting of
stockholders of the Company following the Conversion, which under applicable
FDIC regulations, may be held no earlier than six months after the completion
of the Conversion. An amount of shares of Common Stock equal to 10.0% of the
shares of Common Stock issued in the Conversion have been reserved for
issuance under the Stock Option Plans. No determinations have been made by
the Board of Directors as to the specific terms of the Stock Option Plans or
the amount of awards thereunder. However, FDIC regulations provide that no
individual officer or employee of the Bank may receive more than 25% of the
options granted under the Option Plans and non-employee directors may not
receive more than 5% individually or more than 30% in the aggregate of the
options granted under the Option Plans. Awards proposed for executive
officers and directors will be set forth in the Proxy Statement sent to
stockholders in preparation for the stockholder meeting that will be held to
obtain stockholder approval of the Stock Option Plans.
The purpose of the anticipated adoption of the Incentive Option Plan
will be to attract and retain qualified personnel in key positions, provide
officers and key employees with a proprietary interest in the Company as an
incentive to contribute to the success of the Company and reward key
employees for outstanding performance. It is expected that all employees of
the Company and its subsidiaries will be eligible to participate in the
Incentive Option Plan. Although the terms of the Incentive Option Plan have
not yet been determined, it is expected that the Incentive Option Plan will
provide for the grant of: (i) options to purchase the Company's Common Stock
intended to qualify as incentive stock options under Section 422 of the Code
("Incentive Stock Options"); (ii) options that do not so qualify
("Non-Statutory Stock Options"); and (iii) Limited Rights (discussed below)
which will be exercisable only upon a change in control of the Bank or the
Company. Unless sooner terminated, any Incentive Option Plan adopted will be
in effect for a period of ten years from the earlier of adoption by the Board
of Directors or approval by the Company's Stockholders. Subject to
stockholder approval, the Company intends to grant options (with Limited
Rights as defined below) under the Incentive Option Plan at an exercise price
equal to the fair market value of the underlying Common stock on the date of
grant. It is anticipated that all options granted contemporaneously with
stockholder approval of the Incentive Option Plan are intended to be
Incentive Stock Options to the extent permitted under Section 422 of the Code.
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Any Incentive Option Plan adopted will be administered by the Personnel
Committee of the Board of Directors and such committee will determine which
officers and employees will be granted options and Limited Rights, whether
such options will be incentive or non-statutory stock options, the number of
shares subject to each option, the exercise price of each non-statutory stock
option, whether such options may be exercised by delivering other shares of
Common Stock and when such options become exercisable. In order to qualify
as an Incentive Stock Option, the per share exercise price of an option must
be at least equal to the fair market value of a share of Common Stock on the
date the option is granted.
The Stock Option Plans shall provide for the exercisability and vesting
of options granted thereunder consistent with the manner specified by the
Personnel Committee and consistent with FDIC regulations, which generally
require that options begin vesting no earlier than one year from the date of
shareholder approval of the Incentive Option Plan and thereafter vest at a
rate of no more than 20% per year. Options granted in connection with the
Incentive Option Plan may be exercisable for three months following the date
on which the employee ceases to perform services for the Bank or the Company,
except that in the event of death or disability, or if otherwise not
prohibited upon a change in control options become fully vested and may be
exercisable for up to one year thereafter or such longer period as determined
by the Company; provided, however, that any Incentive Stock Options exercised
more than three months following the date the employee ceases to perform
services shall be treated as a Non-Statutory Stock Option as described above.
It is anticipated that the Stock Option Plans will also grant Limited
Rights which, upon a change in control, will allow the employee to exercise
such Limited Rights and thereby be entitled to receive a lump sum cash
payment equal to the difference between the exercise price of the related
option and the fair market value of the shares of common stock subject to the
option on the date of exercise of the right in lieu of purchasing the stock
underlying the option. A change in control will generally be defined to
occur when a person or group of persons acting in concert acquires beneficial
ownership of 20% or more of any class of equity security, such as the Common
Stock of the Company or the Bank or in the event of a tender offer or
exchange offer, merger or other form of business combination, sale of assets
or contested election of directors which result in a change in control of a
majority of the Board of Directors. In the event of death, disability or
normal retirement, the Company, if requested by the optionee, may elect, in
exchange for vested options, to pay the optionee, or beneficiary in the event
of death, the amount by which the fair market value of the Common Stock
exceeds the exercise price of the options on the date of the employee's
termination of employment.
An employee will not be deemed to have received taxable income upon
grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the
employee for at least one year after the date the stock is received in
connection with the option exercise and two years after the date of grant of
the option. No compensation deduction may be taken by the Company as a
result of the grant or exercise of Incentive Stock Options, provided such
shares are not disposed of before the expiration of the period described
above (a "disqualifying disposition"). In the case of a Non-Statutory Stock
Option and in the case of a disqualifying disposition of an Incentive Stock
Option, an employee will be deemed to receive ordinary income upon exercise
of the stock option in an amount equal to the amount by which the exercise
price is exceeded by the fair market value of the Common Stock purchased by
exercising the option on the date of exercise. The amount of any ordinary
income deemed to be received by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an
Incentive Stock Option is a deductible expense for tax purposes for the
Company. In the case of Limited Rights, upon exercise, the option holder
would have to include the amount paid to him or her upon exercise in his
gross income for federal income tax purposes in the year in which the payment
is made and the Company would be entitled to a deduction for federal income
tax purposes of the amount paid.
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Under the Directors' Option Plan, it is anticipated that the exercise
price per share of each option granted thereunder will be equal to the fair
market value of the shares of Common Stock on the date the option is granted.
Any Options granted under the Directors' Option Plan shall be Non-Statutory
Stock Options and will be self-administering and will not be administered by
the Personnel Committee of the Board.
STOCK PROGRAMS. Following the Conversion, the Bank also intends to
establish the Stock Programs as a method of providing officers and
non-employee directors of the Bank and the Company with a proprietary
interest in the Company in a manner designed to encourage such persons to
remain with the Bank. The adoption of the Stock Program and awards
thereunder will be subject to stockholder approval which the Bank expects to
seek at its first meeting of stockholders, which pursuant to applicable FDIC
regulations, may be held no earlier than six months after the completion of
the Conversion.
Subject to stockholder approval, the Bank expects to contribute funds to
the Stock Programs to enable the trusts to acquire, in the aggregate, an
amount up to 4% of the shares of Common Stock issued in the Conversion.
Shares used to fund the Stock Programs may be acquired through open market
purchases, if permitted, or from authorized but unissued shares. No
determinations have been made as to the specific terms of the Stock Programs
or the amount of awards thereunder. Although no specific award
determinations have been made, the Company anticipates that, if stockholder
approval is obtained, it will provide awards to its directors and employees
to the extent permitted by applicable regulations. FDIC regulations provide
that no individual employee may receive more than 25% of the shares of any
plan and non-employee directors may not receive more than 5% of any plan
individually or 30% in the aggregate for all directors. Awards proposed for
executive officers and directors will be set forth in the Proxy Statement
sent to stockholders in preparation for the stockholder meeting that will be
held to obtain stockholder approval of the Stock Programs.
The Stock Programs adopted for the benefit of officers and employees
shall be administered by the Personnel Committee of the Board of Directors;
the Stock Programs adopted for the benefit of directors will be
self-administering under the Plan. Any Stock Programs for the benefit of
non-employee Directors are expected to be self-administered with respect to
grants or allocations made thereunder. Under the Stock Programs, awards are
expected to be granted in the form of shares of Common Stock held by the
Stock Programs. Awards will be non-transferable and non-assignable. The
Board intends to appoint an independent fiduciary to serve as trustee of the
trust to be established pursuant to any Stock Programs. Allocations and
grants under the Stock Programs may be made in the form of base grants and
allocations based on performance goals established by the Personnel
Committee. In establishing such goals, the Committee may utilize the annual
financial results of the Bank, actual performance of the Bank as compared to
targeted goals such as the ratio of the Bank's net worth to total assets, the
Bank's return on average assets, or such other performance standard as
determined by the Committee with the approval of the Board of Directors.
Performance allocations may be granted upon the achievement of performance
goals and base grants and performance allocations may vest in annual
installments established by the Committee. The Stock Programs shall provide
for the exercisability and vesting of awards granted thereunder consistent
with the manner specified by the Personnel Committee and consistent with FDIC
conversion regulations, which currently provide that awards thereunder begin
vesting no earlier than one year from the date of stockholder approval and
thereafter vest at a rate of no more than at a rate of 20% per year. It is
also expected that in the event of death, disability and, except as may
otherwise be prohibited, change in control, grants would be 100% vested, or
upon termination of service as a director.
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When shares become vested in accordance with the Stock Programs, the
Participants will recognize income equal to the fair market value of the
Common Stock at that time. The amount of income recognized by the
participants will be a deductible expense for tax purposes for the Bank.
When shares become vested and are actually distributed in accordance with the
Stock Programs, the participants will receive amounts equal to any accrued
dividends with respect thereto. Prior to vesting, recipients of grants may
direct the voting of the shares awarded to them. Shares not subject to
grants and shares allocated subject to the achievement of performance and
high performance goals will be voted by the trustee of the Stock Programs in
proportion to the directions provided with respect to shares subject to
grants. Vested shares are distributed to recipients as soon as practicable
following the day on which they are vested.
In the event that additional authorized but unissued shares are acquired
by the Stock Programs after the Conversion, the interests of existing
shareholders will be diluted. See "Pro Forma Data."
TRANSACTIONS WITH CERTAIN RELATED PERSONS
FIRREA requires that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more
than the normal risk of repayment or present other unfavorable features.
It is the policy of the Bank to make loans to Executive Officers and
Directors on their principal residences. The Bank's policy provides that all
loans made by the Bank, including lines of credit, to its directors and
officers are made in the ordinary course of business, are made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons
and do not involve more than the normal risk of collectibility or present
other unfavorable features. As of December 31, 1995, six of the Bank's
directors or executive officers had loans outstanding totalling $570,000 in
the aggregate. All such loans were made by the Bank in the ordinary course
of business and were not made with favorable terms nor involved more than the
normal risk of collectibility or presented unfavorable features.
The Company intends that all transactions in the future between the Bank
and its executive officers, directors, holders of 10% or more of the shares
of any class of its common stock and affiliates thereof, will contain terms
no less favorable to the Company than could have been obtained by it in
arm's-length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any
interest in the transaction.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE DIVISION AND FDIC HAVE
APPROVED THE PLAN OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE
BANK ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER
CONDITIONS. SUCH DIVISION AND FDIC APPROVAL, HOWEVER, DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY SUCH AGENCIES.
GENERAL
On July 6, 1995 the Bank's Board of Directors unanimously adopted (and
subsequently amended) the Plan pursuant to which the Bank will be converted
from an Ohio-chartered mutual savings bank to an Ohio-chartered stock savings
bank under the name of Lenox Savings Bank. It is currently intended that all
of the outstanding capital stock of the Bank will be held by the Company,
which is incorporated under Ohio law. The Plan was approved by the Division
and FDIC, subject to, among other things, approval of the Plan by the Bank's
members. A special meeting of members has been called for this purpose to be
held on June 26, 1996.
The Company received approval to become a savings and loan holding
company and to acquire all of the Common Stock of the Bank to be issued in
the Conversion. The Company plans to retain up to 50% of the net proceeds
from the sale of the Common Stock and to use the remaining net proceeds to
purchase all of the then to be issued and outstanding capital stock of the
Bank. The Conversion will be effected only upon completion of the sale of
all of the shares of Common Stock of the Company or the Bank, if the holding
company form of organization is not utilized.
The Plan provides that the Board of Directors of the Bank may, at any
time prior to the issuance of the Common Stock and for any reason, decide not
to use a holding company form. Such reasons may include possible delays
resulting from overlapping regulatory processing or policies which could
adversely affect the Bank's or the Company's ability to consummate the
Conversion and transact its business as contemplated herein and in accordance
with the Bank's operating policies. In the event such a decision is made,
the Bank will withdraw the Company's registration statement from the SEC and
take steps necessary to complete the Conversion without the Company,
including filing any necessary documents with the Division and the FDIC. In
such event, and provided there is no regulatory action, directive or other
consideration upon which basis the Bank determines not to complete the
Conversion, if permitted by the Division and the FDIC, the Bank will issue
and sell the Common Stock of the Bank and subscribers will be notified of the
elimination of a holding company and resolicited (i.e., be permitted to
affirm their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their funds will be promptly refunded with interest at the Bank's statement
savings rate of interest; or be permitted to modify or rescind their
subscriptions), and notified of the time period within which the subscriber
must affirmatively notify the Bank of his intention to affirm, modify or
rescind his subscription. The following description of the Plan assumes that
a holding company form of organization will be used in the Conversion. In
the event that a holding company form of organization is not used, all other
pertinent terms of the Plan as described below will apply to the conversion
of the Bank from the mutual to stock form of organization and the sale of the
Bank's common stock.
The Plan provides generally that (i) the Bank will convert from a mutual
savings bank to a capital stock savings bank under the name of Lenox Savings
Bank, and (ii) the Company will offer shares of Common Stock for sale in the
Subscription Offering to the Bank's Eligible Account Holders, ESOP,
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Supplemental Eligible Account Holders, and Other Members. Shares may be
offered in a Community Offering with preference to be given to natural
persons residing in the Bank's Local Community. All shares not subscribed
for in the Subscription Offering may be offered for sale by the Company to
the general public in a Community Offering or a Syndicated Community
Offering. The Bank has the right to accept or reject, in whole or in part,
any orders to purchase shares of the Common Stock received in the Community
Offering or in the Syndicated Community Offering. See "-Community Offering"
and "-Syndicated Community Offering."
Division policy requires, with certain exceptions, that shares offered
in the Conversion must be sold up to at least the minimum point of the
Valuation Range in order for the Conversion to become effective. The
completion of the Conversion requires approval of the Plan by the Division
and the FDIC as well as the Voting Members of the Bank at the Special Meeting
and the sale of the requisite amount of Common Shares within 12 months
following the date of such approval by the Division and the FDIC. If these
conditions are not satisfied, the Plan will automatically terminate and the
Bank will continue its business in the mutual form of organization. The Plan
may be voluntarily terminated by the Board of Directors at any time before
the Special Meeting and at any time thereafter with the approval of the
Division and the FDIC.
The aggregate price of the shares of Common Stock to be issued in the
Conversion within the Estimated Price Range, currently estimated to be
between $4.25 million and $5.75 million, will be determined based upon an
independent appraisal, prepared by RP Financial, of the estimated pro forma
market value of the Common Stock of the Company. All shares of Common Stock
to be issued and sold in the Conversion will be sold at the same price. The
independent appraisal will be affirmed or, if necessary, updated at the
completion of the Subscription Offering, if all shares are subscribed for, or
at the completion of the Community Offering or Syndicated Community Offering.
The appraisal has been performed by RP Financial, a consulting firm
experienced in the valuation and appraisal of savings institutions. See
"-Stock Pricing" for additional information as to the determination of the
estimated pro forma market value of the Common Stock.
The following is a brief summary of pertinent aspects of the Conversion.
The summary is qualified in its entirety by reference to the provisions of
the Plan. A copy of the Plan is available for inspection at the office of
the Bank. The Plan is also filed as an Exhibit to the Registration Statement
of which this Prospectus and Proxy Statement is a part, copies of which may
be obtained from the SEC. See "Additional Information."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to
the following persons in the following order of descending priority: (1)
holders of deposit accounts with a balance of $50 or more ("Qualifying
Deposit") as of December 31, 1993 ("Eligible Account Holders"); (2) the ESOP;
(3) holders of deposit accounts with a Qualifying Deposit as of March 31,
1996 ("Supplemental Eligible Account Holders") and (4) members of the Bank,
consisting of depositors and borrowers of the Bank, each as of April 30,
1996, the Voting Record Date other than Eligible Account Holders and
Supplemental Eligible Account Holders ("Other Members"). All subscriptions
received will be subject to the availability of Common Stock after
satisfaction of all subscriptions of all persons having prior rights in the
Subscription Offering and to the maximum and minimum purchase limitations set
forth in the Plan of Conversion and as described below under "-Limitations on
Common Stock Purchases."
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PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder
will receive, without payment therefor, first priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of the amount permitted to be purchased in the Community Offering,
currently $60,000 of the Common Stock offered, one-tenth of one percent
(.10%) of the total offering of shares of Common Stock or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which
the numerator is the amount of the Eligible Account Holder's Qualifying
Deposit and the denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders, in each case on the Eligibility Record Date,
subject to the overall purchase limitation and exclusive of an increase in
the shares issued pursuant to an increase in the Estimated Price Range of up
to 15%. See "-Limitations on Common Stock Purchases." In the event
Eligible Account Holders exercise subscription rights for a number of shares
of Conversion Stock in excess of the total number of such shares eligible for
subscription, the shares of Conversion Stock shall be allocated among the
subscribing Eligible Account Holders so as to permit each subscribing
Eligible Account Holder, to the extent possible, to purchase a number of
shares sufficient to make his or her total allocation of Conversion Stock
equal to the lesser of 100 shares or the number of shares subscribed for by
the Eligible Account Holder. Any shares remaining after that allocation will
be allocated among the subscribing Eligible Account Holders whose
subscriptions remain unsatisfied in the proportion that the amount of the
Qualifying Deposit of each Eligible Account Holder whose subscription remains
unsatisfied bears to the total amount of the Qualifying Deposits of all
Eligible Account Holders whose subscriptions remain unsatisfied. If the
amount so allocated exceeds the amount subscribed for by any one or more
Eligible Account Holders, the excess shall be reallocated (one or more times
as necessary) among those Eligible Account Holders whose subscriptions are
still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied. To ensure proper
allocation of stock, each Eligible Account Holder must list on his
subscription order form all accounts in which he has an ownership interest.
Failure to list an account could result in less shares being allocated than
if all accounts had been disclosed. The subscription rights of Eligible
Account Holders who are also Directors or Officers of the Bank or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the year
preceding December 31, 1993.
PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. To the extent that there
are sufficient shares remaining after satisfaction of the subscriptions by
Eligible Account Holders, the ESOP will receive, without payment therefor,
second priority, nontransferable subscription rights to purchase, in the
aggregate, up to 10% of Common Stock issued in the Conversion, including any
increase in the number of shares of Common Stock to be issued in the
Conversion after the date hereof as a result of an increase of up to 15% in
the maximum of the Estimated Price Range. The ESOP intends to purchase 8% of
the shares to be issued in the Conversion, or 34,000 shares and 46,000
shares, based on the issuance of 425,000 shares and 575,000 shares,
respectively. Subscriptions by the ESOP will not be aggregated with shares of
Common Stock purchased directly by or which are otherwise attributable to any
other participants in the Subscription and Community Offerings, including
subscriptions of any of the Bank's directors, officers, employees or
associates thereof. See "Management of the Bank - Benefits - Employee Stock
Ownership Plan and Trust."
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third
priority, nontransferable subscription rights to subscribe for in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently $60,000 of the Common Stock
offered, one-tenth of one percent (.10%) of the total offering of shares of
Common Stock or fifteen times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common Stock to
be issued by a fraction of which the numerator is the amount of the
Supplemental Eligible Account Holder's Qualifying Deposit
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and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall purchase limitation and
exclusive of an increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%. See "-Limitations on Common Stock
Purchases." In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of
the total number of such shares eligible for subscription, the shares of
Conversion Stock shall be allocated among the subscribing Supplemental
Eligible Account Holders so as to permit each subscribing Supplemental
Eligible Account Holder, to the extent possible, to purchase a number of
shares sufficient to make his or her total allocation of Conversion Stock
equal to the lesser of 100 shares or the number of shares subscribed for by
the Supplemental Eligible Account Holder. Any shares remaining after that
allocation will be allocated among the subscribing Supplemental Eligible
Account Holders whose subscriptions remain unsatisfied in the proportion that
the amount of the Qualifying Deposit of each Supplemental Eligible Account
Holder whose subscription remains unsatisfied bears to the total amount of
the Qualifying Deposits of all Supplemental Eligible Account Holders whose
subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Supplemental Eligible Account
Holders, the excess shall be reallocated (one or more times as necessary)
among those Supplemental Eligible Account Holders whose subscriptions are
still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied. To ensure proper
allocation of stock, each Supplemental Eligible Account Holder must list on
his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in less shares being
allocated than if all accounts had been disclosed. The subscription rights
received by Eligible Account Holders will be applied in partial satisfaction
to the subscription rights to be received as a Supplemental Eligible Account
Holder.
PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by the Eligible Account
Holders, the ESOP and the Supplemental Eligible Account Holders, each Other
Member will receive, without payment therefor, fourth priority
nontransferable subscription rights to subscribe for Common Stock in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently $60,000 of the Common Stock
offered, or one-tenth of one percent (.10%) of the total offering of shares
of Common Stock, subject to the overall purchase limitation and exclusive of
an increase in shares issued pursuant to an increase in the Estimated Price
Range of up to 15%. In the event that Other Members subscribe for a number
of shares of Conversion Stock which, when added to the shares of Conversion
Stock subscribed for by the Eligible Account Holders, the Employee Plans and
the Supplemental Eligible Account Holders is in excess of the total number of
shares of Conversion Stock being issued, the subscriptions of such Other
Members will be allocated among the subscribing Other Members so as to permit
each subscribing Other Member, to the extent possible, to purchase a number
of shares sufficient to make his or her total allocation of Conversion Stock
equal to the lesser of 100 shares or the number of shares subscribed for by
the Other Member. Any shares remaining after that allocation will be
allocated among the subscribing Other Members whose subscriptions remain
unsatisfied pro rata in the same proportion that the number of votes of a
subscribing Other Member on the Voting Record Date bears to the total votes
on the Voting Record Date of all subscribing Other Members whose
subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more remaining Other Members, the excess
shall be reallocated (one or more times as necessary) among those remaining
Other Members whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
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EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription
Offering will expire on June 26, 1996, unless extended for up to 45 days by
the Bank or such additional periods with the approval of the FDIC and the
Division. Subscription rights which have not been exercised prior to the
Expiration Date will become void.
The Bank will not execute orders until all shares of Common Stock have
been subscribed for or otherwise sold. If all shares have not been
subscribed for or sold within 45 days after the Subscription Expiration Date,
unless such period is extended with the consent of the FDIC and the Division,
all funds delivered to the Bank pursuant to the Subscription Offering will be
returned promptly to the subscribers with interest and all withdrawal
authorizations will be cancelled. If an extension beyond the 45 day period
following the Subscription Expiration Date is granted, the Bank will notify
subscribers of the extension of time and of any rights of subscribers to
modify or rescind their subscriptions. Such extensions may not go beyond
March 26, 1997.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of the Eligible Account Holders, the ESOP,
the Supplemental Eligible Account Holders and Other Members, the Bank may
determined to offer shares pursuant to the Plan to certain members of the
general public, with preference given to natural persons (such natural
persons referred to as "Preferred Subscribers") residing in the Bank's Local
Community, subject to the right of the Bank and the Company to accept or
reject any such orders, in whole or in part, in their sole discretion. The
Community Offering, if one is held, is expected to begin immediately
following the termination of the Subscription Offering, but may begin at
anytime during the Subscription Offering. Persons purchasing in the
Community Offering, if any, together with associates of and persons acting in
concert with such persons, may purchase up to $60,000 of the Common Stock
offered subject to the maximum purchase limitation and exclusive of shares
issued pursuant to an increase in the Estimated Price Range by up to 15%.
See "-Limitations on Common Stock Purchases." This amount may be decreased
to less than $60,000 at the sole discretion of the Company and the Bank. THE
OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY OFFERING
CATEGORY IS SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN ITS SOLE
DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT
THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE
SUBSCRIPTION EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of Preferred Subscribers after completion of
the Subscription and Community Offerings, such stock will be allocated first
to each Preferred Subscriber whose order is accepted by the Bank, in an
amount equal to the lesser of 100 shares or the number of shares subscribed
for by each such Preferred Subscriber, if possible. Thereafter, unallocated
shares will be allocated among the Preferred Subscribers whose order remains
unsatisfied on a 100 shares per order basis until all such orders have been
filled or the remaining shares have been allocated. If there are any shares
remaining, shares will be allocated to other persons of the general public
who purchase in the Community Offering applying the same allocation described
above for Preferred Subscribers.
PERSONS IN NON-QUALIFIED STATES OR FOREIGN COUNTRIES. The Company and
the Bank will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons entitled to subscribe for
stock pursuant to the Plan reside. However, the Plan provides that the Bank
and the Company are not required to offer stock in the Subscription Offering
to any person who resides in a foreign country or resides in a state of the
United States with respect to which both of the following apply: (i) a small
number of persons otherwise eligible to subscribe for shares of Common Stock
reside in such state; and (ii) the Company or the Bank determines that
compliance with the securities laws of such state
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would be impracticable for reasons of cost or otherwise, including but not
limited to a request that the Company and the Bank or their officers,
directors or trustees register as a broker, dealer, salesman or selling
agent, under the securities laws of such state, or a request to register or
otherwise qualify the subscription rights or Common Stock for sale or submit
any filing with respect thereto in such state. Where the number of persons
eligible to subscribe for shares in one state is small, the Bank and the
Company will base their decision as to whether or not to offer the Common
Stock in such state on a number of factors, including the size of accounts
held by account holders in the state, the cost of registering or qualifying
the shares or the need to register the Company, its officers, directors or
employees as brokers, dealers or salesmen.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible,
all shares of Common Stock not purchased in the Subscription Offering and
Community Offering, if any, will be offered for sale to the general public in
a Syndicated Community Offering through a syndicate of registered
broker-dealers to be formed and managed by Trident acting as agent of the
Company to assist the Company and the Bank in the sale of the Common Stock.
The Company and the Bank have the right to reject orders in whole or part in
their sole discretion in the Syndicated Community Offering. Neither Trident
nor any registered broker-dealer shall have any obligation to take or
purchase any shares of the Common Stock in the Syndicated Community Offering,
however, Trident has agreed to use its best efforts in the sale of shares in
the Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "-Stock Pricing."
Subject to overall purchase limitations, no person, together with any
associate or group of persons acting in concert, will be permitted to
subscribe in the Syndicated Community Offering for more than $60,000 of the
total number of shares offered in the Conversion, exclusive of an increase in
shares issued pursuant to an increase in the Estimated Price Range of up to
15%; provided, however, that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of or persons
acting in concert with such persons, will be aggregated with purchases in the
Syndicated Community Offering and be subject to an overall maximum purchase
limitation of $60,000 of the shares offered, exclusive of an increase in
shares issued pursuant to an increase in the Estimated Price Range by up to
15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's statement savings rate of interest from the
date such payment is actually received by the Bank until completion or
termination of the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in the Syndicated Community
Offering, a purchaser may pay for his shares with funds held by or deposited
with a selected dealer. If an order form is executed and forwarded to the
selected dealer or if the selected dealer is authorized to execute the order
form on behalf of a purchaser, the selected dealer is required to forward the
order form and funds to the Bank for deposit in a segregated account on or
before noon of the business day following receipt of the order form or
execution of the order form by the selected dealer. Alternatively, selected
dealers may solicit indications of interest from their customers to place
orders for shares. Such selected dealers shall subsequently contact their
customers who indicated an interest and seek their confirmation as to their
intent to purchase. Those indicating an intent to purchase shall execute
order forms and forward them to their selected dealer or authorize the
selected dealer to execute such forms. The selected dealer will acknowledge
receipt of the order to its customer in writing on the following business day
and will debit such customer's account on the third business day after the
customer has confirmed his intent to purchase (the "debit date") and on or
before noon of the
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next business day following the debit date will send order forms and funds to
the Bank for deposit in a segregated account. Although purchasers' funds are
not required to be in their accounts with selected dealers until the debit
date in the event that such alternative procedure is employed once a
confirmation of an intent to purchase has been received by the selected
dealer, the purchaser has no right to rescind his order.
Certificates representing shares of Common Stock purchased, together
with any refund due, will be mailed to purchasers at the address specified in
the order form, as soon as practicable following consummation of the sale of
the Common Stock. Any certificates returned as undeliverable will be
disposed of in accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Company with the
approval of the FDIC and the Division. Such extensions may not be beyond
March 26, 1997. See "-Stock Pricing" above for a discussion of rights of
subscribers, if any, in the event an extension is granted.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of the amount permitted to
be purchased in the Community Offering, currently $60,000 of the
shares of Common Stock offered, one-tenth of one percent (.10%) of
the total offering of shares of Common Stock or fifteen times the
product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Eligible Account Holder and the
denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders in each case on the Eligibility Record
Date subject to the overall maximum purchase limitation in (8)
below and exclusive of an increase in the total number of shares
issued due to an increase in the Estimated Price Range of up to
15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10% of
the shares of Common Stock issued in the Conversion, including
shares issued in the event of an increase in the Estimated Price
Range of 15% and intends to purchase 8% of the shares of Common
Stock issued in the Conversion;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of the
amount permitted to be purchased in the Community Offering,
currently $60,000 of the shares of Common Stock, one-tenth of one
percent (.10%) of the total offering of shares of Common Stock or
fifteen times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock
to be issued by a fraction of which the numerator is the amount of
the Qualifying Deposit of the Supplemental Eligible Account Holder
and the denominator is the total amount of Qualifying Deposits of
all Supplemental Eligible Account Holders in such case on the
Supplemental Eligibility Record Date subject to the
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overall maximum purchase limitation in (8) below and exclusive of an
increase in the total number of shares issued due to an increase
in the Estimated Price Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the
Subscription Offering up to the greater of the amount permitted to
be purchased in the Community Offering, currently $60,000 of the
shares of Common Stock, or one-tenth of one percent (.10%) of the
total offering of shares of Common Stock subject to the overall
maximum purchase limitation in (8) below and exclusive of an
increase in the total number of shares issued due to an increase
in the Estimated Price Range of up to 15%;
(6) Persons purchasing shares of Common Stock in the Community
Offering, together with associates of and groups of persons acting
in concert with such persons, may purchase in the Community
Offering up to $60,000 of the shares of Common Stock subject to
the overall maximum purchase limitation in (8) below and exclusive
of an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%;
(7) Persons purchasing shares of Common Stock in the Syndicated
Community Offering, together with associates of and persons acting
in concert with such persons, may purchase in the Syndicated
Offering up to $60,000 of the shares of Common Stock subject to
the overall maximum purchase limitation in (8) below and exclusive
of an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15% and, provided
further that shares of Common Stock purchased in the Community
Offering by any persons, together with associates of and persons
acting in concert with such persons, will be aggregated with
purchases in the Syndicated Community Offering in applying the
$60,000 purchase limitation.
(8) Eligible Account Holders, Supplemental Eligible Account Holders
and Other Members may purchase stock in the Community Offering and
Syndicated Community Offering subject to the purchase limitations
described in (6) and (7) above, provided that, except for the
ESOP, the overall maximum number of shares of Common Stock
subscribed for or purchased in all categories of the Conversion by
any person, together with associates of and groups of persons
acting in concert with such persons, shall not exceed $60,000 of
the shares of Common Stock offered in the Conversion and exclusive
of an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%; and
(9) No more than 35% of the total number of shares offered for sale in
the Conversion may be purchased by directors and officers of the
Bank and their associates in the aggregate, excluding purchases by
the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members
of the Bank, both the individual amount permitted to be subscribed for and
the overall maximum purchase limitation may be increased up to a maximum of
5% at the sole discretion of the Bank and the Company. If such amount is
increased, subscribers for the maximum amount will be, and certain other
large subscribers in the sole discretion of the Bank may be, given the
opportunity to increase their subscriptions up to the then-applicable limit.
In addition, the Boards of Directors of the Company and the Bank may, in
their sole discretion, increase the maximum purchase limitation referred to
above up to 9.99%, provided that orders for shares exceeding 5% of the shares
being offered in the Subscription and Community Offerings shall not exceed,
in the
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aggregate, 10% of the shares being offered in the Subscription and Community
Offerings. Requests to purchase additional shares of Common Stock under this
provision will be determined by the Boards of Directors and, if approved,
allocated on a pro rata basis giving priority in accordance with the priority
rights set forth herein. The overall maximum purchase limitation may be
reduced below $60,000, but may not be reduced to less than 1.0%; however, the
individual amount permitted to be subscribed for may be reduced by the Bank
to less than 1.0%, subject to paragraphs (3) and (4) above without the
further approval of members or resolicitation of subscribers. In the event
the amount permitted to be subscribed for in the Subscription Offering were
reduced below $60,000, an individual Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member could not purchase individually in
the Subscription Offering the overall maximum purchase limit of $60,000 of
the shares offered, but may make such purchase, together with associates of
and persons acting in concert with such person, by also purchasing in other
available categories of the Conversion, subject to availability of shares and
the maximum overall purchase limit for purchases in the Conversion.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order or priority in accordance with the Plan: (i) in the event that there
is an oversubscription by Eligible Account Holders, to fill unfulfilled
subscriptions of Eligible Account Holders exclusive of the Adjusted Maximum;
(ii) to fill the ESOP's subscription of 8.0% of the Adjusted Maximum number
of shares; (iii) in the event that there is an oversubscription by
Supplemental Eligible Account Holders, to fill unfulfilled subscriptions of
Supplemental Eligible Account Holders exclusive of the Adjusted Maximum; (iv)
in the event that there is an oversubscription by Other Members, to fill
unfulfilled subscriptions of Other Members exclusive of the Adjusted Maximum;
and (v) to fill unfulfilled subscriptions in the Community Offering to the
extent possible, exclusive of the Adjusted Maximum and with preference to
Preferred Subscribers.
The term "associate" of a person is defined to mean: (i) any
corporation or organization (other than the Bank or a majority-owned
subsidiary of the Bank) of which such person is an officer, partner or 10%
stockholder; (ii) any trust or other estate in which such person has a
substantial beneficial interest or serves as a trustee or in a similar
fiduciary capacity; provided, however, such term shall not include any
employee stock benefit plan of the Bank in which such person has a
substantial beneficial interest or serves as a trustee or in a similar
fiduciary capacity; and (iii) any relative or spouse of such person, or any
relative of such spouse, who either has the same home as such person or who
is a director or officer of the Bank or the Company. Directors are not
treated as associates of each other solely because of their Board membership.
For a further discussion of limitations on purchases of a converting
institution's stock at the time of Conversion and subsequent to Conversion,
see "Subscriptions by Executive Officers and Directors," "-Certain
Restrictions on Purchase or Transfer of Shares After Conversion" and
"Restrictions on Acquisition of the Company and the Bank."
The term "acting in concert" is defined to mean (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or
(ii) a combination or pooling of voting or other interests in the securities
of an issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise.
Further, a person or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in concert with any
person or company who is also acting in concert with that other party, except
that any employee stock benefit plan will not be deemed to be acting in
concert with its trustee or a person who serves in a similar capacity solely
for the purpose of determining whether stock held by the trustee and stock
held by the plan will be aggregated.
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PURPOSES OF CONVERSION
The Bank, as an Ohio mutual savings bank, does not have shareholders and
has no authority to issue capital stock. By converting to the capital stock
form of organization, the Bank will be structured in the form used by
commercial banks, other business entities and a growing number of savings
institutions. The Conversion may enhance the Bank's ability to: access
capital markets; increase its presence in the communities it serves through
the acquisition or establishment of branch offices or the acquisition of
smaller financial institutions, although the Bank has no current
understanding or agreement for the acquisition of any specific financial
institution or the acquisition or establishment of new branch offices;
provide affordable home financing opportunities to the communities it serves
or diversify into other financial services to the extent allowable by
applicable law and regulation. In particular, the increase in the Bank's
capital as a result of the Conversion will enhance the ability of the Bank to
meet the needs of the communities it serves by, among other things,
permitting the Bank to increase its one- to four-family residential mortgage
lending, subject to the demand for such loans, competitive considerations and
other relevant factors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Management Strategy" and
"Business of the Bank - Market Area and Competition."
The holding company form of organization, if used, would provide
additional flexibility to diversify the Bank's business activities through
newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock institutions, as well as other companies. Although there
are no current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Conversion,
subject to regulatory limitations and the Company's financial position, to
take advantage of any such opportunities that may arise.
The potential impact of the Conversion upon the Bank's capital base is
significant. The Bank had retained earnings in accordance with GAAP of $3.8
million, or 8.92% of assets at December 31, 1995. Assuming that $5.7 million
(based on the maximum of the estimated pro forma market value of the Common
Stock which has been estimated by RP Financial to be from a minimum of $4.2
million to a maximum of $5.7 million) of gross proceeds are realized from the
sale of Common Stock (see "Pro Forma Data" for the basis of this assumption)
and assuming that 50% of the net proceeds are used by the Company to purchase
the capital stock of the Bank, the Bank's ratio of GAAP capital to adjusted
assets, on a pro forma basis, will increase to 12.75% after the Conversion;
at the midpoint of the Estimated Price Range, the Bank's ratio of leverage
capital to adjusted assets, on a pro forma basis, will increase to 12.04%
after Conversion. The investment of the net proceeds from the sale of the
Common Stock will provide the Bank with additional income to further increase
its capital position. The additional capital may also assist the Bank in
offering new programs and expanded services to its customers.
After completion of the Conversion, the unissued common stock authorized
by the Company's Articles of Incorporation will permit the Company, subject
to market conditions and regulatory approval of an offering, to raise
additional equity capital through further sales of securities, and to issue
securities in connection with possible acquisitions. At the present time,
the Company has no plans with respect to additional offerings of securities,
other than the issuance of additional shares upon exercise of stock options
or the possible issuance of authorized but unissued shares to the Stock
Programs. Following the Conversion, the Company will also be able to use
stock-related incentive programs to attract and retain executive and other
personnel for itself and its subsidiaries. See "Management of the Bank -
Executive Compensation."
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EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual savings institution has both a
deposit account in the institution and a pro rata ownership interest in the
net worth of the institution based upon the balance in his or her account,
which interest may only be realized in the event of a liquidation of the
institution. However, this ownership interest is tied to the depositor's
account and has no tangible market value separate from such deposit account.
Any depositor who opens a deposit account obtains a pro rata ownership
interest in the net worth of the institution without any additional payment
beyond the amount of the deposit. A depositor who reduces or closes his
account receives a portion or all of the balance in the account but nothing
for his ownership interest in the net worth of the institution, which is lost
to the extent that the balance in the account is reduced.
Consequently, mutual savings institution depositors normally have no way
to realize the value of their ownership interest, which has realizable value
only in the unlikely event that the mutual savings institution is liquidated.
In such event, the depositors of record at that time, as owners, would share
pro rata in any residual surplus and reserves after other claims, including
claims of depositors to the amounts of their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY. Certificates are issued to evidence ownership of the
capital stock. The stock certificates are transferable, and therefore the
stock may be sold or traded if a purchaser is available with no effect on any
account the seller may hold in the institution.
CONTINUITY. While the Conversion is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. The Bank will continue to be subject to regulation by
the Division and the FDIC. After the Conversion, the Bank will continue to
provide services for depositors and borrowers under current policies by its
present management and staff.
The Directors serving the Bank at the time of Conversion will serve as
Directors of the Bank after the Conversion. The Directors of the Company
will consist of individuals currently serving on the Board of Directors of
the Bank. All officers of the Bank at the time of Conversion will retain
their positions after Conversion.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the Bank
at the time of Conversion will automatically continue as a depositor after
the Conversion, and each such deposit account will remain the same with
respect to deposit balance, interest rate and other terms. Each such account
will be insured by the FDIC to the same extent as before the Conversion
(i.e., up to $100,000 per depositor). Depositors will continue to hold their
existing certificates, statement savings and other evidences of their
accounts.
EFFECT ON LOANS. No loan outstanding from the Bank will be affected by
the Conversion, and the amount, interest rate, maturity and security for each
loan will remain as they were contractually fixed prior to the Conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors and
borrowers of the Bank are members of, and have voting rights in, the Bank as
to all matters requiring membership action. Upon Conversion, depositors and
borrowers will cease to be members and will no longer be entitled to vote at
meetings of the Bank. Upon Conversion, all voting rights in the Bank will be
vested in the Company as the sole stockholder of the Bank. Exclusive voting
rights with respect to the Company will be vested in
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the holders of Common Stock. Depositors of the Bank will not have voting
rights after the Conversion except to the extent that they become
stockholders of the Company through the purchase of Common Stock.
TAX EFFECTS. The Bank has received an opinion of counsel with regard to
federal and Ohio income taxation which provides that the adoption and
implementation of the Plan of Conversion set forth herein will not be taxable
for federal or Ohio tax purposes to the Bank, its Eligible Account Holders,
or its Supplemental Eligible Account Holders or the Company, except as
discussed below. See "-Tax Aspects."
EFFECT ON LIQUIDATION RIGHTS. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the
extent of deposit balances) would be paid first. Thereafter, if there were
any assets remaining, depositors would be entitled to such remaining assets,
pro rata, based upon the deposit balances in their deposit accounts
immediately prior to liquidation. In the unlikely event that the Bank were
to liquidate after Conversion, all claims of creditors (including those of
depositors, to the extent of their deposit balances) would also be paid
first, followed by distribution of the "liquidation account" to certain
depositors (see "-Liquidation Rights"), with any assets remaining thereafter
distributed to the Company as the holder of the Bank's capital stock. A
post-Conversion merger, consolidation, sale of bulk assets or similar
combination or transaction with another insured savings institution would not
be considered a liquidation and, in such a transaction, the liquidation
account would be assumed by the surviving institution.
STOCK PRICING
The Plan of Conversion requires that the purchase price of the Common
Stock must be based on the appraised pro forma market value of the Common
Stock, as determined on the basis of an independent valuation. The Bank and
the Company have retained RP Financial to make such valuation. For its
services in making such appraisal, RP Financial, Inc. will receive a fee of
$17,000, plus reasonable expenses. The Bank and the Company have agreed to
indemnify RP Financial and its employees and affiliates against certain
losses (including any losses in connection with claims under the federal
securities laws) arising out of its services as appraiser, except where RP
Financial's liability results from its negligence, willful misconduct or bad
faith.
An appraisal has been made by RP Financial in reliance upon the
information contained in this Prospectus and Proxy Statement, including the
Consolidated Financial Statements. RP Financial also considered the
following factors, among others: the present and projected operating results
and financial condition of the Company and the Bank and the economic and
demographic conditions in the Bank's existing marketing area; certain
historical, financial and other information relating to the Bank; a
comparative evaluation of the operating and financial statistics of the Bank
with those of other similarly situated publicly traded savings banks and
savings institutions located in the Bank's primary market area and midwestern
United States; the aggregate size of the offering of the Common Stock; the
impact of Conversion on the Bank's net worth and earnings potential; the
proposed dividend policy of the Company and the Bank; and the trading market
for securities of comparable institutions and general conditions in the
market for such securities.
On the basis of the foregoing, RP Financial has advised the Company and
the Bank that, in its opinion, dated March 1, 1996 the estimated pro forma
market value of the Common Stock ranged from a minimum of $4.25 million to a
maximum of $5.75 million with a midpoint of $5.0 million. Based upon the
Valuation Range and the Purchase Price of $10.00 per share for the Common
Stock established by the Board of Directors, the Board of Directors has
established the Estimated Price Range of $4.25 million to $5.75 million, with
a midpoint of $5.0 million, and the Company expects to issue between 425,000
and
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575,000 shares of Common Stock. The Board of Directors of the Company and
the Bank have reviewed the appraisal of RP Financial and in determining the
reasonableness and adequacy of such appraisal consistent with FDIC
regulations and policies, have reviewed the methodology and reasonableness of
the assumptions utilized by RP Financial in the preparation of such
appraisal. The Estimated Price Range may be amended with the approval of the
FDIC and the Division (if required), if necessitated by subsequent
developments in the financial condition of the Company or the Bank or market
conditions generally.
SUCH VALUATION, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH
SHARES. RP FINANCIAL DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID RP FINANCIAL
VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE VALUATION
CONSIDERS THE BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH
VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE
CAN BE GIVEN THAT PERSONS PURCHASING SUCH SHARES IN THE CONVERSION WILL
THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE PURCHASE
PRICE OR IN THE RANGE OF THE FOREGOING VALUATION OF THE PRO FORMA MARKET
VALUE THEREOF.
Following commencement of the Subscription and Community Offerings, the
maximum of the Estimated Price Range may be increased up to 15% and the
number of shares of Common Stock to be issued in the Conversion may be
increased to 661,250 shares due to regulatory considerations, changes in the
market and general financial and economic conditions, without the
resolicitation of subscribers. See "-Limitations on Common Stock Purchases"
as to the method of distribution and allocation of additional shares that may
be issued in the event of an increase in the Estimated Price Range to fill
unfilled orders in the Subscription and Community Offerings.
If the pro forma market value of the Common Stock is either more than
15% above the maximum of the Estimated Price Range or less than the minimum
of the Estimated Price Range, the Bank and the Company, after consulting with
the FDIC and the Division, may terminate the Plan and return all funds
promptly with interest at the Bank's statement savings rate of interest on
payments made by check, bank draft or money order, extend or hold a new
Subscription and Community Offering, establish a new Estimated Price Range,
commence a resolicitation of subscribers or take such other actions as
permitted by the FDIC and the Division in order to complete the Conversion.
In the event that a resolicitation is commenced, unless an affirmative
response is received within a reasonable period of time, all funds will be
promptly returned to investors as described above. A resolicitation, if any,
following the conclusion of the Subscription and Community Offerings would
not exceed 45 days unless further extended by the FDIC and the Division for
periods of up to 90 days not to extend beyond March 26, 1997.
If all shares of Common Stock are not sold through the Subscription and
Community Offerings, then the Bank and the Company expect to offer the
remaining shares in a Syndicated Community Offering which would occur as soon
as practicable following the close of the Subscription and Community
Offerings but may commence during the Subscription and Community Offering
subject to prior rights of subscribers. All shares of Common Stock will be
sold at the same price per share in the Syndicated Community Offering as in
the Subscription and Community Offerings. See "-Syndicated Community
Offering."
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, RP Financial confirms to the Bank, the Company, the FDIC
and the Division that, to the best of its knowledge, nothing of a material
nature has occurred which, taking into account all relevant factors,
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including those which would be involved in a change in the maximum
subscription price, would cause RP Financial to conclude that the aggregate
value of the Common Stock at the Purchase Price is incompatible with its
estimate of the pro forma market value of the Common Stock of the Company at
the conclusion of the Subscription and Community Offerings. Any change which
would result in an aggregate purchase price which is below or more than 15%
above the Estimated Price Range would be subject to approval by the FDIC and
the Division. If such confirmation is not received, the Bank may extend the
Conversion, extend, reopen or commence new Subscription and Community
Offerings or Syndicated Community Offering, establish a new Estimated Price
Range and commence a resolicitation of all subscribers with the approval of
the FDIC and the Division or take such other actions as permitted by the FDIC
and the Division in order to complete the Conversion, or terminate the Plan
and cancel the Subscription and Community Offerings and/or the Syndicated
Community Offering. In the event market or financial conditions change so as
to cause the aggregate purchase price of the shares to be below the minimum
of the Estimated Price Range or more than 15% above the maximum of such
range, and the Company and the Bank determine to continue the Conversion,
subscribers will be resolicited (i.e., be permitted to continue their orders,
in which case they will need to affirmatively reconfirm their subscriptions
prior to the expiration of the resolicitation offering or their subscription
funds will be promptly refunded with interest at the Bank's statement savings
rate of interest, or be permitted to decrease or cancel their subscriptions).
Any change in the Estimated Price Range must be approved by the FDIC and the
Division. A resolicitation, if any, following the conclusion of the
Subscription and Community Offerings would not exceed 45 days, or if
following the Syndicated Community Offering, 90 days, unless further extended
by the FDIC and the Division for periods up to 90 days not to extend beyond
March 26, 1997. If such resolicitation is not effected, the Bank will return
all funds promptly with interest at the Bank's statement savings rate of
interest on payments made by check, bank draft or money order.
Copies of the appraisal report of RP Financial including any amendments
thereto, and the detailed memorandum of the appraiser setting forth the
method and assumptions for such appraisal are available for inspection at the
main office of the Bank and the other locations specified under "Additional
Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement
of the Subscription and Community Offerings, the total number of shares to be
issued in the Conversion may be increased or decreased without a
resolicitation of subscribers, provided that the product of the total number
of shares times the price per share is not below the minimum of the Estimated
Price Range or more than 15% above the maximum of the Estimated Price Range.
Based on a fixed purchase price of $10.00 per share and RP Financial's
estimate of the pro forma market value of the Common Stock ranging from a
minimum of $4.25 million to a maximum, as increased by 15%, of $6.61
million, the number of shares of Common Stock expected to be issued is
between a minimum of 425,000 shares and a maximum, as adjusted by 15%, of
661,250 shares. The actual number of shares issued between this range will
depend on a number of factors and shall be determined by the Bank and Company
subject to FDIC and the Division approval, if necessary.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the
Estimated Price Range or more than 15% above the maximum of the Estimated
Price Range, if the Plan is not terminated by the Company and the Bank after
consultation with the Division and the FDIC, purchasers will be resolicited
(i.e., permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly
refunded, or be
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permitted to modify or rescind their subscriptions). Any change in the
Estimated Price Range must be approved by the Division and the FDIC. If the
number of shares issued in the Conversion is increased due to an increase of
up to 15% in the Estimated Price Range to reflect changes in market or
financial condition, persons who subscribed for the maximum number of shares
will not be given the opportunity to subscribe for an adjusted maximum number
of shares, except for the ESOP which will be able to subscribe for such
adjusted amount. See "-Limitations on Common Stock Purchases."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A
decrease in the number of shares to be issued in the Conversion would
increase both a subscriber's ownership interest and the Company's pro forma
net earnings and stockholders' equity on a per share basis while decreasing
pro forma net earnings and stockholder's equity on an aggregate basis. For a
presentation of the effects of such changes, see "Pro Forma Data."
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Trident as a financial and
marketing advisor in connection with the offering of the Common Stock, and
Trident has agreed to use its best efforts to solicit subscriptions and
purchase orders for shares of Common Stock in the Offerings. Based upon
negotiations between the Bank and the Company concerning fee structure,
Trident will receive a fee equal to $65,000. Fees to Trident and to any
other broker-dealer, which may not exceed 4% of the aggregate purchase price
of the shares sold in the Syndicated Offering, if any, may be deemed to be
underwriting fees, and Trident and such broker-dealers may be deemed to be
underwriters. Trident will also be reimbursed for its reasonable
out-of-pocket expenses, including legal fees, in an amount not to exceed
$30,000. In the event the Offerings are not consummated or Trident ceases,
under certain circumstances after the subscription solicitation activities
are commenced, to provide assistance to the Company, Trident will be entitled
to be reimbursed for its reasonable out-of-pocket expenses as described
above. The Company and the Bank have agreed to indemnify Trident for
reasonable costs and expenses in connection with the investigation or defense
of all losses, claims, damages or liabilities, joint or several and all legal
or other expenses reasonably incurred by them in connection with the
investigation or defense thereof to which Trident may become subject under
the securities laws or under the common law that arise out of or are based
upon the conversion or the engagement of Trident unless such losses are
primarily a result of Trident's willful misconduct or gross negligence.
Trident has received advances towards its fees totalling $10,000. See "Pro
Forma Data" for the assumptions used to arrive at these estimates.
Directors and executive officers of the Company and Bank may participate
in the solicitation of offers to purchase Common Stock. Other employees of
the Bank may participate in the Offering in ministerial capacities or
providing clerical work in effecting a sales transaction. Other questions of
prospective purchasers will be directed to executive officers or registered
representatives. Such other employees have been instructed not to solicit
offers to purchase Common Stock or provide advice regarding the purchase of
Common Stock. The Company will rely on Rule 3a4-1 under the Exchange Act,
and sales of Common Stock will be conducted within the requirements of Rule
3a4-1, so as to permit officers, directors and employees to participate in
the sale of Common Stock. No officer, director or employee of the Company or
the Bank will be compensated in connection with his participation by the
payment of commissions or other remuneration based either directly or
indirectly on the transactions in the Common Stock.
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PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus and proxy statement
at least 48 hours before the Expiration Date in accordance with Rule 15c2-8 of
the Exchange Act, no prospectus and proxy statement will be mailed any later
than five days prior to such date or hand delivered any later than two days
prior to such date. Execution of the stock order form and certification form
will confirm receipt or delivery in accordance with Rule 15c2-8. Stock order
and certification forms will only be distributed with a prospectus and proxy
statement.
To purchase shares in the Subscription and Community Offerings, an
executed stock order form and certification form with the required payment for
each share subscribed for, or with appropriate authorization for withdrawal
from the Bank's deposit account (which may be given by completing the
appropriate blanks in the stock order form), must be received by the Bank at
any of its offices by 12:00 noon, Cincinnati Time, on the Expiration Date.
Stock order forms which are not received by such time or are executed
defectively or are received without full payment (or appropriate withdrawal
instructions) are not required to be accepted. In addition, the Bank and
Company are not obligated to accept orders submitted on photocopied or
facsimilied stock order forms and will not accept stock order forms
unaccompanied by an executed certification form. The Company and the Bank
have the right to waive or permit the correction of incomplete or improperly
executed forms, but do not represent that they will do so. Once received, an
executed stock order form may not be modified, amended or rescinded without
the consent of the Bank unless the Conversion has not been completed within 45
days after the end of the Subscription and Community Offerings, unless such
period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December
31, 1993) and/or the Supplemental Eligibility Record Date (March 31, 1996)
and/or the Voting Record Date (April 30, 1996) must list all accounts on the
stock order form giving all names in each account and the account number.
Payment for subscriptions may be made (i) in cash if delivered in person
at the office of the Bank, (ii) by check, bank draft or money order, or (iii)
by authorization of withdrawal from deposit accounts maintained with the Bank.
No wire transfers will be accepted. Interest will be paid on payments made by
cash, check, bank draft or money order at the Bank's statement savings rate of
interest from the date payment is received until the completion or termination
of the Conversion. If payment is made by authorization of withdrawal from
deposit accounts, the funds authorized to be withdrawn from a deposit account
will continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds,
thereby making them unavailable to the depositor until completion or
termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from his deposit account, the Bank will do so as of the
effective date of the Conversion. The Bank will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum
balance requirement at the time that the funds actually are transferred under
the authorization, the certificate will be cancelled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at
the Bank's statement savings rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription and
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Community Offering, if all shares are sold, or upon consummation of the
Syndicated Community Offering if shares remain to be sold in such offering;
provided, that there is in force from the time of its subscription until such
time, a loan commitment from an unrelated financial institution or the
Company to lend to the ESOP, at such time, the aggregate Purchase Price of
the shares for which it subscribed.
Owners of self-directed Individual Retirement Accounts ("IRAs") may use
the assets of such IRAs to purchase shares of Common Stock in the Subscription
and Community Offerings, provided that such IRAs are not maintained at the
Bank. Persons with self-directed IRAs maintained at the Bank must have their
accounts transferred to an unaffiliated institution or broker to purchase
shares of Common Stock in the Subscription and Community Offerings. In
addition, the provisions of ERISA and IRS regulations require that officers,
directors and ten percent shareholders who use self-directed IRA funds to
purchase shares of Common Stock in the Subscription and Community Offerings,
make such purchases for the exclusive benefit of the IRAs.
Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the address specified in properly completed stock
order forms, as soon as practicable following consummation of the sale of all
shares of Common Stock. Any certificates returned as undeliverable will be
disposed of in accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
The FDIC and the Division conversion regulations prohibit any person
with subscription rights, including the Eligible Account Holders, the ESOP,
the Supplemental Eligible Account Holders and Other Members of the Bank, from
transferring or entering into any agreement or understanding to transfer the
legal or beneficial ownership of the subscription rights issued under the Plan
or the shares of Common Stock to be issued upon their exercise. Such rights
may be exercised only by the person to whom they are granted and only for his
account. Each person exercising such subscription rights will be required to
certify that he is purchasing shares solely for his own account and that he
has no agreement or understanding regarding the sale or transfer of such
shares. The regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of Common Stock prior to the completion of the
Conversion.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its
present mutual form, each depositor would receive his pro rata share of any
assets of the Bank remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). Each depositor's pro rata share of such remaining assets would be
in the same proportion as the value of his deposit account was to the total
value of all deposit accounts in the Bank at the time of liquidation. After
the Conversion, each depositor, in the event of a complete liquidation, would
have a claim as a creditor of the same general priority as the claims of all
other general creditors of the Bank. However, except as described below, his
claim would be solely in the amount of the balance in his deposit account plus
accrued interest. He would not have an interest in the value or assets of the
Bank above that amount.
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The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders in an amount equal to the surplus and reserves of the Bank as
of the date of its latest balance sheet contained in the final Prospectus and
Proxy Statement used in connection with the Conversion. Each Eligible Account
Holder, if he were to continue to maintain his deposit account at the Bank,
would be entitled, on a complete liquidation of the Bank after the Conversion,
to an interest in the liquidation account prior to any payment to the
stockholders of the Bank. Each Eligible Account Holder would have an initial
interest in such liquidation account for each Qualifying Deposit held in the
Bank on December 31, 1993. Each Eligible Account Holder will have a pro rata
interest in the total liquidation account based on the proportion that the
balance of his Qualifying Deposits on the Eligibility Record Date bore to the
total amount of all Qualifying Deposits of all Eligible Account Holders in the
Bank.
If, however, on any annual closing date subsequent to the Eligibility
Record Date the amount of the Qualifying Deposit of an Eligible Account Holder
is less than the amount of the Qualifying Deposit of such Eligible Account
Holder as of the Eligibility Record Date or less than the amount of the
Qualifying Deposits as of the previous annual closing date, then the interest
in the liquidation account relating to such Qualifying Deposit would be
reduced from time to time by the proportion of any such reduction, and such
interest will cease to exist if such Qualifying Deposit accounts are closed.
In addition, no interest in the liquidation account would ever be increased
despite any subsequent increase in the related Qualifying Deposit. Any assets
remaining after the above liquidation rights of Eligible Account Holders are
satisfied would be distributed to the Company as the sole stockholder of the
Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt
by the Bank of either a favorable ruling from the IRS or an opinion of counsel
with respect to federal income taxation and with respect to Ohio income and
franchise taxation, to the effect that the Conversion will not be a taxable
transaction to the Company, the Bank or Eligible Account Holders except as
noted below. The federal and Ohio income tax consequences will remain
unchanged in the event that a holding company form of organization is not
utilized.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its
counsel, Muldoon, Murphy & Faucette, to the effect that for federal income tax
purposes, among other matters: (i) the Bank's change in form from mutual to
stock ownership will constitute a reorganization under section 368(a)(1)(F) of
the Code and neither the Bank nor the Company will recognize any gain or loss
as a result of the Conversion; (ii) no gain or loss will be recognized to the
Bank or the Company upon the purchase of the Bank's capital stock by the
Company or to the Company upon the purchase of its Common Stock in the
Conversion; (iii) no gain or loss will be recognized by Eligible Account
Holders or Supplemental Eligible Account Holders upon the issuance to them of
deposit accounts in the Bank in its stock form plus their interests in the
liquidation account in exchange for their deposit accounts in the Bank; (iv)
the tax basis of the depositors' deposit accounts in the Bank immediately
after the Conversion will be the same as the basis of their deposit accounts
immediately prior to the Conversion; (v) the tax basis of each Eligible
Account Holder's and Supplemental Eligible Account Holder's interest in the
liquidation account will be zero; (vi) no gain or loss will be recognized by
Eligible Account Holders or Supplemental Eligible Account Holders upon the
distribution to them of nontransferable subscription rights to purchase shares
of the Common Stock, provided that the amount to be paid for the Common Stock
is equal to the fair market value of such stock; and (vii) the tax basis to
the stockholders of the Common Stock of the Company purchased in the
Conversion will be the amount paid therefore and the holding period for the
shares of Common Stock purchased by such persons will begin on the date on
which their subscription rights are exercised. Further, Muldoon, Murphy &
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Faucette has opined that the Conversion will not be a taxable transaction to
the Company, the Bank, Eligible Account Holders or Supplemental Eligible
Account Holders for Ohio income and/or franchise tax purposes. Certain
portions of both the federal and the state tax opinions are based upon the
assumption that the subscription rights issued in connection with the
Conversion will have no value. The Company and the Bank have received a
letter from RP Financial stating that, pursuant to RP Financial's valuation,
RP Financial is of the belief that the subscription rights issued in
connection with the Conversion will have no value.
Unlike private rulings, an opinion of counsel is not binding on the IRS
and the IRS could disagree with conclusions reached therein. In the event of
such disagreement, there can be no assurance that the IRS would not prevail in
a judicial or administrative proceeding.
RP Financial has issued a letter stating that, pursuant to its
valuation, RP Financial is of the belief that the subscription rights do not
have any value, based on the fact that such rights are acquired by the
recipients without cost, are nontransferable and of short duration, and afford
the recipients the right only to purchase the Common Stock at a price equal to
its estimated fair market value, which will be the same price as the Purchase
Price for the unsubscribed shares of Common Stock, which such valuation is not
binding on the IRS or the Ohio Department of Taxation. If the subscription
rights granted to Eligible Account Holders or Supplemental Eligible Account
Holders are deemed to have an ascertainable value, receipt of such rights
could be taxable to those Eligible Account Holders or Supplemental Eligible
Account Holders who receive and/or exercise the subscription rights in an
amount equal to such value and the Bank could recognize gain on such
distribution. Eligible Account Holders and Supplemental Eligible Account
Holders are encouraged to consult with their own tax advisor as to the tax
consequences in the event that such subscription rights are deemed to have an
ascertainable value.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion
by a director or an executive officer of the Bank will be subject to a
restriction that the shares not be sold for a period of one year following the
Conversion, except in the event of the death of such director or executive
officer. Each certificate for restricted shares will bear a legend giving
notice of this restriction on transfer, and instructions will be issued to the
effect that any transfer within such time period of any certificate or record
ownership of such shares other than as provided above is a violation of the
restriction. Any shares of Common Stock issued at a later date as a stock
dividend, stock split, or otherwise, with respect to such restricted stock
will be subject to the same restrictions. The directors and executive
officers of the Bank will also be subject to the insider trading rules
promulgated pursuant to the Exchange Act and any other applicable requirements
of the federal securities laws.
Purchases of outstanding shares of Common Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the Division. This restriction does not apply, however,
to negotiated transactions involving more than 1.0% of the Company's
outstanding Common Stock or to the purchase of stock pursuant to the Incentive
Option Plan and the Directors' Option Plan to be established after the
Conversion.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank
from the mutual to the stock form of organization and, in connection
therewith, a new Ohio Articles of Incorporation and Constitution to be adopted
by members of the Bank. The Plan also provides for the concurrent formation
of a holding company, which form of organization may or may not be utilized at
the option of the Board of Directors of the Bank. See "The Conversion -
General." In the event that the holding company form of organization is
utilized, as described below, certain provisions in the Company's Articles of
Incorporation and Code of Regulations and in its management remuneration
entered into in connection with the Conversion, together with provisions of
Ohio corporate law, may have anti-takeover effects. In the event that the
holding company form of organization is not utilized, the Bank's stock
Articles of Incorporation and Constitution and management remuneration entered
into in connection with the Conversion may have anti-takeover effects as
described below. In addition, regulatory restrictions may make it difficult
for persons or companies to acquire control of either the Company or the Bank.
The Plan of Conversion prohibits any person, prior to the completion of
the Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior
to the completion of the Conversion, from offering, or making an announcement
of an offer or intent to make an offer, to purchase such subscription rights
or Common Stock.
RESTRICTIONS IN THE COMPANY'S ARTICLES OF INCORPORATION
ABILITY OF THE BOARD OF DIRECTORS TO ISSUE ADDITIONAL SHARES. The
Articles of Incorporation of the Company permit the Board of Directors of the
Company to issue additional Common Shares. The ability of the Board of
Directors to issue such additional shares may create impediments to gaining,
or otherwise discourage persons from attempting to gain control of the
Company.
MATTERS REQUIRING ENLARGED SHAREHOLDER VOTE. Article Sixth of the
Articles of Incorporation of the Company provides that, in the event the Board
of Directors recommends against the approval of any of the following matters,
the holders of at least 75% of the voting shares of the Company are required
to adopt any such matters:
(1) A proposed amendment to the Articles of Incorporation of the
Company;
(2) A proposed amendment to the Code of Regulations of the Company;
(3) A proposal to change the number of directors by action of the
shareholders;
(4) An agreement of merger or consolidation providing for the proposed
merger or consolidation of the Company with or into one or more
other corporations;
(5) A proposed combination or majority share acquisition involving the
issuance of shares of the Company and requiring shareholder
approval;
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(6) A proposal to sell, exchange, transfer, or otherwise dispose of
all, or substantially all, of the assets, with or without the
goodwill of the Company; or
(7) A proposed dissolution of the Company.
Officers and directors of the Company are expected to purchase
approximately 3.02% of the shares issued in connection with the Conversion
assuming 575,000 shares are sold. In addition, the ESOP intends to purchase
approximately 8% of the Common Stock sold in the Conversion. Moreover, if at
the first meeting of stockholders following the Conversion, stockholder
approval of the proposed Stock Programs and Stock Option Plans is received,
the Company expects to acquire 4% of the Common Stock issued in the Conversion
on behalf of the Stock Programs and expects to grant stock options for an
amount of Common Stock equal to 10% of the Common Stock issued in the
Conversion under the Stock Option Plans to directors and executive officers.
As a result, assuming the Stock Programs and Stock Option Plans are approved
by Stockholders, the directors, executive officers and employees have the
potential to control the voting of approximately 22.7% of the Company's Common
Stock, thereby potentially enabling them to prevent the approval of the
transactions requiring the approval of at least 75% of the Company's
outstanding shares of voting stock described above.
FIVE YEAR LIMITATION ON ACQUISITION OF COMPANY STOCK. Article Eighth of
the Company's Articles of Incorporation provides that until the expiration of
five years from the date of acquisition by the Company of the stock of the
Bank, no person, or group of persons acting together, may acquire directly or
indirectly more than 10% of any class of stock of the Company. In the event
any person (as defined in Article Eighth) directly or indirectly acquires (as
defined in Article Eighth) beneficial ownership of more than 10% of the
outstanding shares of any class of stock, such person will not be permitted to
vote such shares in excess of the 10% limit.
ELIMINATION OF CUMULATIVE VOTING. Section 1701.55 of the Ohio Revised
Code provides in substance and effect that shareholders of a for profit
corporation which is incorporated under Ohio law must initially be granted the
right to cumulate votes in the election of directors. The right to cumulate
votes in the election of directors will exist at a meeting of shareholders if
notice in writing is given by any shareholder to the President, a Vice
President or the Secretary of an Ohio corporation, not less than 48 hours
before a meeting at which directors are to be elected, that the shareholder
desires that the voting for the election of directors shall be cumulative and
if an announcement of the giving of such notice is made upon the convening of
such meeting by the Chairman or Secretary or by or on behalf of the
shareholder giving such notice. If cumulative voting is invoked, each
shareholder would have a number of votes equal to the number of directors to
be elected, multiplied by the number of shares owned by him, and would be
entitled to distribute his votes among the candidates as he sees fit.
Section 1701.69 of the Ohio Revised Code provides that an Ohio
corporation may eliminate cumulative voting in the election of directors after
the expiration of 90 days after the date of initial incorporation by filing
with the Ohio Secretary of State an amendment to the Articles of Incorporation
eliminating cumulative voting. The Articles of Incorporation of the Holding
Company have been amended to eliminate cumulative voting. The elimination of
cumulative voting make it more difficult for shareholders to elect as
directors persons whose elections are not supported by the Board of Directors.
EMPLOYEE BENEFIT PLANS. The Stock Option Plan and the Stock Programs
may be deemed to have certain anti-takeover effects. In addition, adoption of
the ESOP may also have an anti-takeover effect. The ESOP may become the owner
of a sufficient percentage of the total outstanding Common Stock that the
decision whether to tender the shares held by the ESOP to a potential acquiror
may prevent a takeover.
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See "Description of Capital Stock of the Company" and "Management of the Bank
- - Benefits - Stock Option Plans," "-Stock Programs" and "-Employee Stock
Ownership Plan."
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S ARTICLES OF INCORPORATION AND CODE OF
REGULATIONS AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have
not been negotiated with and approved by members of its Board of Directors.
The provisions of the employment agreements, change in control agreements and
the Stock Programs, the Stock Option Plan and the Directors' Option Plan to be
established may also discourage takeover attempts by increasing the costs to
be incurred by the Bank and the Company in the event of a takeover. See
"Management of the Bank - Employment Agreements" and "-Benefits - Stock Option
Plan."
The Company's Board of Directors believes that the provisions of the
Articles of Incorporation, Code of Regulations and management remuneration
plans to be established are in the best interest of the Company and its
stockholders. An unsolicited non-negotiated proposal can seriously disrupt
the business and management of a corporation and cause it great expense.
Accordingly, the Board of Directors believes it is in the best interests of
the Company and its stockholders to encourage potential acquirors to negotiate
directly with management and that these provisions will encourage such
negotiations and discourage non-negotiated takeover attempts. It is also the
Board of Directors' view that these provisions should not discourage persons
from proposing a merger or other transaction at a price that reflects the true
value of the Company and that otherwise is in the best interest of all
stockholders. However, because these provisions encourage negotiation with
management, they may have the effect of discouraging a future takeover attempt
that is not approved by the Board of Directors, but which individual Company
stockholders may deem to be in their best interests or in which stockholders
may receive a premium for their shares.
OHIO LAW
MERGER MORATORIUM STATUTE. In April 1990, Ohio adopted a merger
moratorium statute regulating certain takeover bids affecting certain public
corporations which have significant ties to Ohio. Generally, the statute
prohibits, any merger, combination or consolidation and any of certain other
sales, leases, distributions, dividends, exchanges, mortgages, or transfers
between such an Ohio corporation and any person who has the right to exercise,
alone or with others, 10% or more of the voting power of such corporation (an
"Interested Shareholder"), for three years following the date on which such
person first becomes an Interested Shareholder. Such a business combination
is permitted only if, prior to the time such person first becomes an
Interested Shareholder, the Board of Directors of the issuing corporation has
approved the purchase of shares which resulted in such person first becoming
an Interested Shareholder.
After the initial three-year moratorium, such a business combination may
not occur unless (1) the holders of at least two-thirds of the voting shares,
and of at least a majority of the voting shares not beneficially owned by the
Interested Shareholder, approve the business combination at a meeting called
for such purpose, or (2) the business combination meets certain statutory
criteria designed to ensure that the issuing public corporation's remaining
shareholders receive fair consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its article of incorporation that the
statute does not apply to any business combination of such corporation.
However, the statute still prohibits for twelve months any business
combination that would have been prohibited but for the adoption of such an
opt out amendment. The statute also provides that
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it will continue to apply to any business combination between a person who
became an Interested Shareholder prior to the adoption of such an amendment
as if the amendment had not been adopted. The Articles of Incorporation of
the Company do not opt out of the protection afforded by Chapter 1704.
CONTROL SHARE ACQUISITION STATUTE. Section 1701.831 of the Ohio Revised
Code (the "Control Share Acquisition Statute") requires that certain
acquisitions of voting securities which would result in the acquiring
shareholder owning 20%, 33 1/3%, or 50% of the outstanding voting securities
of the Company (a "Control Share Acquisition") must be approved in advance by
the holders of at least a majority of the outstanding voting shares
represented at a meeting at which a quorum is present and a majority of the
portion of the outstanding voting shares represented at such a meeting,
excluding the voting shares owned by the acquiring shareholder. The Control
Share Acquisition Statute was intended, in part, to protect shareholders of
Ohio corporations from coercive tender offers excluding the voting shares
owned by the acquiring shareholder.
RESTRICTIONS IN THE BANK'S NEW ARTICLES OF INCORPORATION
Although the Board of Directors of the Bank is not aware of any effort
that might be made to obtain control of the Bank after the Conversion, the
Board of Directors believes that it is appropriate to adopt certain provisions
permitted by Ohio law to protect the interests of the converted Bank and its
stockholders from any hostile takeover. Such provisions may, indirectly,
inhibit a change in control of the Company, as the Bank's sole stockholder.
See "Risk Factors - Certain Anti-Takeover Provisions."
The Bank's Articles of Incorporation will contain a provision whereby
the acquisition of or offer to acquire beneficial ownership of more than 10%
of the issued and outstanding shares of any class of equity securities of the
Bank by any person (i.e., any individual, corporation, group acting in
concert, trust, partnership, joint stock company or similar organization),
either directly or through an affiliate thereof, will be prohibited for a
period of five years following the date of completion of the Conversion. Any
stock in excess of 10% acquired in violation of the Articles of Incorporation
provision will not be counted as outstanding for voting purposes. This
limitation shall not apply to any purchase of shares by an underwriter in
connection with a public offering or to the purchase of up to twenty-five
percent (25%) of any class of equity security of the Company by a tax-
qualified employee stock benefit plan.
FEDERAL LIMITATIONS
Any proposal to acquire 10% of any class of voting security of the
Company generally would be subject to approval by the OTS. The OTS requires
all persons seeking control of a savings and loan holding company to obtain
regulatory approval prior to offering to obtain control. Federal law
generally provides that no "person," acting directly or indirectly or through
or in concert with one or more other persons, may acquire directly or
indirectly "control," as that term is defined in OTS regulations, of a savings
and loan holding company without giving at least 60 days' written notice to
the OTS and providing the OTS an opportunity to disapprove the proposed
acquisition. Such acquisitions of control may be disapproved if it is
determined, among other things, that: (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings institution or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity
of the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person. Such change in control restrictions on
the acquisition of holding company stock are not limited to three years after
conversion but will apply for as long as the regulations are in effect.
Persons holding revocable or irrevocable proxies may be deemed to be
beneficial owners of such securities under OTS regulations and therefore
prohibited from voting all or the portion of such proxies in excess of the 10%
121
<PAGE>
aggregate beneficial ownership limit. Such regulatory restrictions may
prevent or inhibit proxy contests of control of the Company by persons who
have not received prior regulatory approval for the acquisition of control of
the Company.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue two million (2,000,000) shares of
Common Stock without par value. The Company currently expects to issue
between 425,000 and 575,000 shares of Common Stock (or 661,250 in the event of
an increase of 15% in the Estimated Price Range) in the Conversion. Except as
discussed above in "Restriction on Acquisition of the Company and the Bank."
Each share of the Company's Common Stock will have the same relative rights
as, and will be identical in all respects with, each other share of Common
Stock. Upon payment of the Purchase Price for the common stock, in accordance
with the Plan, all such stock will be duly authorized, fully paid and
nonassessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NONWITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE
FDIC.
COMMON STOCK
DIVIDENDS. The Company can pay dividends out of statutory surplus or
from certain net profits if, as and when declared by its Board of Directors.
The payment of dividends by the Company is subject to limitations which are
imposed by law and applicable regulation. See "Dividend Policy" and
"Regulation and Supervision." The holders of Common Stock of the Company will
be entitled to receive and share equally in such dividends as may be declared
by the Board of Directors of the Company out of funds legally available
therefor. If the Company issues stock of different series or designations,
the holders thereof may have a priority over the holders of the Common Stock
with respect to dividends.
VOTING RIGHTS. Upon Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect
the Company's Board of Directors and act on such other matters as are required
to be presented to them under Ohio law or the Company's Articles of
Incorporation or as are otherwise presented to them by the Board of Directors.
Except as discussed in "Restrictions on Acquisition of the Company and the
Bank," each holder of Common Stock will be entitled to one vote per share and
will not have any right to cumulate votes in the election of directors. If
the Company issues stock of different series or designations, holders thereof
may also possess voting rights. Certain matters require an 75% shareholder
vote. See "Restrictions on Acquisition of the Company and the Bank."
As an Ohio mutual savings bank, corporate powers and control of the Bank
are vested in its Board of Directors, who elect the officers of the Bank and
who fill any vacancies on the Board of Directors as it exists upon Conversion.
Subsequent to Conversion, voting rights will be vested exclusively in the
owners of the shares of capital stock of the Bank, which will be the Company,
and voted at the direction of the Company's Board of Directors. Consequently,
the holders of the Common Stock will not have direct control of the Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding up
of the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders (see "The
122
<PAGE>
Conversion - Liquidation Rights"), all assets of the Bank available for
distribution. In the event of liquidation, dissolution or winding up of the
Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of the Company available for distribution. If Preferred Stock is
issued, the holders thereof may have a priority over the holders of the
Common Stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the Common Stock of the Company will not
be entitled to preemptive rights with respect to any shares which may be
issued. The Common Stock is not subject to redemption.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Articles of Incorporation and Constitution of the Bank, to be
effective upon the Conversion, authorizes the issuance of capital stock
consisting of two million (2,000,000) shares of common stock without par
value. Each share of Common Stock of the Bank will have the same relative
rights as, and will be identical in all respects with, each other share of
common stock. After the Conversion, the Board of Directors will be authorized
to approve the issuance of Common Stock up to the amount authorized by the
Articles of Incorporation without the approval of the Bank's stockholders. In
the event that the holding company form of organization is utilized, all of
the issued and outstanding common stock of the Bank will be held by the
Company as the Bank's sole stockholder. THE CAPITAL STOCK OF THE BANK WILL
REPRESENT NONWITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE
TYPE, AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
DIVIDENDS. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See
"Dividend Policy" for certain restrictions on the payment of dividends and
"Federal and State Taxation - Federal Taxation" for a discussion of the
consequences of the payment of cash dividends from income appropriated to bad
debt reserves.
VOTING RIGHTS. Immediately after the Conversion, the holders of the
Bank's common stock will possess exclusive voting rights in the Bank. Each
holder of shares of common stock will be entitled to one vote for each share
held, subject to the right of shareholders to cumulate their votes for the
election of directors. During the five-year period after the effective date
of the Conversion, no person will be permitted to acquire beneficial ownership
of 10% or more of the issued and outstanding shares of the Bank. Shares held
in excess of such limit will not be permitted to vote on any matter.
LIQUIDATION. In the event of any liquidation, dissolution, or winding
up of the Bank, the holders of common stock will be entitled to receive, after
payment of all debts and liabilities of the Bank (including all deposit
accounts and accrued interest thereon), and distribution of the balance in the
special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders, all assets of the Bank available for distribution in
cash or in kind. If additional preferred stock is issued subsequent to the
Conversion, the holders thereof may also have priority over the holders of
common stock in the event of liquidation or dissolution.
123
<PAGE>
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the common stock of the Bank
will not be entitled to preemptive rights with respect to any shares of the
Bank which may be issued. The common stock will not be subject to redemption.
Upon receipt by the Bank of the full specified purchase price therefor, the
common stock will be fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Fifth Third
Bank, Cincinnati, Ohio.
EXPERTS
The consolidated financial statements of the Bank, as of December 31,
1995 and 1994 and the years ended December 31, 1995, 1994 and 1993 have been
included herein in reliance upon the report of Clark, Schaefer, Hackett & Co.,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of
its report to the Bank and Company setting forth its opinion as to the
estimated pro forma market value of the Common Stock upon Conversion and its
opinion with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal and state income tax
consequences of the Conversion will be passed upon for the Bank and the
Company by Muldoon, Murphy & Faucette, Washington, D.C., special counsel to
the Bank and the Company. Certain legal matters will be passed upon for
Trident by Thacher Proffitt & Wood.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus and Proxy Statement
does not contain all the information set forth in the registration statement.
Such information, including the Conversion Valuation Appraisal Report which is
an exhibit to the Registration Statement, can be examined without charge at
the public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of such material can be obtained from the
SEC at prescribed rates. The statements contained in this Prospectus and
Proxy Statement as to the contents of any contract or other document filed as
an exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document.
The Bank has filed an Application for Approval of Conversion with the
Division and the FDIC. This document omits certain information contained in
that application. The Application, the exhibits and the financial statements
that are part thereof may be inspected at the offices of the Ohio Department
of Commerce, Division of Financial Institutions, 77 High Street, 21st Floor,
Columbus, Ohio 43266-0512.
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<PAGE>
The Company has filed with the Office of Thrift Supervision an
Application to Form a Holding Company. This Prospectus and Proxy Statement
omits certain information contained in such Application. The Application may
be inspected at the offices of the OTS, 1700 G Street, N.W., Washington, D.C.
20552.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the
Exchange Act. Under the Plan, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion. In the event that the Bank amends the Plan to eliminate the
concurrent formation of the Company as part of the Conversion, the Bank will
register its stock with the FDIC under Section 12(g) of the Exchange Act and,
upon such registration, the Bank and the holders of its stock will become
subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting and certain other
requirements of the Exchange Act.
A copy of the Plan of Conversion, Articles of Incorporation and the Code
of Regulations of the Company and the Articles of Incorporation and
Constitution of the Bank are available without charge from the Bank.
125
<PAGE>
LENOX SAVINGS BANK
TABLE OF CONTENTS
PAGE
----
Independent Auditors' Report F-1
Financial Statements:
Balance Sheets F-2
Statements of Income 40
Statements of Retained Earnings F-3
Statements of Cash Flows F-4 - F-5
Notes to Financial Statements F-6 - F-20
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Lenox Savings Bank:
We have audited the accompanying balance sheets of Lenox Savings Bank as of
December 31, 1995 and 1994, and the related statements of income, retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Savings Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lenox Savings Bank as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
each of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
/s/ CLARK, SCHAEFER, HACKETT & CO.
Clark, Schaefer, Hackett & Co.
Cincinnati, Ohio
February 3, 1996
F-1
<PAGE>
LENOX SAVINGS BANK
Balance Sheets
December 31, 1995 and 1994
ASSETS
DECEMBER 31,
-------------------------
1995 1994
----------- ----------
Cash and due from banks $ 1,249,318 1,978,636
Certificates of deposit 151,874 488,347
Investment securities, at amortized
cost (market value of $4,076,756 at
December 31, 1994) - 4,156,772
Investment securities - available for
sale, at fair value (amortized cost
of $6,021,760 at December 31, 1995) 6,080,487 -
Mortgage-backed securities, at cost
(market value of $798,829 at
December 31, 1994) - 786,860
Mortgage-backed securities - available
for sale, at fair value (amortized
cost of $1,023,745 at December 31, 1995) 1,082,553 -
Loan receivable, net 33,383,757 31,604,733
Accrued interest receivable:
Loans 123,606 88,503
Mortgage-backed securities 7,409 5,939
Investments and certificates of deposit 103,540 69,934
Property and equipment, net 287,727 269,209
Federal Home Loan Bank stock - at cost 406,900 380,500
Prepaid federal income tax 19,000 44,800
Prepaid expenses and other assets 252,820 16,839
----------- ----------
$43,148,991 39,891,072
----------- ----------
----------- ----------
LIABILITIES AND RETAINED EARNINGS
Deposits $33,668,938 35,525,949
Advances from Federal Home Loan Bank 5,327,482 401,523
Capitalized lease obligations 16,262 45,124
Advance payments by borrowers for taxes
and insurance 94,765 80,420
Accrued expenses 87,390 38,321
Deferred federal income taxes 106,024 60,800
----------- ----------
39,300,861 36,152,137
Commitments and contingent liabilities
Retained earnings, substantially restricted 3,767,619 3,738,935
Net unrealized gain on available for sale
securities, net of tax of $37,024 80,511 -
----------- ----------
3,848,130 3,738,935
----------- ----------
$43,148,991 39,891,072
----------- ----------
----------- ----------
See accompanying notes to financial statements.
F-2
<PAGE>
LENOX SAVINGS BANK
Statements of Retained Earnings
Three Years Ended December 31, 1995
UNREALIZED
GAIN ON
AVAILABLE-
RETAINED FOR-SALE
EARNINGS SECURITIES
---------- ----------
Balance at December 31, 1992 $3,286,083 -
Net income for the year ended
December 31, 1993 345,083 -
---------- ------
Balance at December 31, 1993 3,631,166 -
Net income for the year ended
December 31, 1994 107,769 -
---------- ------
Balance at December 31, 1994 3,738,935 -
Net income for the year ended
December 31, 1995 28,684 -
Net unrealized gain on available-for-sale
securities net of tax of $37,024, upon
transfer of securities at December 31,
1995 - 80,511
---------- ------
Balance at December 31, 1995 $3,767,619 80,511
---------- ------
---------- ------
See accompanying notes to financial statements.
F-3
<PAGE>
LENOX SAVINGS BANK
Statements of Cash Flows
Three Years Ended December 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Interest and dividends received $ 2,872,709 2,659,380 3,065,156
Interest paid (1,848,114) (1,604,244) (1,825,459)
Loan origination fees received 10,176 56,288 78,158
Other fees 99,596 84,343 86,237
Cash paid to suppliers and employees (1,326,502) (1,038,184) (1,012,474)
Income taxes (paid) refunded 24,140 (38,977) (208,329)
----------- ----------- -----------
Net cash provided (used)
by operating activities (167,995) 118,606 183,289
----------- ----------- -----------
Cash flows from investing activities:
Property and equipment additions (89,691) (17,116) (180,240)
Proceeds from sale of equipment 16,750 - -
Purchase of mortgage-backed securities
held to maturity (350,219) - -
Repayments of mortgage-backed securities 112,406 347,018 742,172
Proceeds from sale of mortgage-backed
securities - available for sale - 4,156,466 -
Purchase of certificates of deposit (151,874) - (230,993)
Redemption of certificates of deposit 488,347 762,186 -
Loan disbursements (8,297,193) (10,673,000) (10,490,000)
Loan principal repayments 6,536,363 7,292,623 11,162,261
Purchase of investments - held to maturity (6,326,298) (3,861,612) -
Maturity of investment securities -
held to maturity 4,460,000 - -
Proceeds from sale of investments - - 63,077
Proceeds from sale of investments -
available for sale - 3,050,233 -
----------- ----------- -----------
Net cash provided (used)
by investing activities (3,601,409) 1,056,798 1,066,277
----------- ----------- -----------
Cash flows from financing activities:
Net decrease in deposits (1,857,011) (2,594,216) (624,280)
Borrowings from Federal Home Loan Bank 4,950,000 235,800 184,500
Repayment of Federal Home Loan Bank loan (24,041) (18,361) (416)
Payments on capitalized lease obligations (28,862) (47,677) (38,261)
----------- ----------- -----------
Net cash provided (used)
by financing activities 3,040,086 (2,424,454) (478,457)
----------- ----------- -----------
Increase (decrease) in cash and
cash equivalents (729,318) (1,249,050) 771,109
Cash and due from banks at beginning of period 1,978,636 3,227,686 2,456,577
----------- ----------- -----------
Cash and due from banks at end of period $ 1,249,318 1,978,636 3,227,686
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
LENOX SAVINGS BANK
Statements of Cash Flows
Three Years Ended December 31, 1995
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
<TABLE>
<CAPTION>
1995 1994 1993
--------- ------- -------
<S> <C> <C> <C>
Net income $ 28,684 107,769 345,083
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 59,421 71,345 60,895
Provision (credit) for losses on loans (2,000) - 5,691
Amortization of deferred loan fees (13,438) (10,415) (74,217)
Deferred loan origination fees (2,756) (10,210) (11,840)
Federal Home Loan Bank stock dividends (26,400) (20,900) (15,600)
Loss (gain) on sale of investment and
mortgage-backed securities - 14,251 (57,836)
Gain on sale of equipment (2,760) - -
Effect of change in operating assets
and liabilities:
Accrued interest receivable (70,179) (38,207) (4,488)
Prepaid expenses and other assets (210,181) (22,819) (18,688)
Advances by borrowers for taxes
and insurance 14,345 13,108 (11,184)
Accrued expenses 49,069 (5,616) (16,327)
Accrued federal income tax - - (56,200)
Deferred federal income tax 8,200 20,300 38,000
--------- ------- -------
Net cash provided (used) by
operating activities $(167,995) 118,606 183,289
--------- ------- -------
--------- ------- -------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capitalized lease obligations of $17,883 and $27,631 were incurred when the
Savings Bank entered into leases for automated teller equipment for the years
ended December 31, 1994 and 1993, respectively.
Investment and mortgage-backed securities with a carrying value of $7,045,505
were transferred to an available for sale classification at December 31, 1995.
See accompanying notes to financial statements.
F-5
<PAGE>
LENOX SAVINGS BANK
Notes to Financial Statements
1. ORIGINATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following describes the organization and the significant accounting
policies followed in the preparation of these financial statements.
ORGANIZATION
The Savings Bank converted to a state chartered savings bank on
November 11, 1993. The Savings Bank is a member of the Federal Home
Loan Bank system (FHLB). As a member of this system, the Savings Bank
maintains a required investment in capital stock of the Federal Home
Loan Bank of Cincinnati. The Savings Bank is regulated by the Federal
Deposit Insurance Corporation (FDIC) and the State of Ohio. Prior to
this date the Savings Bank was a state chartered savings and loan,
subject to regulation by the Office of Thrift Supervision, an office of
the U.S. Department of Treasury.
Savings accounts are insured by the Savings Association Insurance
Fund (SAIF), a division of FDIC, within certain limitations.
Semi-annual premiums are required by the SAIF for the insurance of
such savings accounts.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND DUE FROM BANKS
For the purpose of presentation in the statements of cash flows, the
Savings Bank considers all highly liquid debt instruments with original
maturity when purchased of three months or less to be cash equivalents.
Cash and cash equivalents are defined as those amounts included in the
balance sheets caption cash and due from banks.
The Savings Bank maintains their cash deposit accounts at financial
institutions where the balances at times may exceed federally insured
limits.
F-6
<PAGE>
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Savings Bank adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities, as of January 1, 1994. Statement No. 115 requires
the classification of investments in debt and equity securities into
three categories; held to maturity, trading, and available for sale.
Debt securities that the Savings Bank has the positive intent and
ability to hold to maturity are classified as held to maturity
securities and reported at amortized cost. Debt and equity securities
that are bought and held principally for the purpose of selling in the
near-term are classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings. The
Savings Bank has no trading securities. Debt and equity securities not
classified as either held to maturity securities or trading securities
are classified as available for sale securities and reported at fair
value, with unrealized gains or losses excluded from earnings and
reported as a separate component of equity, net of deferred taxes. As
of January 1, 1994, the cumulative effect of the adoption of the new
statement would have been to increase retained earnings by
approximately $214,000.
The Savings Bank designates investment securities and
mortgage-backed securities as held to maturity or available for sale
upon acquisition. Gains or losses on the sales of investment
securities and mortgage-backed securities available for sale are
determined on the specific identification method. Premiums and
discounts on investment securities and mortgage-backed securities are
amortized or accredited using the interest method over the expected
lives of the related securities. At December 31, 1994, all investment
securities and mortgage-backed securities were classified as held to
maturity.
In November 1995, the Financial Accounting Standards Board issued a
Special Report "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities".
The guide provided technical interpretations and guidance relating
to the adoption of SFAS No. 115, issued in May 1993. This guide
allows an enterprise to reassess the appropriateness of the
classifications of all seucrities held at that time and account for
any resulting reclassifications at fair value in accordance with
SFAS no. 115. Those one-time reassessments should occur no later than
December 31, 1995. Management has reclassified its entire portfolio
of investments and mortgage-backed securities from "held to maturity"
to "available for sale" at December 31, 1995, in accordance with the
guide, to reflect their intention as to the classification of the
securities.
LOANS RECEIVABLE
Loans receivable that management has the intent and ability to hold
for the foreseeable future or until maturity or payoff are reported
at their outstanding unpaid principal balances reduced by any charge
offs or specific valuation accounts and net of any deferred fees or
costs on originated loans, or unamortized premiums or discounts on
purchased loans. At December 31, 1995 the entire portfolio of loans
was held for investment.
F-7
<PAGE>
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the
related loan.
The allowance for loan and real estate losses is increased by
charges to income and decreased by charge offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is
based on the Savings Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Savings Bank's allowance for loan losses.
Such agencies may require the Savings Bank to recognize additions to
the allowance based on judgments different from those of management.
Although management uses the best information available to make
these estimates, future adjustments to the allowances may be necessary
in the near term due to economic, operating, regulatory and other
conditions that may be beyond the Savings Bank's control. However, the
amount of the change that is reasonably possible cannot be estimated.
The accrual of interest on impaired loans is discontinued when, in
management opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan". This standard amends Statement
No. 5 to clarify that a creditor should evaluate the collectibility
of both contractual interest and contractual principal on all loans
when assessing the need for a loss accrual. In October, 1994, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosure", which amends Statement
No. 114 to allow a creditor to use existing methods for recognizing
interest income on impaired loans.
For impairment recognized in accordance with SFAS No. 114, the
entire change in present value of expected cash flows is reported as
bad debt expense in the same manner in which impairment initially was
recognized or as a reduction in the amount of bad debt expense that
otherwise would be reported. Interest on impaired loans is reported
on the cash basis. Impaired loans are loans that are considered to be
permanently impaired in relation to principal or interest based on the
original contract. Impaired loans would be charged off in the same
manner as all loans subject to charge off. For the year ended
December 31, 1995 the Savings Bank had no loans that were impaired as
described in the pronouncement and therefore no interest income was
recognized or received on impaired loans.
F-8
<PAGE>
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair value at
the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and
the real estate is carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in loss on foreclosed
real estate.
PROPERTY AND EQUIPMENT
Furniture and equipment, and leasehold improvements are carried at
cost, less accumulated depreciation and amortization computed by
straight-line and accelerated methods over the estimated useful lives
of the respective assets.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". Statement No. 109 requires a change from the
deferred method to the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying
amounts and the tax basis of existing assets and liabilities. Under
Statement No. 109, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the
enactment date. The Savings Bank adopted Statement No. 109 in 1993.
The effect of adopting Statement No. 109 was not significant to the
financial statements.
CONCENTRATION OF CUSTOMERS
The Savings Bank grants real estate and consumer loans to, and
accepts deposits from customers who are primarily employees of The
Procter & Gamble Company located in the Metropolitan Cincinnati area.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Savings Bank
in estimating fair values of financial instruments as disclosed
herein:
Cash and short-term instruments. The carrying amounts of cash
and short-term instruments approximate their fair value.
Available-for-sale and held-to-maturity securities. Fair values
for securities excluding restricted equity securities, are based
on quoted market prices. The carrying values of restrictred
equity securities approximate fair values.
F-9
<PAGE>
Loans receivable. For variable-rate loans that reprice
frequently and have no significant change in credit risk, fair
values are based on carrying values. Fair values for certain
mortgage loans (for example, one-to-four family residential),
credit-card loans, and other consumer loans were estimated by
discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Deposit liabilities. The fair values disclosed for demand
deposits, NOW and money market accounts are, by definition,
equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). Fair values for fixed-rate
CDs are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on time
deposits.
FHLB advances. The fair values of FHLB advances are estimated
using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing
arrangements.
Accrued interest. The carrying amounts of accrued interest
approximate their fair values.
RECENT ACCOUNTING PRONOUNCEMENTS
In October, 1994, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 119, "Disclosures
about Derivative Financial Instruments and Fair Value of Financial
Instruments". This Statement requires disclosures about the amounts,
nature and terms of derivative financial instruments that are not
subject to Statement No. 105, "Disclosures of Information about
Financial Instruments and Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk", because they do not
result in off-balance-sheet risk of accounting loss. It requires that
a distinction be made between financial instruments held or issued for
trading purposes (including dealing and other trading activities
measured at fair value with gains and losses recognized in earnings)
and financial instruments held or issued for purposes other than
trading. Statement No. 119 is effective for financial statements
issued for fiscal years ending after December 15, 1995. There was no
effect on the financial statements of adopting Statement No. 119.
In May 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 122, "Accounting for
Mortgage Servicing Rights". This statement
F-10
<PAGE>
requires that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others, however those
servicing rights are acquired. A mortgage banking enterprise that
acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells or securitizes those loans
with servicing rights retained would allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans based
on their relative fair value. Statement No. 122 is effective for
fiscal years beginning after December 15, 1995. Management does not
expect an impact from the adoption of this standard, because the
Savings Bank does not presently originate mortgage loans for sale.
RECLASSIFICATIONS
Certain reclassifications were made to the prior year financial
statements to conform the current year's presentation.
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES:
The amortized cost and estimated fair values of investment and
mortgage-backed securities are as follows:
DECEMBER 31, 1995
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government
and agencies
securities $ 5,567,157 64,146 6,820 5,624,483
Corporate notes 454,603 1,401 - 456,004
Mortgage-backed
securities 1,023,745 58,808 - 1,082,553
----------- ------- ----- ---------
$ 7,045,505 124,355 6,820 7,163,040
----------- ------- ----- ---------
----------- ------- ----- ---------
DECEMBER 31, 1995
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government
and agencies
securities $ 2,997,436 22,163 93,171 2,926,428
Corporate notes 1,159,336 - 9,008 1,150,328
Mortgage-backed
securities 786,860 11,969 - 798,829
----------- ------ ------- ---------
$ 4,943,632 34,132 102,179 4,875,585
----------- ------ ------- ---------
----------- ------ ------- ---------
F-11
<PAGE>
The amortized cost and estimated market values of investment and
mortgage-backed securities at December 31, 1995 by contractual maturity
are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------- -----------------
ESTIMATED ESTIMATED
MARKET MARKET
COST VALUE COST VALUE
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 704,603 705,927 $ 1,191,371 1,187,858
Due in one to five years 1,450,000 1,446,342 2,265,401 2,168,457
Due in five to ten years 3,867,157 3,928,218 700,000 720,441
Mortgage-backed
securities 1,023,745 1,082,553 786,860 798,829
----------- --------- ----------- ---------
$ 7,045,505 7,163,040 $ 4,943,632 4,875,585
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
The amortized cost and market values of investment securities by call date
at December 31, 1995 are as follows:
AMORTIZED MARKET
COST VALUE
---- -----
Callable in one year or less $ 5,174,388 5,183,954
Callable in one to three years 449,139 478,657
Callable in three to five years 398,233 417,876
----------- ---------
$ 6,021,760 6,080,487
----------- ---------
----------- ---------
Proceeds and resulting gains and losses realized from sale of investments
and mortgage-backed securities for years endeds December 31, 1994 and
1993 were as follows:
NET
REALIZED
GROSS GROSS GROSS GAIN
PROCEEDS GAINS LOSSES (LOSS)
-------- ----- ------ ------
Year ended December 31, 1995 $ - - - -
Year ended December 31, 1994 7,206,699 279,282 293,533 (14,251)
Year ended December 31, 1993 63,077 57,836 - 57,836
As discussed in Note 1, the Corporation adopted Statement No. 115 as of
January 1, 1994, and investment securities were classified based on the
Corporation's current intent. The impact of adopting the new standard
resulted in an increase in the carrying value of investments by $324,254
to reflect the unrealized holding gain at January 1, 1994 for securities
classified as available for sale. Additionally, stockholders' equity was
increased by $214,000 to reflect the unrealized holding gain as a separate
component of stockholders' equity, net of taxes of $110,254. Statement
No. 115 had no impact on earnings for the year ended December 31, 1994.
All investments and mortgage-backed securities at December 31, 1994 were
held to maturity.
Management reclassified all investment and mortgage-backed securities
to available for sale at December 31, 1995.
F-12
<PAGE>
3. LOANS RECEIVABLE:
Loans receivable are summarized as follows:
1995 1994
------------ ----------
Mortgage loans secured by one to
four family residences $ 30,685,593 29,265,400
Consumer 2,796,487 2,433,130
Passbook loans 20,995 31,904
------------ ----------
33,503,075 31,730,434
------------ ----------
Less:
Loans in process 16,020 -
Allowance for loan
loss 60,050 66,259
Deferred loan fees 43,248 59,442
------------ ----------
119,318 125,701
------------ ----------
$ 33,383,757 31,604,733
------------ ----------
------------ ----------
At December 31, 1995 and 1994, adjustable rate loans approximated
$18,041,000 and $17,514,000.
Activity in the allowance for loan losses are as follows:
1995 1994 1993
-------- ------ ------
Beginning balance $ 66,259 65,959 56,843
Provision (credit) for
loan losses (2,000) - 5,691
Charge off of loans (5,411) (1,178) (338)
Recoveries of prior
charge-offs 1,202 1,478 3,763
-------- ------ ------
$ 60,050 66,259 65,959
-------- ------ ------
-------- ------ ------
At December 31, 1995 and 1994, the Savings Bank had $-0- and $7,600 in
adjustable rate and $245,600 and -0- of fixed rate loan commitments
outstanding. Management anticipates that all originations will be funded
from existing liquidity and normal monthly cash flows.
The Savings Bank grants first mortgage and other loans to customers who
are primarily Procter and Gamble employees located in the Metropolitan
Cincinnati area. Accordingly, a substantial portion of its debtors'
ability to honor their contracts is dependent on continued employment at
Procter and Gamble as well as the health of the local economy and market.
Loans to officers and directors totalled approximately $570,413 and
$625,512 as of December 31, 1995 and 1994, respectively. An analysis of
loan activity for the year ended December 31, 1995 follows:
YEAR ENDED
DECEMBER 31,
1995
----
Outstanding balance, beginning $ 625,512
New loans issued 215,200
Repayments (164,759)
Retirement of director (105,810)
---------
Outstanding balance, ending $ 570,143
---------
---------
F-13
<PAGE>
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1995 and 1994 are summarized by
major classification as follows:
DECEMBER 31,
1995 1994
---- ----
Furniture and equipment $ 274,327 323,857
Leasehold improvements 240,595 180,174
--------- -------
514,922 504,031
Accumulated depreciation 227,195 234,822
--------- -------
$ 287,727 269,209
--------- -------
--------- -------
In 1993, the Savings Bank constructed an addition with a cost of $126,938
to the building that it is currently leasing. The Savings Bank has an
agreement with the lessor that if the lease is terminated, the Savings
Bank will receive from the lessor a set dollar amount based on a ten year
graduated schedule. The building addition at the end of the lease becomes
the property of the lessor.
Effective July 1, 1995, the Savings Bank entered into a five-year lease
with Procter & Gamble for its facilities. Rent expense for the year ended
December 31, 1995 was $11,488. Future minimum lease payments on the lease
at December 31, 1995 are as follows:
1996 $ 14,246
1997 21,396
1998 28,528
1999 35,660
---------
$ 99,830
---------
---------
The Savings Bank may exercise a five year renewal option on the lease,
only upon the approval of the lessor. The Savings Bank's continued use
of its facilities beyond the lease term is dependent upon the decisions
of Procter & Gamble Company. The Savings Bank previously leased its
facilities on a year to year basis from The Procter & Gamble Company at
a nominal annual amount.
In June 1995, the Savings Bank entered into a sub-lease agreement with
an entity providing financial planning services to individuals. The
lease agreement provides for variable lease payments based on the
operating results of the lessee. The lease runs through June 1998.
During 1995 sub-lease income recognized by the Savings Bank was $8,661.
F-14
<PAGE>
5. DEPOSITS:
Deposit amounts are summarized as follows:
DECEMBER 31,
1995 1994
----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
Statement savings 5,621,541 2.59% 6,121,664 2.75%
NOW and money market accounts 5,520,279 2.70 5,637,936 2.69
Other 61,267 2.38 56,176 2.53
------------ ----------
11,203,087 11,815,776
------------ ----------
Certificates:
Three months 74,469 4.53 71,085 4.24
Six months 1,607,453 5.22 1,445,177 4.54
Nine months 352,930 5.55 265,981 5.34
One year 4,801,439 5.81 4,759,311 4.83
Fifteen months 231,089 5.76 321,854 5.50
Eighteen months 1,600,686 5.86 1,168,990 5.76
Two years 3,510,224 5.72 5,503,950 5.03
Three years 1,172,863 5.47 1,116,123 5.29
Four years 562,653 5.90 103,445 6.31
Five years 8,552,045 6.44 8,954,257 6.69
------------ ----- ---------- ----
22,465,851 5.97 23,710,173 5.65
------------ ----- ---------- ----
$ 33,668,938 4.87% 35,525,949 4.68%
------------ ----- ---------- ----
------------ ----- ---------- ----
Scheduled maturities of certificate accounts are as follows:
1995 1994
---- ----
Within one year $ 11,136,932 13,269,093
1 - 2 years 4,080,282 4,188,904
2 - 3 years 2,100,229 1,635,121
Over 3 years 5,148,408 4,617,055
------------ ----------
$ 22,465,851 23,710,173
------------ ----------
------------ ----------
Interest expense on deposits is summarized as follows:
DECEMBER 31,
-----------------------------------
1995 1994 1993
---- ---- ----
Statement savings $ 155,368 169,418 194,450
NOW and Money Market 127,125 160,953 177,059
Certificates of Deposit 1,366,545 1,246,609 1,444,427
----------- --------- ---------
$ 1,649,038 1,576,980 1,815,936
----------- --------- ---------
----------- --------- ---------
The aggregate amount of certificates of deposit in denominations of
$100,000 or more was $4,020,576 and $3,663,424 at December 31, 1995
and 1994.
6. CAPITALIZED LEASE OBLIGATIONS:
The Savings Bank leases automated teller machines under capital leases.
The leases contain a bargain purchase option at the end of the lease.
The leased assets are included in furniture and fixtures at $94,736 and
$160,922 less accumulated depreciation of $73,162 and $105,866 at
December 31, 1995 and 1994 respectively.
F-15
<PAGE>
The following is a schedule of future minimum lease payments required
under the leases:
YEAR ENDED
DECEMBER 31,
1995
------------
1996 $12,650
1997 4,467
-------
Total minimum lease payments 17,117
Less amount representing interest 855
-------
Present value of minimum
lease payments $16,262
-------
-------
7. FEDERAL HOME LOAN BANK ADVANCES:
Future maturities on the advances from the Federal Home Loan Bank are as
follows:
1996 $4,723,572
1997 274,997
1998 26,504
1999 28,100
2000 29,795
Subsequent years 244,514
----------
$5,327,482
----------
----------
The advances are collateralized by a blanket pledge of residential
mortgage loans held by the Savings Bank. The Savings Bank has also pledged
its Federal Home Loan Bank stock and mortgage notes with unpaid principal
balances of approximately $8.0 million for future advances.
The Savings Bank borrowed $419,800 under a mortgage matched advance
program. Interest is charged on the advances at a weighted average rate of
5.99% and are due in 120 to 180 monthly installments of $3,800 including
interest.
The Savings Bank has also borrowed $4,950,000 as of December 31, 1995 under
various cash and investment advance programs at Federal Home Loan Bank. The
borrowings are for ninety day to two year periods and interest is charged
at 5.81% to 6.90%.
8. INCOME TAXES:
The Savings Bank has qualified under provisions of the Internal Revenue
Code, which permits the Savings Bank to deduct from taxable income an
allowance for bad debts based on a percentage of taxable income before
such deduction. The Tax Reform Act of 1969 gradually reduced this
deduction to 40% for years beginning in 1979. The Tax Reform Act of 1986
reduced this deduction to 8% beginning in 1988.
Appropriated and unappropriated retained income at December 31, 1995
included earnings of approximately $1,096,000 representing such bad debt
deductions for which no provision for federal income taxes has been made.
In the future, if the Savings Bank does not meet the federal income tax
requirements necessary to permit it to deduct an allowance for bad debts,
the Savings Bank will be subject to federal income tax at the then current
corporate rate.
F-16
<PAGE>
An analysis of the provision for federal income taxes is as follows:
YEARS ENDED DECEMBER 31,
DECEMBER 31,
-----------------------------
1995 1994 1993
------ ------ -------
Current $1,660 18,037 128,269
Deferred 8,200 20,300 38,000
------ ------ -------
$9,860 38,337 166,269
------ ------ -------
------ ------ -------
At December 31, 1995 and 1994, the deferred components of the Savings
Bank's income tax liabilities, as included in the statements of financial
condition are summarized as follows:
1995 1994
--------- -------
Deferred tax liabilities:
FHLB stock dividends $ 73,200 70,000
Bad debt reserve 5,700 5,200
Net unrealized gain on available
for sale securities 37,024 -
Depreciation 7,400 11,300
--------- -------
Gross deferred tax liabilities 123,324 86,500
--------- -------
Deferred tax assets:
Deferred loan fees (14,600) (21,200)
Other (2,700) (4,500)
--------- -------
Gross deferred tax assets (17,300) (25,700)
--------- -------
Valuation allowance - -
--------- -------
Net deferred tax liability $ 106,024 60,800
--------- -------
--------- -------
The Savings Bank's income tax expense differed from the statutory
federal rate of 34% as follows:
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------ -------
Tax expense at statutory rate $13,105 49,676 173,860
Sur tax exemption (5,970) (9,445) -
Bad debt deduction - - (5,043)
Other 2,725 (1,894) (2,548)
------- ------ -------
$ 9,860 38,337 166,269
------- ------ -------
------- ------ -------
Effective tax rate 25.6% 26.2% 32.5%
------- ------ -------
------- ------ -------
9. CAPITAL REQUIREMENTS:
The Savings Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary -actions by regulators that, if undertaken, could
have a direct material effect on the Savings Bank's financial statements.
The regulations require the Savings Bank to meet specific capital adequacy
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Savings Bank's capital classification
is also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
F-17
<PAGE>
Quantitative measures established by regulation to ensure capital
adequacy require the Savings Bank to maintain minimum amounts and ratios
(set forth in the table below) of Tier I capital (as defined in the
regulations) to total average assets (as defined), and minimum ratios of
Tier I and total capital (as defined) to risk-weighted assets (as defined).
To be considered adequately capitalized (as defined) under the regulatory
framework for prompt corrective action, the Bank must maintain minimum
Tier I leverage and Tier II risk-based, ratios as set forth in the table.
The Bank's actual capital amounts and ratios are also presented in the
table.
DECEMBER 31, 1995
-----------------------------------------------------------
REQUIRED ACTUAL REQUIRED
AMOUNT AMOUNT EXCESS RATE RATE
---------- --------- --------- ------ --------
Tier I $3,768,000 1,726,000 2,042,000 8.8 4.0
Tier II 3,828,000 1,726,000 2,102,000 17.8 8.0
DECEMBER 31, 1994
-----------------------------------------------------------
REQUIRED ACTUAL REQUIRED
AMOUNT AMOUNT EXCESS RATE RATE
---------- --------- --------- ------ --------
Tier I $3,739,000 1,594,000 2,145,000 9.35 4.0
Tier II 3,805,000 1,557,000 2,248,000 19.6 8.0
10. RETIREMENT PLANS:
The Savings Bank is a member of The Financial Institution Retirement
Fund, a multi-employer defined benefit pension plan, for its employees.
The Fund is administered by the U.S. League of Savings Institutions which
also determines the required pension plan contribution. The pension
expense for the years ended December 31, 1995 and 1994 was $8,416 and
$4,208. The Savings Bank had not been required to make a contribution to
the plan for 1993 as the Fund was over funded. The Savings Bank's policy is
to fund pension cost accrued. This plan was terminated at June 30, 1995.
In 1992, the Savings Bank implemented a 401-K savings plan which covers
substantially all employees. The employees may elect to make contributions
pursuant to a salary reduction agreement upon meeting age and length of
service requirements. The Savings Bank annually determines the contribution
based on the percentage of the employees plan compensation or employee pay
contributed to the Plan. The Savings Bank matched the employee contribution
to the plan up to 5% of employee compensation. Total contributions by the
Savings Bank and the years ended December 31, 1995, 1994 and 1993 were
$6,803, $8,852 and $8,455 respectively.
11. OTHER EXPENSES:
Other expenses consist of the following:
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- ------- -------
Advertising $ 19,543 19,049 11,268
Postage and telephone 30,108 32,236 34,469
Legal and litigation 121,651 32,560 23,197
Other professional services 35,687 35,775 50,005
NOW account servicing 30,242 19,156 17,586
Membership dues and subscriptions 12,965 14,484 13,986
Office supplies 22,320 27,814 22,606
Appraisal and credit fees, net 5,172 921 3,951
ATM expense 51,273 56,695 48,844
Payroll taxes 32,112 27,735 24,767
Liability and other insurance 17,258 20,617 20,428
Automobile expense 5,154 1,857 4,944
Other 44,510 44,396 39,391
-------- ------- -------
$427,995 333,295 315,442
-------- ------- -------
-------- ------- -------
F-18
<PAGE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of the Savings Bank's financial instruments at
December 31, 1995 were as follows:
DECEMBER 31,
---------------------------
CARRYING FAIR
VALUE VALUE
----------- ----------
Financial assets:
Cash and certificates of deposit $ 1,401,192 1,401,192
Investment and mortgage-backed
securities 7,163,040 7,163,040
Loans receivable, net 33,383,757 34,476,000
Accrued interest receivable 234,555 234,555
Financial liabilities:
Deposits:
Demand 2,536,003 2,536,003
Money market accounts 2,984,277 2,984,277
Savings 5,682,808 5,682,808
Certificates 22,465,851 22,688,000
FHLB advances 5,327,482 5,353,000
Accrued interest payable 5,517 5,517
13. COMMITMENTS AND CONTINGENCIES:
The Savings Bank was named in a lawsuit related to an age discrimination
matter seeking unspecified damages. An agreement to settle the lawsuit in
February 1996 was reached by mutual agreement of the parties. All costs
associated with the settlement were accrued in the financial statements at
December 31, 1995.
In the ordinary course of business, the Savings Bank has various
outstanding commitments and contingent liabilities that are not reflected
in the accompanying financial statements. The principal commitments of the
Savings Bank consist of loan commitments disclosed in Note 3. The Savings
Bank uses the same credit policies in making commitments as it does for
on-balance sheet instruments.
The deposits of savings associations such as the Savings Bank are presently
insured by the SAIF, which together with the BIF, are the two insurance
funds administered by the FDIC. On November 8, 1995, the FDIC revised the
premium schedule for BIF-insured banks to provide a range of .00% to .31%
of deposits (as compared to the current range of .23% to .31% of deposits
for SAIF-insurred institutions) due to the BIF achieving its statutory
reserve ratio. As a result, BIF Members generally would pay substantially
lower premiums than the SAIF members. The most recent reduction for BIF
members are expected to take effect no later than the first quarter of
1996. It is anticipated that the SAIF will not be adequately recapitalized
until 2,002, absent a substantial increase in premium rates or the
imposition of special assessments or other significant developments, such
as a merger of the SAIF and the BIF. As a result of this disparity, SAIF
members could be placed at a significant, competitive disadvantage to BIF
members due to higher costs for deposit insurance. A recapitalization plan
under consideration by the Treasury Department, the FDIC, the OTS and the
Congress reportedly provides for a one-time assessment of .85% to .90% to
be imposed on all deposits assessed at the SAIF rates in order to
recapitalize the SAIF and eliminate the disparity, and an eventual merger
of the SAIF and the BIF. The Savings Bank currently is unable to predict
the likelihood of legislation effecting these changes, although a consensus
appears to be developing in this regard. If such an assessment was effected
based on deposits as of December 31, 1995, as proposed, the Savings Bank's
pro rata share would amount to approximately $189,000 to $200,000 after
taxes, respectively.
F-19
<PAGE>
14. PLAN OF CONVERSION:
On July 6, 1995, the Savings Bank's Board of Directors adopted a Plan of
Conversion (the "Plan") to convert the Savings Bank from a state chartered
mutual savings bank to a state chartered stock savings bank, which will
then become a wholly owned subsidiary of a holding company formed in
connection with the Conversion. The holding company will issue common
stock to be sold in the conversion and will use a portion of the net
proceeds thereof which it does not retain to purchase the capital stock
of the Savings Bank. The Plan is subject to approval by the regulatory
authorities and the members of the Savings Bank at a special meeting.
At the time of conversion, the Savings Bank will establish a liquidation
account in an amount equal to its net worth as reflected in its latest
balance sheet used in its final conversion Prospectus. The liquidation
account will be maintained for the benefit of eligible deposit account
holders who continue to maintain their deposit accounts in the Savings Bank
after conversion. Only in the event of a complete liquidation will each
deposit account holder be entitled to receive a liquidation distribution
from the liquidation account in the amount of the then current adjusted
subaccount balance for deposit accounts then held before any liquidation
distribution may be made with respect to common stock. Dividends paid by
the Savings Bank subsequent to the conversion cannot be paid from this
liquidation account.
The Savings Bank may not declare or pay a cash dividend on or repurchase
any of its common stock if its net worth would thereby be reduced below
either the aggregate amount then required for the liquidation account or
the minimum regulatory capital requirements imposed by the federal and
state regulations.
Conversion costs of $207,893 had been incurred as of December 31, 1995.
If the conversion is ultimately successful, conversion costs will be
accounted for as a reduction of the stock proceeds. If the conversion is
unsuccessful, conversion costs will be charged to the Savings Bank's
operations.
F-20
<PAGE>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus and Proxy Statement in connection with the offering made hereby,
and, if given or made, such other information or representation must not be
relied upon as having been authorized by Lenox Bancorp, Inc., the Bank or
Trident Securities, Inc. This Prospectus and Proxy Statement does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such
offer or solicitation is not qualified to do so, or to any person to whom it
is unlawful to make such offer or solicitation in such jurisdiction. Neither
the delivery of this Prospectus and Proxy Statement nor any sale hereunder
shall under any circumstances create any implication that there has been no
change in the affairs of Lenox Bancorp, Inc. or the Bank since any of the
dates as of which information is furnished herein or since the date hereof.
______________________________
TABLE OF CONTENTS
Page
----
Summary of the Conversion and the Offerings. . . . . . . . . . . . . . . . . 3
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Selected Financial and Other Data of the Bank. . . . . . . . . . . . . . . .15
Recent Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Lenox Bancorp, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Lenox Savings Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Regulatory Capital Compliance. . . . . . . . . . . . . . . . . . . . . . . .31
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Market for the Common Stock. . . . . . . . . . . . . . . . . . . . . . . . .34
Subscriptions by Executive Officers and Directors. . . . . . . . . . . . . .35
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Pro Forma Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Lenox Savings Bank Statements of Income. . . . . . . . . . . . . . . . . . .40
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . . . . .41
Business of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Federal and State Taxation . . . . . . . . . . . . . . . . . . . . . . . . .76
Regulation and Supervision . . . . . . . . . . . . . . . . . . . . . . . . .79
Management of the Company. . . . . . . . . . . . . . . . . . . . . . . . . .87
Management of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . .88
The Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99
Restrictions on Acquisition of the Company and
the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Description of Capital Stock of the Company. . . . . . . . . . . . . . . . 122
Description of Capital Stock of the Bank . . . . . . . . . . . . . . . . . 123
Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . 124
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Legal and Tax Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Index of Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 126
______________________________
Until June 26, 1996, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus and Proxy Statement. This is in addition to the
obligation of dealers to deliver a Prospectus and Proxy Statement when acting as
underwriters and with respect to their unsold allotments or subscriptions.
575,000 SHARES
LENOX BANCORP, INC.
(Proposed Holding Company for
Lenox Savings Bank)
COMMON STOCK
__________
PROSPECTUS AND PROXY STATEMENT
__________
MAY 13, 1996
TRIDENT SECURITIES, INC.
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