<PAGE>
PROSPECTUS UP TO 402,500 COMMON SHARES
$10 PURCHASE PRICE PER SHARE
FOUNDATION BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR FOUNDATION SAVINGS BANK)
CINCINNATI, OHIO
Foundation Bancorp, Inc., an Ohio corporation (the "Holding Company"), is
hereby offering for sale up to 402,500 common shares, without par value (the
"Common Shares"), in connection with its acquisition of all of the capital stock
to be issued by Foundation Savings Bank, an Ohio mutual savings and loan
association which has its principal office in Cincinnati, Ohio (the "Bank"),
upon the conversion of the Bank from a mutual savings and loan association to a
permanent capital stock savings and loan association incorporated under the laws
of the State of Ohio (the "Conversion"). The sale of the Common Shares is
subject to the approval of the Bank's Plan of Conversion (the "Plan") and the
adoption of the Amended Articles of Incorporation and Amended Constitution of
the Bank by the members of the Bank at a Special Meeting to be held at 3:30
p.m., Eastern Time, on September 24, 1996, at the office of the Bank, 25
Garfield Place, Cincinnati, Ohio (the "Special Meeting").
Based on an independent appraisal of the pro forma market value of the
Bank, as converted, as of May 14, 1996, the aggregate purchase price of the
Common Shares offered in connection with the Conversion ranges from a minimum of
$2,975,000 to a maximum of $4,025,000 (the "Valuation Range"), resulting in a
range of 297,500 to 402,500 Common Shares at $10 per share. See "THE CONVERSION
- - Pricing and Number of Common Shares to be Sold." Applicable regulations
permit the Holding Company to offer additional Common Shares in an amount not to
exceed 15% above the maximum of the Valuation Range, which would permit the
issuance of up to 462,875 Common Shares with an aggregate purchase price of
$4,628,750. The actual number of Common Shares sold in connection with the
Conversion will be based upon the final valuation of the Bank, as determined by
the independent appraiser upon the completion of this offering. If the final
valuation is greater than or equal to $2,975,000 and less than or equal to
$4,628,750, the number of Common Shares to be issued in connection with the
Conversion will not be less than 297,500, nor more than 462,875. If, due to
changing market conditions, the final valuation is less than $2,975,000 or more
than 462,875, subscribers will be given notice of such final valuation and a
resolicitation of subscribers will be conducted. See "THE CONVERSION - Pricing
and Number of Common Shares to be Sold," "USE OF PROCEEDS," "CAPITALIZATION" and
"PRO FORMA DATA."
(CONTINUED ON NEXT PAGE)
THE COMMON SHARES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), THE OFFICE OF THRIFT
SUPERVISION OF THE DEPARTMENT OF THE TREASURY (THE "OTS"), THE FEDERAL DEPOSIT
INSURANCE CORPORATION (THE "FDIC"), THE OHIO DEPARTMENT OF COMMERCE, DIVISION OF
FINANCIAL INSTITUTIONS (THE "DIVISION"), OR THE SECURITIES COMMISSION OF ANY
STATE, NOR HAS THE SEC, THE OTS, THE FDIC, THE DIVISION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY INVOLVES CERTAIN RISKS.
FOR A DISCUSSION OF SUCH RISKS AND OTHER FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS, SEE "RISK FACTORS" ON PAGE 11.
THE COMMON SHARES BEING OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
FOR INFORMATION ON HOW TO SUBSCRIBE, PLEASE CALL THE CONVERSION INFORMATION
CENTER AT (513) 721-0120.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Estimated Expenses
Subscription and Underwriting Estimated Net
Price Commissions(1) Proceeds(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share Minimum. . . . . . . . . . . . $10 $0.84 $9.16
Per share Mid-point. . . . . . . . . . . $10 $0.72 $9.28
Per share Maximum. . . . . . . . . . . . $10 $0.62 $9.38
Per share Maximum, as adjusted(3). . . . $10 $0.54 $9.46
Total Minimum. . . . . . . . . . . . . . $2,975,000 $251,000 $2,724,000
Total Mid-point. . . . . . . . . . . . . $3,500,000 $251,000 $3,249,000
Total Maximum. . . . . . . . . . . . . . $4,025,000 $251,000 $3,774,000
Total Maximum, as adjusted(3). . . . . . $4,628,750 $251,000 $4,377,750
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Expenses of the Conversion payable by the Bank and the Holding Company
include legal, accounting, appraisal, printing, mailing and miscellaneous
expenses. Such expenses also include a financial advisory fee of $50,000,
payable to Charles Webb & Company, a division of Keefe, Bruyette & Woods,
Inc. ("Webb"). Such fee may be deemed to be underwriting fees. See "THE
CONVERSION - Plan of Distribution." Actual expenses may vary from the
estimates.
(2) Includes the net proceeds from purchases intended to be made by the
Foundation Bancorp, Inc. Employee Stock Ownership Plan (the "ESOP") with
funds borrowed by the ESOP from the Holding Company. See "PRO FORMA DATA"
and "MANAGEMENT - Stock Benefit Plans -- Employee Stock Ownership Plan."
(3) Gives effect to the increase in the number of Common Shares sold in
connection with the Conversion of up to 15% above the maximum of the
Valuation Range. Such shares may be offered without the resolicitation of
persons who subscribe for Common Shares in the Subscription Offering and
the Community Offering (hereinafter defined) (collectively, the
"Offering"). See "THE CONVERSION - Pricing and Number of Common Shares to
be Sold."
THE DATE OF THIS PROSPECTUS IS AUGUST 12, 1996.
CHARLES WEBB & COMPANY
A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
<PAGE>
In accordance with the Plan, nontransferable subscription rights to
purchase Common Shares at a price of $10 per share are offered hereby in a
subscription offering (the "Subscription Offering"), subject to the rights and
restrictions established by the Plan, to (a) eligible depositors of the Bank as
of May 31, 1995 (the "Eligibility Record Date"), (b) the ESOP and (c) members of
the Bank eligible to vote at the Special Meeting ("Other Eligible Members").
ALL SUBSCRIPTION RIGHTS TO PURCHASE COMMON SHARES IN THE SUBSCRIPTION OFFERING
ARE NONTRANSFERABLE AND WILL EXPIRE AT 4:00 P.M., EASTERN TIME, ON SEPTEMBER 13,
1996. See "THE CONVERSION - Subscription Offering." To the extent that all of
the Common Shares are not subscribed for in the Subscription Offering, the
remaining Common Shares are hereby being offered concurrently to the general
public in a direct community offering in which preference will be given to
natural persons residing in Hamilton County, Ohio (the "Community Offering").
See "THE CONVERSION - Community Offering."
The minimum number of Common Shares any person may purchase in the Offering
is 25. Except for the ESOP, which may purchase up to 8% of the total Common
Shares sold in the Offering, (i) no Eligible Account Holder (hereinafter
defined) or Other Eligible Member may purchase in the Offering more than 2.5% of
the total Common Shares sold in the Offering, (ii) no person, together with his
or her Associates (hereinafter defined) and other persons acting in concert with
him or her, may purchase in the Community Offering more than 2.5% of the total
Common Shares sold in the Offering, and (iii) no person, together with his or
her Associates and other persons acting in concert with him or her, may purchase
more than 5% of the total Common Shares sold in the Offering. In connection
with the exercise of subscription rights arising from a deposit account or a
loan account in which two or more persons have an interest, the aggregate
maximum number of Common Shares which the persons having an interest in such
account may purchase is 2.5% of the total Common Shares sold in the Offering.
Subject to OTS regulations, the maximum purchase limitation may be increased or
decreased after the commencement of the Offering in the sole discretion of the
Boards of Directors of the Holding Company and the Bank. If the maximum
purchase limitation is increased to more than 2.5% of the Common Shares, persons
who have subscribed for 2.5% of the Common Shares will be given the opportunity
to increase their subscriptions. See "THE CONVERSION - Limitations on Purchases
of Common Shares."
Common Shares may be subscribed for in the Offering by returning the
accompanying Stock Order Form and Certification Form (the "Stock Order Form"),
along with full payment of the purchase price per share for all shares for which
subscription is made, so that it is received by the Bank no later than 4:00
p.m., Eastern Time, September 13, 1996. See "THE CONVERSION - Use of Stock
Order Forms."
THE CONVERSION OF THE BANK FROM A MUTUAL SAVINGS AND LOAN ASSOCIATION TO A
PERMANENT CAPITAL STOCK SAVINGS AND LOAN ASSOCIATION IS CONTINGENT UPON (I) THE
APPROVAL OF THE PLAN AND THE ADOPTION OF THE AMENDED ARTICLES OF INCORPORATION
AND THE AMENDED CONSTITUTION BY THE BANK'S VOTING MEMBERS, (II) THE SALE OF THE
REQUISITE NUMBER OF COMMON SHARES, AND (III) CERTAIN OTHER FACTORS. SEE "THE
CONVERSION."
-2-
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING INFORMATION IS NOT COMPLETE AND IS QUALIFIED IN ITS ENTIRETY
BY THE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND ACCOMPANYING NOTES
APPEARING ELSEWHERE IN THIS PROSPECTUS.
FOUNDATION BANCORP, INC.
The Holding Company was incorporated under Ohio law in April 1996 at the
direction of the Bank for the purpose of purchasing all of the capital stock of
the Bank to be issued in connection with the Conversion. The Holding Company
has not conducted and will not conduct any business before the completion of the
Conversion other than business related to the Conversion. Upon the consummation
of the Conversion, the Holding Company will be a unitary savings and loan
holding company, the principal assets of which initially will be the capital
stock of the Bank, the investments made with the net proceeds retained from the
sale of Common Shares in connection with the Conversion and a loan to be made by
the Holding Company to the ESOP to facilitate the ESOP's purchase of Common
Shares in the Conversion. See "USE OF PROCEEDS."
The office of the Holding Company is located at 25 Garfield Place,
Cincinnati, Ohio 45202, and its telephone number is (513) 721-0120.
FOUNDATION SAVINGS BANK
The Bank is a mutual savings and loan association which was organized under
Ohio law in 1888. As an Ohio savings and loan association, the Bank is subject
to supervision and regulation by the OTS and the Division. The Bank is a member
of the Federal Home Loan Bank (the "FHLB") of Cincinnati, and the deposits of
the Bank are insured up to applicable limits by the FDIC in the Savings
Association Insurance Fund (the "SAIF"). See "REGULATION."
The Bank conducts business from its office at 25 Garfield Place in
Cincinnati, Ohio. The principal business of the Bank is the origination of
permanent mortgage loans secured by first mortgages on one- to four-family
residential real estate located in Hamilton County, Ohio and the contiguous Ohio
counties of Clermont, Butler and Warren and the Kentucky counties of Boone and
Kenton. The Bank also originates mortgage loans secured by multifamily real
estate (over four units) and nonresidential real estate in its primary market
area. See "THE BUSINESS OF THE BANK - Lending Activities." In addition to real
estate lending, the Bank originates a limited number of secured and unsecured
consumer loans. For liquidity and interest rate risk management purposes, the
Bank invests in interest-bearing deposits in other financial institutions, U.S.
Government and agency obligations, mortgage-backed securities and other
investments permitted by applicable law. See "THE BUSINESS OF THE BANK -
Investment Activities." Funds for lending and other investment activities are
obtained primarily from savings deposits, which are insured up to applicable
limits by the FDIC, and principal repayments on loans. Advances from the FHLB
of Cincinnati are utilized from time to time when other sources of funds are
inadequate to fund loan demand. See "THE BUSINESS OF THE BANK - Deposits and
Borrowings."
In 1994, the Bank changed its operating strategy to become less reliant on
retirement deposits and to increase its loan originations. The Bank now has a
full-time loan originator who solicits mortgage loan applications. Loans
originated by the Bank are underwritten in accordance with national secondary
mortgage market standards. Depending on market conditions, the Bank either
sells its loans or holds them in its portfolio. The Bank attempts to maintain
an adequate net interest margin, control expenses and enhance earnings with fee
income and gains on the sale of loans. Although the Bank intends to pursue a
policy of prudent growth in assets and deposits, its downtown Cincinnati
location is not conducive to attracting lower cost deposits such as checking and
passbook accounts. Some of the results of this strategy are summarized as
follows:
- - MORTGAGE LENDING. Approximately 50% of the Bank's mortgage loan portfolio
at March 31, 1996, consisted of loans originated during the period from
January 1, 1994, to March 31, 1996. During such period, the Bank increased
its total investment in mortgage loans from $18.5 million to $21.3 million,
an increase of $2.8 million, or 15.2%. At March 31, 1996, approximately
$19.0 million, or 88.9%, of the Bank's total loans were secured by one- to
four-family real estate. See "THE BUSINESS OF THE BANK - Lending
Activities -- Loans Secured by One- to Four-Family Real Estate."
-3-
<PAGE>
- - ASSET QUALITY. Maintaining a high level of asset quality is a top
priority of the board and management of the Bank. The Bank's efforts to
control non-performing assets begin with prudent lending policies and
stringent underwriting standards. The Bank moves quickly to resolve
delinquencies and to dispose of real estate acquired through foreclosure.
At April 30, 1996, the Bank had only one loan, with a principal balance of
approximately $2,000, delinquent in excess of sixty days and no real estate
owned acquired through foreclosure. See "THE BUSINESS OF THE BANK -
Lending Activities -- Delinquent Loans, Nonperforming Assets and Classified
Assets."
- - CAPITAL POSITION. At March 31, 1996, the Bank's equity to assets ratio was
8.73%. In addition, the Bank's ratio of tangible capital to total assets
and its risk-based capital ratio were 8.73% and 19.59%, respectively, both
of which substantially exceeded the OTS requirements. See "REGULATION -
Office of Thrift Supervision -- Regulatory Capital Requirements."
- - ASSET AND DEPOSIT GROWTH. From January 1, 1994, through March 31, 1996,
there was little or no change in the Bank's asset and deposit growth, with
assets remaining at approximately $31.7 million and deposits at
approximately $27.8 million. Although total assets and total deposits have
remained relatively constant over that period, the mix of the assets and
deposits has changed significantly as the Bank has focused on loan
originations. Cash and equivalents declined by $1.0 million, or 20.0%, and
mortgage-backed securities declined by $1.7 million, or 25.4%, with the
proceeds invested primarily in mortgage loans, which increased $2.8
million, or 15.2%. Retirement accounts, which totalled approximately 60%
of deposits at January 1, 1994, had been reduced to 40% of deposits at
March 31, 1996. During such period, capital increased $353,000, or 14.6%.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "THE BUSINESS OF THE BANK."
- - NET INCOME. The Bank's net income decreased approximately $25,000, to
$66,100 for the nine months ended March 31, 1996, compared to the same
period in 1995, and decreased $70,000 for the fiscal year ended June 30,
1995, compared to 1994. Such decreases are attributable to various
factors. During the nine-month period, a decline in net interest income
accounted for nearly all of the decrease in net income as the Bank's
liabilities repriced more quickly than its assets during the recent period
of rising interest rates. The decline in net income from the 1994 to the
1995 fiscal year was primarily attributable to a decline in other income.
Net income for 1994 was favorably affected by a gain on sale of
investments. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
- - PROFITABILITY. The Bank's return on assets was .62%, .41% and .28% for the
fiscal years ended June 30, 1994 and 1995, and the nine months ended March
31, 1996, respectively. Such ratios have been, on average, 33 basis points
below the Bank's peer group average, as compiled by the OTS. The Bank's
return on average equity for the fiscal years ended June 30, 1994 and 1995,
and the nine months ended March 31, 1996, averaged 5.28%. The Bank's cost
of deposits has been, on average, 69 basis points higher than the Bank's
peer group average. The higher cost of deposits has been partially offset
by general and administrative expenses that have been approximately 19
basis points lower than the peer group. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
THE CONVERSION
GENERAL. The Boards of Directors of the Holding Company and the Bank have
unanimously approved the Plan. The Plan provides for the Conversion of the Bank
from a mutual savings and loan association to a permanent capital stock savings
and loan association incorporated under the laws of the State of Ohio. The OTS
and the Division have approved the Plan, subject to the approval of the Plan by
the Bank's voting members at the Special Meeting and the satisfaction of certain
other conditions. See "THE CONVERSION - Conditions and Termination."
The principal factors considered by the Bank's Board of Directors in
reaching the decision to pursue a mutual-to-stock conversion were the numerous
competitive disadvantages which the Bank faces if it maintains its mutual form.
These disadvantages relate to a variety of factors, including growth
opportunities, employee retention and regulatory uncertainty. The Conversion
will also provide the Bank with additional capital which will support future
growth. See "THE CONVERSION - Reasons for the Conversion."
-4-
<PAGE>
THE SUBSCRIPTION AND COMMUNITY OFFERINGS. Pursuant to the Plan,
subscription rights to purchase Common Shares at a price of $10 per share are
hereby offered to (a) each account holder who has one or more deposit accounts
with an aggregate balance of $50 or more (a "Qualifying Deposit") with the Bank
at the close of business on the Eligibility Record Date (the "Eligible Account
Holders"), (b) the ESOP and (c) Other Eligible Members. See "THE CONVERSION -
Subscription Offering."
Concurrently with the Subscription Offering, the Common Shares not
subscribed for in the Subscription Offering are hereby offered to the general
public in the Community Offering, in which preference will be given to natural
persons residing in Hamilton County, Ohio. The Boards of Directors of the
Holding Company and the Bank have the right to reject, in whole or in part, any
subscription for Common Shares submitted in the Community Offering. See "THE
CONVERSION - Community Offering."
The Plan authorizes the Boards of Directors of the Holding Company and the
Bank to establish limits on the amount of Common Shares which may be purchased
by various categories of persons. The minimum number of Common Shares any
person may purchase in the Offering is 25. Pursuant to the Plan, the Boards of
Directors have set the following additional preliminary limitations: (i) no
Eligible Account Holder or Other Eligible Member may purchase in the Offering
more than 2.5% of the total Common Shares sold in the Offering, (ii) no person,
together with his or her Associates and other persons acting in concert with him
or her, may purchase in the Community Offering more than 2.5% of the total
Common Shares sold in the Offering, and (iii) no person, together with his or
her Associates and other persons acting in concert with him or her, may purchase
more than 5% of the total Common Shares sold in the Offering. In connection
with the exercise of subscription rights arising from a deposit account or a
loan account in which two or more persons have an interest, the aggregate
maximum number of Common Shares which the persons having an interest in such
account may purchase is 2.5% of the total Common Shares sold in the Offering.
Such limitations do not apply to the ESOP, which intends to purchase up to 8% of
the Common Shares sold in the Offering. Subject to applicable regulations, the
purchase limitation may be increased or decreased after the commencement of the
Offering in the sole discretion of the Boards of Directors. See "THE CONVERSION
- - Limitations on Purchases of Common Shares." In addition to the purchase
limitations established by the Plan, OTS regulations impose restrictions on the
acquisition of more than 10% of the outstanding shares of the Bank by any
person or company individually or acting in concert with others. See
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK." The sale of
Common Shares pursuant to subscriptions received in the Offering will be subject
to the approval of the Plan by the voting members of the Bank at the Special
Meeting, to the determination by the Boards of Directors of the Holding Company
and the Bank of the total number of Common Shares to be sold in the Offering and
to certain other conditions. See "THE CONVERSION - Subscription Offering; -
Community Offering; and - Pricing and Number of Common Shares to be Sold."
The Subscription Offering will terminate and subscription rights will
expire if not exercised by 4:00 p.m., Eastern Time, on September 13, 1996. The
Community Offering may be terminated at any time after orders for at least
462,875 shares have been received, but in no event later than October 28, 1996,
unless extended. Any extension of the Community Offering beyond October 28,
1996, will require the consent of the OTS and the Division, and persons who have
subscribed for Common Shares in the Offering will be given notice that they have
the right to increase, decrease or rescind their subscriptions for Common
Shares. Persons who do not affirmatively elect to continue their subscription
or who elect to rescind their subscriptions during any such extension will have
all of their funds promptly refunded with interest. Persons who elect to
decrease their subscriptions will have the appropriate portion of their funds
promptly refunded with interest. See "THE CONVERSION - Pricing and Number of
Common Shares to be Sold."
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS. Federal and Ohio regulations
provide that subscription rights are non-transferable. OTS regulations
specifically prohibit any person from transferring or entering into any
agreement or understanding before the completion of the Conversion to transfer
the ownership of the subscription rights issued in the Conversion or the shares
to be issued upon the exercise of such subscription rights. Persons attempting
to violate such provision may lose their rights to purchase Common Shares in the
Conversion and may be subject to penalties imposed by the OTS. Each person
exercising subscription rights will be required to certify that his purchase of
Common Shares is solely for the subscriber's own account and that there is no
agreement or understanding regarding the sale or transfer of such Common Shares.
PARTICIPATION OF WEBB IN THE OFFERINGS. The Holding Company and the Bank
have retained Webb to consult, advise and assist in the sale of the Common
Shares in the Offering on a "best efforts" basis. Webb will receive a financial
advisory fee in the amount of $50,000. In addition, the Holding Company will
reimburse Webb for certain expenses,
-5-
<PAGE>
including reasonable legal fees. Such expenses shall not exceed $30,000. If
the Holding Company and Webb deem necessary, Webb may enter into agreements
("Selected Dealer Agreements") with other National Association of Securities
Dealers, Inc. ("NASD") member firms ("Selected Dealers") for assistance in the
sale of Common Shares. Selected Dealers will receive fees equal to 4% of the
purchase price of Common Shares sold, if any, pursuant to Selected Dealer
Agreements. Webb is not obligated to purchase any Common Shares.
PRICING OF THE COMMON SHARES. Keller & Company, Inc. ("Keller"), a
Columbus, Ohio, firm experienced in valuing thrift institutions, has prepared an
independent valuation of the estimated pro forma market value of the Bank, as
converted. Keller's valuation of the estimated pro forma market value of the
Bank, as converted, is $3,500,000 as of May 14, 1996 (the "Pro Forma Value").
Based on the Pro Forma Value of the Bank, the Valuation Range established in
accordance with the Plan is $2,975,000 to $4,025,000.
In the event that Keller determines at the close of the Offering that the
aggregate pro forma value of the Bank is higher or lower than the Pro Forma
Value, but is within the Valuation Range, the Holding Company will make an
appropriate adjustment by raising or lowering the total number of Common Shares
sold in the Conversion consistent with the final valuation. The total number of
Common Shares sold in the Conversion will be determined by the Board of
Directors consistent with the final valuation. If, due to changing market
conditions, the final valuation is outside the Valuation Range, subscribers will
be given notice of such final valuation and the right to increase, decrease or
rescind their subscriptions. Any person who does not affirmatively elect to
continue his subscription or elects to rescind his subscription before the date
specified in the notice will have all of his funds promptly refunded with
interest. Any person who elects to decrease his subscription will have the
appropriate portion of his funds promptly refunded with interest. See "THE
CONVERSION - Pricing and Number of Common Shares to be Sold."
USE OF PROCEEDS. The Holding Company will retain up to 50% of the net
proceeds from the sale of the Common Shares, estimated to be $1.62 million at
the midpoint of the Valuation Range. The balance of the net proceeds will be
used to purchase all of the capital stock to be issued by the Bank and will
increase the regulatory capital of the Bank. The Bank anticipates that the net
proceeds will initially be invested in short-term U.S. Government and agency
obligations and will be available for general corporate purposes, including loan
originations. See "USE OF PROCEEDS."
The funds retained by the Holding Company will be used by the Holding
Company to make a loan to the ESOP and will be available for general corporate
purposes, including the payment of dividends. The funds retained by the Holding
Company will be available for the repurchase of shares, although the Holding
Company has no current intentions to pursue stock repurchases. OTS regulations
generally prohibit stock repurchases in the first six months following the
completion of the Conversion without prior OTS approval. See "THE CONVERSION -
Restrictions on Repurchase of Common Shares."
TAX CONSEQUENCES
The consummation of the Conversion is expressly conditioned upon the
receipt by the Holding Company and the Bank of a private letter ruling from the
Internal Revenue Service (the "IRS") or an opinion of counsel to the effect that
the Conversion will constitute a tax-free reorganization as defined in Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The
Holding Company and the Bank intend to proceed with the Conversion based upon an
opinion received from Vorys, Sater, Seymour and Pease, special counsel to the
Bank and the Holding Company, that states, in part, that (1) no gain or loss
will be recognized by the Bank in connection with the Conversion or the receipt
from the Holding Company of proceeds from the sale of the Common Shares, and (2)
assuming that the subscription rights received by deposit account holders in
connection with the Conversion have no ascertainable fair market value, no gain
or loss will be recognized by the deposit account holders of the Bank upon
issuance to them of subscription rights or interests in the Liquidation Account
(hereinafter defined) and no taxable income will be realized by deposit account
holders as a result of their exercise of such subscription rights. Although the
IRS could challenge the assumption that the subscription rights have no
ascertainable fair market value, the Holding Company and the Bank have received
an opinion from Keller supporting such assumption. See "THE CONVERSION -
Principal Effects of the Conversion -- Tax Consequences."
-6-
<PAGE>
MARKET FOR THE COMMON SHARES
There is presently no market for the Common Shares. The existence of a
market in the Common Shares upon the completion of the Conversion will depend
upon the presence in the marketplace of both willing buyers and willing sellers
at any given time. It is expected that the Common Shares will be traded in the
over-the-counter market and will be quoted through brokers participating on the
Nation Daily Quotation Service (the "NDQS"). Because of the limited size of the
Offering, however, it is unlikely that an active market for the Common Shares
will develop after the completion of the Conversion or, if such market does
develop, that it will continue. See "RISK FACTORS - Limited Market for the
Common Shares" and "MARKET FOR THE COMMON SHARES."
DIVIDEND POLICY
The declaration and payment of dividends by the Holding Company will be
subject to the discretion of the Board of Directors of the Holding Company, to
the earnings and financial condition of the Holding Company and to general
economic conditions. If the Board of Directors of the Holding Company
determines in the exercise of its discretion that the net income, capital and
consolidated financial condition of the Holding Company and the general economy
justify the declaration and payment of dividends, the Board of Directors of the
Holding Company may authorize the payment of dividends on the Common Shares,
subject to the limitation under Ohio law that a corporation may pay dividends
only out of surplus. There can be no assurance that dividends will be paid on
the Common Shares or, if paid, will continue to be paid.
BENEFITS OF THE CONVERSION TO DIRECTORS, OFFICERS AND EMPLOYEES OF THE HOLDING
COMPANY AND THE BANK
GENERAL. Among the factors considered by the Board of Directors of the Bank
in making the decision to pursue the Conversion is the ability of the Holding
Company and the Bank to utilize various types of stock benefit plans to attract
and retain qualified directors and employees. See "THE CONVERSION - Reasons for
the Conversion."
EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the Conversion, the
Holding Company has established the ESOP, which intends to purchase 8.0% of the
Common Shares issued in the Conversion. All full-time employees of the Holding
Company and the Bank who meet certain age and years of service criteria will be
eligible to participate in the ESOP. See "MANAGEMENT - Stock Benefit Plans --
Employee Stock Ownership Plan."
STOCK OPTION PLAN. After the Conversion, the Holding Company intends to
establish a stock option and incentive plan (the "Stock Option Plan"). Under
OTS regulations, the Stock Option Plan cannot be implemented for at least six
months after the completion of the Conversion. See "MANAGEMENT - Stock Benefit
Plans -- Stock Option Plan." The Board of Directors of the Holding Company
anticipates that a number of shares equal to 10% of the Common Shares issued in
the Conversion will be reserved for issuance to directors, officers and
employees under the Stock Option Plan. The Stock Option Plan will be
administered by a committee comprised of three directors who are not employees
of the Holding Company (the "Committee"). Persons eligible for Awards under the
Stock Option Plan will consist of directors and managerial and other key
employees of the Holding Company or the Bank who hold positions with significant
responsibilities or whose performance or potential contribution, in the judgment
of the Committee, will benefit the future success of the Holding Company or the
Bank. The Committee will consider the position, duties and responsibilities of
the directors and employees of the Holding Company and the Bank, the value of
their services to the Holding Company and the Bank and any other factors the
Committee may deem relevant. No determination has been made with respect to
option recipients.
Based on the purchase price of $10 per share in the Conversion, the
aggregate market value of shares which could be issued under the Stock Option
Plan is between $297,500 and $462,875, based on the Valuation Range. Under OTS
regulations, if the Stock Option Plan is implemented during the first year after
the Conversion, the following restrictions will apply: (i) the number of shares
that may be awarded under the Stock Option Plan to directors who are not full-
time employees of the Holding Company or the Bank cannot exceed 5% of the plan
shares per person and 30% of the plan shares in the aggregate, or $23,144 and
$138,863, respectively, based on a per share value of $10 and the adjusted
maximum of the Valuation Range; (ii) the number of shares that may be awarded to
any individual who is a full-time employee of the Holding Company or the Bank
may not exceed 25% of the plan shares, or $115,720 based on a per share value of
$10 and the adjusted maximum of the Valuation Range; and (iii) stock options
must be awarded with an exercise price of at least fair market value at the
time of grant. The ultimate value of any option granted at fair market value
will depend on future
-7-
<PAGE>
appreciation in the fair market value of the shares to which the option relates.
No decision has been made as to anticipated awards under the Stock Option Plan.
RECOGNITION AND RETENTION PLAN. The Bank intends to establish a
recognition and retention plan (the "RRP") after the Conversion. Under OTS
regulations, the RRP cannot be implemented for at least six months after the
completion of the Conversion. See "MANAGEMENT - Stock Benefit Plans --
Recognition and Retention Plan." The Board of Directors of the Bank anticipates
that a number of shares equal to 4.0% of the Common Shares sold in the
Conversion will be purchased by or issued to the RRP. Shares held in the RRP
will be available for awards to selected directors, officers and employees of
the Bank. The RRP will be administered by a committee comprised of three
directors who are not employees of the Bank (the "RRP Committee"). In selecting
the directors and employees to whom awards will be granted and the number of
shares covered by such awards, the RRP Committee will consider the position,
duties and responsibilities of the directors and employees, the value of their
services to the Bank and any other factors the RRP Committee may deem relevant.
No determination has been made with respect to RRP award recipients.
Assuming the purchase of a number of shares equal to 4.0% of the Common
Shares issued in the Conversion at a purchase price of $10 per share, the shares
available for distribution under the RRP will have an aggregate market value of
between $119,000 and $185,150, based on the Valuation Range. See "PRO FORMA
DATA" for a discussion of the impact of the RRP on pro forma earnings per share.
Under OTS regulations, if the RRP is implemented during the first year
after the Conversion, the number of shares awarded to directors who are not
full-time employees of the Holding Company cannot exceed 5% of the plan shares
per person and 30% of the plan shares in the aggregate, or $9,258 and $55,545,
respectively, based on a per share value of $10 at the adjusted maximum of the
Valuation Range, and the number of shares awarded to any individual who is a
full-time employee of the Holding Company or its subsidiaries cannot exceed 25%
of the plan shares, or $46,288 based on a per share value of $10 at the adjusted
maximum of the Valuation Range. No decision has been made as to anticipated
awards under the RRP.
EMPLOYMENT AGREEMENT. In connection with the Conversion, the Bank will
enter into an employment agreement with Laird L. Lazelle, the President of the
Bank. The employment agreement with Mr. Lazelle will be for a term of three
years, with a salary not less than $85,000. The employment agreement also will
provide for severance payments if the agreement is terminated prior to the
expiration of the term upon a change of control of the Bank or for any reason
other than just cause, as defined therein. The payment that would have been
made to Mr. Lazelle pursuant to the proposed employment agreement, assuming
termination of his employment agreement at March 31, 1996, following a change of
control of the Bank, would have been approximately $195,000. See "MANAGEMENT -
Employment Agreement."
INVESTMENT RISKS
An investment in the Common Shares involves certain risks. Special
attention should be given to the matters discussed under "RISK FACTORS -
Interest Rate Risk; - Low Return on Assets and Return on Equity; - Competition
in Market Area; - Legislation and Regulation Which May Adversely Affect
Operations and Earnings; - Potential Impact of Benefit Plans on Net Earnings and
Shareholders' Equity; - Limited Market for the Common Shares; - Price of the
Common Shares Upon Resale; - Anti-Takeover Provisions Which May Discourage Sales
of Common Shares for Premium Prices; and - Reliance on Key Personnel."
-8-
<PAGE>
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following table sets forth certain information concerning the financial
condition, earnings and other data regarding the Bank at the dates and for the
periods indicated. Such information should be read in conjunction with the
financial statements and notes thereto appearing elsewhere herein. In the
opinion of management, financial information at March 31, 1996 and 1995, and for
the nine months then ended reflect all adjustments (consisting only of normal
recurring accruals) which are necessary to present fairly the results for such
periods.
<TABLE>
<CAPTION>
At March 31, At June 30,
----------------- -----------------------------------------------
SELECTED FINANCIAL CONDITION 1996 1995 1995 1994 1993 1992 1991
AND OTHER DATA: ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Total amount of:
Assets $31,738 $29,898 $31,849 $31,056 $31,635 $30,091 $27,470
Cash and equivalents 4,236 1,477 3,943 2,462 4,639 3,110 2,949
Investment securities 674 1,406 1,310 2,691 1,644 1,242 248
Mortgage-backed securities 4,957 5,843 5,532 6,593 5,303 3,167 1,132
Loans receivable, net 21,359 20,670 20,511 18,794 19,550 22,038 22,663
Deposits 27,780 25,777 27,737 27,348 29,062 27,617 25,363
FHLB advances 842 1,208 1,192 955 - - -
Retained earnings 2,772 2,673 2,706 2,581 2,385 2,259 2,025
Number of full-service offices 1 1 1 1 1 1 1
<CAPTION>
SUMMARY OF EARNINGS:
For the nine
months ended
March 31, Year ended June 30,
---------------- ----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $1,783 $1,593 $2,162 $2,069 $2,297 $2,479 $2,446
Interest expense 1,207 988 1,368 1,339 1,499 1,713 1,855
------ ------ ------ ------ ------ ------ ------
Net interest income 576 605 794 730 798 766 591
Provision for loan losses 34 9 12 33 83 5 5
------ ------ ------ ------ ------ ------ ------
Net interest income after
provision for loan losses 542 596 782 697 715 761 586
Other income 52 47 70 204 136 135 86
General, administrative and
other expense 496 509 679 627 639 537 514
------ ------ ------ ------ ------ ------ ------
Net income before provision for
income taxes 98 134 173 274 212 359 158
Provision for income taxes 32 43 48 79 85 125 39
Net income $ 66 $ 91 $ 125 $ 195 $ 127 $ 234 $ 119
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
-9-
<PAGE>
<CAPTION>
SELECTED FINANCIAL RATIOS: At or for the nine
months ended
March 31, At or for the year ended June 30,
-------------------- -----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets 0.28% 0.41% 0.41% 0.62% 0.40% 0.81% 0.45%
Return on average equity 3.20 4.66 4.72 7.92 5.42 10.89 6.02
Interest rate spread 2.00 2.33 2.25 2.02 2.22 2.27 1.75
Net interest margin 2.47 2.73 2.66 2.35 2.57 2.69 2.28
Non-interest expense to average
assets 2.08 2.25 2.23 1.99 2.03 1.85 1.96
Average equity to average
assets 8.66 8.73 8.71 7.80 7.42 7.40 7.53
Equity to assets, end of
period 8.73 8.94 8.50 8.32 7.54 7.51 7.37
Nonperforming assets to
average assets 0.35 0.23 0.64 0.29 1.05 0.96 1.00
Nonperforming loans to
total loans 0.52 0.34 0.95 0.49 1.70 0.98 1.16
Asset quality ratios:
Allowance for loan losses
to gross loans 0.48 0.47 0.47 0.38 0.51 0.07 0.04
Allowance for loan losses
to nonperforming loans 93.69 140.00 50.52 77.42 30.33 6.98 3.44
Net (charge-offs) recoveries
to average loans (.18) .10 .07 (.32) .02 - -
Average interest-earning
assets to average interest-
bearing liabilities 109.01 108.99 108.92 107.70 107.33 106.97 107.50
</TABLE>
-10-
<PAGE>
RISK FACTORS
INVESTMENT IN THE COMMON SHARES INVOLVES CERTAIN RISKS. BEFORE INVESTING,
PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY THE FOLLOWING MATTERS.
INTEREST RATE RISK
The Bank's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income from loans
and investments and interest expense on deposits and borrowings. Like most
thrift institutions, the interest income and interest expense of the Bank change
as the interest rates on mortgages, securities and other assets and on deposits
and other liabilities change. Interest rates generally may change because of
general economic conditions, the policies of various regulatory authorities and
other factors beyond the Bank's control. The interest rates on specific assets
and liabilities of the Bank will change or "reprice" in accordance with the
contractual terms of the asset or liability instrument and in accordance with
customer reaction to general economic trends.
In the event that interest rates rise from their recent levels, the Bank's
net interest income could be expected to be negatively affected if the Bank's
liabilities reprice at a faster rate than its assets. Moreover, rising interest
rates could negatively affect the Bank's earnings due to diminished loan demand.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Asset and Liability Management."
LOW RETURN ON ASSETS AND RETURN ON EQUITY
For the last five years, the Bank's return on assets has ranged from a high
of .81% in 1992 to a low of .41% for 1995, with a median of .45%, and its return
on equity has ranged from a high of 10.89% for 1992 to a low of 4.72% for 1995,
with a median of 6.02%. For the nine months ended March 31, 1996, the Bank's
return on assets declined even further, to .28%, and its return on equity
declined to 3.20%. These ratios are significantly lower than those of
comparable institutions. While different factors have contributed to the Bank's
results each year, the persistent challenge facing the Bank is its cost of
funds. Although the Bank has taken steps to lower its cost of funds by
eliminating adjustable-rate retirement accounts, the Bank still has nearly 90%
of its deposits in certificates of deposit. Certificates of deposit are
typically more expensive than passbook savings and transaction accounts, but the
Bank has had limited success attracting the lower cost account types because of
the limitations of its downtown location. Although the Conversion proceeds will
provide the Bank with a source of interest-earning assets without an attendant
carrying cost, there can be no assurance that the Bank's return on assets will
improve substantially after the Conversion. Moreover, the increased capital
resulting from the Conversion is expected to further reduce the Bank's return on
equity for a prolonged period after the Conversion, which may adversely affect
the market value of the Common Shares.
COMPETITION IN MARKET AREA
The Bank faces strong direct competition for deposits and loans from
commercial banks, other savings associations, credit unions and mortgage banking
companies. Mortgage banking companies and other non-FDIC insured providers of
financial services are not subject to the same degree of regulatory oversight as
savings associations and thus have greater operational flexibility, without the
costs and burdens associated with compliance with OTS and FDIC regulations. The
Bank is also at a competitive disadvantage due to its small size and single
office location, which result in limited marketing capability and restricted
ability to take advantage of technological advancements. Because its market
area is limited to Hamilton County, Ohio and adjacent counties, a pronounced
economic downturn in such geographic area could be expected to have an adverse
impact on the Bank's performance. Because of the diversity of the Greater
Cincinnati economy and the distribution of the labor force over numerous
industry sectors and employers, however, the local economy tends to respond to
national economic cycles. See "THE BUSINESS OF THE BANK - Market Area."
LEGISLATION AND REGULATION WHICH MAY ADVERSELY AFFECT OPERATIONS AND EARNINGS
The Bank is subject to extensive regulation by the OTS, the FDIC and the
Division. As a savings and loan holding company, the Holding Company will also
be subject to regulation and examination by the OTS. Such supervision and
regulation of the Bank and the Holding Company are intended primarily for the
protection of depositors and not for the maximization of shareholder value and
may affect the ability of the Holding Company to engage in various business
activities and may have an adverse effect on the Holding Company's net earnings.
See "REGULATION."
-11-
<PAGE>
Deposit insurance assessments paid by healthy savings associations exceeded
those paid by healthy commercial banks by approximately $.19 per $100 in
deposits in late 1995 and will exceed such assessments by $.23 per $100 in
deposits in 1996. This premium disparity could have a negative competitive
impact on the Bank and other institutions with SAIF deposits. Congress is
considering legislation to recapitalize the SAIF and eliminate the significant
premium disparity. The pending recapitalization plan provides for the payment
of a special assessment which has been estimated to be as high as $.85 per $100
of SAIF-insured deposits and as low as as $.69 per $100 of SAIF-insured deposits
held at March 31, 1995. Based on the Bank's $25.8 million in deposits at March
31, 1995, if the special assessment is enacted into law, the Bank will pay an
additional assessment of between $178,000 and $219,000. Although the assessment
should be tax-deductible, it will reduce earnings and capital for the quarter in
which it is reported.
The recapitalization plan also provides for the merger of the SAIF and BIF
and for the elimination of the federal thrift charter or of the separate
federal regulation of thrifts. Under the legislation, the OTS would cease to
exist and the Bank would be regulated under federal law as a bank and, as a
result, would become subject to the more restrictive activity limitations
imposed on national banks. Legislation has been passed by Congress, but not yet
signed by the President, which eliminates the deduction for income tax purposes
of amounts designated as reserved for bad debts. See Note 12 of the Notes to
the Financial Statements. Such legislation requires, generally, that bad debt
reserves taken by savings associations after 1987 using the percentage of
taxable income method be included in future taxable income of the Bank over a
six-year period, beginning in the 1996 tax year. The requirement that the Bank
convert to a bank charter and the proposed tax legislation could have an adverse
effect on the Holding Company and the Bank, although until such proposals are
acted upon by Congress, the extent of such effect is uncertain.
No assurances can be given that the SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. If the proposed legislation
is not adopted, SAIF premiums may increase and the disparity between BIF and
SAIF premiums may become more pronounced, which would negatively impact the
Bank. See "REGULATION - Federal Deposit Insurance Corporation -- Deposit
Insurance."
POTENTIAL IMPACT OF BENEFIT PLANS ON NET EARNINGS AND SHAREHOLDERS' EQUITY
Statement of Position No. 93-6, "Employers' Accounting for Employee Stock
Ownership Plans" ("SOP 93-6"), published by the American Institute of Certified
Public Accountants (the "AICPA") requires an employer to record compensation
expense in an amount equal to the fair value of shares committed to be released
to employees from an employee stock ownership plan. If the Common Shares
acquired by the ESOP appreciate in value over time, the Holding Company may
incur increased compensation expense relating to the ESOP. See "PRO FORMA DATA"
for pro forma information which includes the effects of SOP 93-6 on net earnings
and shareholders' equity.
If the ESOP is unable to purchase all or part of the Common Shares for
which it subscribes, the ESOP may purchase Common Shares on the open market or
may purchase authorized but unissued shares from the Holding Company. If the
ESOP purchases authorized but unissued shares from the Holding Company, such
purchases would have a dilutive effect of up to approximately 7.4% on the
interests of the Holding Company's shareholders.
The ESOP loan will be repaid through cash contributions to the ESOP from
the Bank and the use of dividends paid on the Common Shares, if any. The Bank
currently anticipates that the ESOP loan will be repaid over a period of seven
years. The amount of cash or other assets that can be contributed to the ESOP
each year is limited by certain IRS regulations. The Bank intends to make the
maximum contribution to the ESOP permitted by such regulations, which could
result in repayment of the ESOP loan in fewer than seven years. A shorter
repayment period could result in increased compensation expense during the years
in which payments are made on the ESOP loan.
It is anticipated that, following the consummation of the Conversion, the
Holding Company will adopt the Stock Option Plan and the RRP. The shares issued
to participants under the RRP could be newly issued shares or shares purchased
in the market. In the event the shares issued under the RRP consist of newly
issued common shares, the interests of existing shareholders will be diluted.
Shares issued pursuant to the exercise of options under the Stock Option Plan
will be authorized but unissued shares, unless the Holding Company has treasury
shares at the time of exercise and elects to use the treasury shares. At the
midpoint of the estimated Valuation Range, if all shares under these plans were
newly issued and the exercise price for the option shares were equal to the $10
per share purchase price in the Conversion, the pro forma book value per share
of the outstanding common shares at March 31, 1996, would decrease from $16.00
to $15.77. See "PRO FORMA DATA" and "MANAGEMENT - Stock Benefit Plans."
-12-
<PAGE>
LIMITED MARKET FOR THE COMMON SHARES
There is presently no market for the Common Shares. The existence of a
market for the Common Shares upon the completion of the Conversion will depend
upon the presence in the marketplace of both willing buyers and willing sellers
at any given time. It is expected that the Common Shares will be traded in the
over-the-counter market and will be quoted through brokers participating on the
NDQS. Because of the limited size of the Offering, however, it is unlikely that
an active market for the Common Shares will develop after the completion of the
Conversion or, if such market does develop, that it will continue. Investors
should consider, therefore, the potentially illiquid and long-term nature of an
investment in the Common Shares.
PRICE OF THE COMMON SHARES UPON RESALE
The aggregate offering price of the Common Shares is based upon an
independent appraisal of the Bank. The appraisal is not a recommendation as to
the advisability of purchasing Common Shares. See "THE CONVERSION - Pricing and
Number of Common Shares to be Sold." No assurance can be given that persons
purchasing Common Shares will thereafter be able to sell such shares at a price
at or above the offering price. The appraisal of the pro forma market value of
the Bank, as converted, does not represent Keller's opinion as to the price at
which the Common Shares may trade. There can be no assurance that the Common
Shares may later be resold at the price at which they are purchased in
connection with the Conversion.
ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE SALES OF COMMON SHARES FOR PREMIUM
PRICES
The Articles of Incorporation and Code of Regulations of the Holding
Company and the Amended Articles of Incorporation of the Bank contain certain
provisions that could deter or prohibit non-negotiated changes in the control of
the Holding Company and the Bank. Such provisions include a restriction on the
direct or indirect acquisition of more than 10% of the outstanding shares of the
Bank by any person during the five-year period following the effective date of
the Conversion, the ability to issue additional common shares and the
requirement of a 75% supermajority voting requirement for the approval of
certain matters, including mergers, acquisitions of a majority of the shares of
the Holding Company or the transfer of substantially all of the assets of the
Holding Company, if the Board of Directors recommends against the approval of
any such matter. See "DESCRIPTION OF AUTHORIZED SHARES" and "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY AND THE BANK."
Officers and directors of the Holding Company and their Associates are
expected to purchase approximately 21% of the shares issued in connection with
the Conversion. In addition, officers of the Holding Company will be able to
vote shares allocated to their accounts under the ESOP, which intends to
purchase approximately 8% of the shares issued in connection with the
Conversion. The ESOP trustee must vote shares allocated under the ESOP as
directed by the participants to whom the shares are allocated and vote
unallocated shares in his sole discretion. The RRP trustees, who are expected
to be three directors of the Bank, will vote shares awarded but not distributed
under the RRP in their discretion. In view of the various provisions of the
Articles of Incorporation and the stock benefit plans of the Holding Company and
the Bank, the ESOP trustee, the RRP Committee and the directors and officers of
the Holding Company and the Bank will have a significant influence over the vote
on any takeover attempt or proxy contest and may be able to defeat such a
proposal. The Boards of Directors of the Holding Company and the Bank believe
that such provisions will be in the best interests of shareholders by
encouraging prospective acquirors to negotiate a proposed acquisition with the
directors. Such provisions could, however, adversely affect the market value of
the Common Shares or deprive shareholders of the opportunity to sell their
shares for premium prices.
Federal law and Ohio law also restrict the acquisition of control of the
Holding Company and the Bank. Regulations of the OTS also restrict the ability
of any person to acquire the beneficial ownership of more than 10% of any class
of voting equity security of the Bank or the Holding Company without the prior
written approval of or lack of objection by the OTS. Any or all of these
provisions may facilitate the perpetuation of current management and discourage
proxy contests or takeover attempts not first negotiated with the Board of
Directors. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE
BANK."
-13-
<PAGE>
RELIANCE ON KEY PERSONNEL
The Bank depends to a considerable degree on a limited number of key
management personnel. In particular, the loss of the services of Laird L.
Lazelle, the President and Chief Executive Officer of the Bank, could adversely
impact the Bank. In order to minimize the likelihood of such negative impact,
the Bank intends to enter into an employment agreement with Mr. Lazelle. The
bank maintains no "key man" life insurance policy with respect to Mr. Lazelle or
any other officer or director. See "MANAGEMENT - Employment Agreement."
USE OF PROCEEDS
The following table presents the estimated gross and net proceeds from the
sale of the Common Shares in connection with the Conversion based on the
Valuation Range:
<TABLE>
<CAPTION>
Minimum Mid-point Maximum Maximum, as adjusted
------- --------- ------- --------------------
<S> <C> <C> <C> <C>
Gross proceeds $2,975,000 $3,500,000 $4,025,000 $4,628,750
Less estimated expenses 251,000 251,000 251,000 251,000
---------- ---------- ---------- ----------
Total net proceeds $2,724,000 $3,249,000 $3,774,000 $4,377,750
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The net proceeds may vary depending upon financial and market conditions at
the time of the completion of the Offering. See "THE CONVERSION - Pricing and
Number of Common Shares to be Sold." Actual expenses may be more or less than
estimated. See "THE CONVERSION - Plan of Distribution ."
The Holding Company will retain 50% of the net proceeds from the sale of
the Common Shares, approximately $1.62 million at the mid-point of the Valuation
Range. Such proceeds will be used by the Holding Company to lend up to
$370,300, at the maximum, as adjusted, of the Valuation Range, to the ESOP to
acquire Common Shares in the Offering and for general corporate purposes, which
may include dividends, repurchases of Common Shares and acquisitions of other
financial institutions. The Holding Company presently has no plans or
agreements relating to any such acquisitions or repurchases. OTS regulations
generally prohibit stock repurchases in the six months following the completion
of the Conversion, without the prior approval of the OTS. See "THE CONVERSION -
Restrictions on Repurchase of Common Shares."
The remainder of the net proceeds received from the sale of the Common
Shares, approximately $1.62 million at the mid-point of the Valuation Range,
will be invested by the Holding Company in the capital stock to be issued by the
Bank to the Holding Company as a result of the Conversion. Such investment will
increase the regulatory capital of the Bank and will permit the Bank to expand
its lending and investment activities and to enhance customer services. The
Bank anticipates that such net proceeds will be used to originate mortgage
loans.
The following table presents the anticipated use of the net proceeds:
<TABLE>
<CAPTION>
Minimum Mid-point Maximum Maximum, as adjusted
---------------------- --------------------- ------------------- ----------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
---------------------- --------------------- -------------------- -----------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proceeds to be
invested in capital $1,362 50.0% $1,625 50.0% $1,887 50.0% $2,189 50.0%
stock of the Bank
Proceeds to be
retained by the 1,124 41.3 1,344 41.4 1,565 41.5 1,819 41.5
Holding Company
Loan to the ESOP 238 8.7 280 8.6 322 8.5 370 8.5
------ ----- ------ ----- ------ ----- ------ ------
Total net proceeds $2,724 100.0% $3,249 100.0% $3,774 100.0% $4,378 100.0%
------ ----- ------ ----- ------ ----- ------ ------
------ ----- ------ ----- ------ ----- ------ ------
</TABLE>
14
<PAGE>
MARKET FOR THE COMMON SHARES
There is presently no market for the Common Shares. The existence of a
market for the Common Shares upon the completion of the Conversion will depend
upon the presence in the marketplace of both willing buyers and willing sellers
at any given time. It is expected that the Common Shares will be traded in the
over-the-counter market and will be quoted through brokers participating on the
NDQS. Because of the limited size of the Offering, however, it is unlikely that
an active market for the Common Shares will develop after the completion of the
Conversion or, if such market does develop, that it will continue. Investors
should consider, therefore, the potentially illiquid and long-term nature of an
investment in the Common Shares. See "RISK FACTORS - Limited Market for the
Common Shares."
The appraisal of the pro forma market value of the Bank, as converted, does
not represent Keller's opinion as to the price at which the Common Shares may
trade. There can be no assurance that the Common Shares may later be resold at
the price at which they are purchased in connection with the Conversion.
DIVIDEND POLICY
The declaration and payment of dividends by the Holding Company will be
subject to the discretion of the Board of Directors of the Holding Company, to
the earnings and financial condition of the Holding Company and to general
economic conditions. If the Board of Directors of the Holding Company
determines in the exercise of its discretion that the net income, capital and
consolidated financial condition of the Holding Company and the general economy
justify the declaration and payment of dividends by the Holding Company, the
Board of Directors of the Holding Company may authorize the payment of dividends
on the Common Shares, subject to the limitation under Ohio law that a
corporation may pay dividends only out of surplus. There are no OTS limits or
other regulatory limits on the payment of dividends by the Holding Company.
There can be no assurance that dividends will be paid on the Common Shares or,
if paid, will continue to be paid.
Other than earnings on the investment of the proceeds retained by the
Holding Company, the only source of income of the Holding Company will be
dividends periodically declared and paid by the Board of Directors of the Bank
on the common shares of the Bank held by the Holding Company. The declaration
and payment of dividends by the Bank to the Holding Company will be subject to
the discretion of the Board of Directors of the Bank, to the earnings and
financial condition of the Bank, to general economic conditions and to federal
and state restrictions on the payment of dividends by thrift institutions.
Under regulations of the OTS applicable to converted savings associations, the
Bank will not be permitted to pay a cash dividend on its capital stock after the
Conversion if its regulatory capital would, as a result of the payment of such
dividend, be reduced below the amount required for the Liquidation Account or
the applicable regulatory capital requirement prescribed by the OTS. See "THE
CONVERSION - Principal Effects of the Conversion -- Liquidation Account" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Liquidity and Capital Resources." The Bank may not pay a dividend
unless such dividend also complies with a regulation of the OTS limiting capital
distributions by savings associations. Capital distributions, for purposes of
such regulation, include, without limitation, payments of cash dividends,
repurchases and certain other acquisitions by an association of its shares and
payments to stockholders of another association in an acquisition of such other
association. See "REGULATION - Office of Thrift Supervision -- Limitations on
Capital Distributions."
-15-
<PAGE>
REGULATORY CAPITAL COMPLIANCE
The following table sets forth the historical and pro forma regulatory
capital of the Bank at March 31, 1996, based on the receipt of 50% of the net
proceeds of the sale of the number of Common Shares indicated. Estimated
expenses used in determining the net proceeds are $251,000:
<TABLE>
<CAPTION>
Pro forma capital at March 31, 1996, assuming the sale of:
----------------------------------------------------------------------------------------------------------------
297,500 350,000 402,500 462,875
Common Shares Common Shares Common Shares Common Shares
Historical at (offering price (offering price (offering price (offering price
March 31, 1996 of $10.00 per share) of $10.00 per share) of $10.00 per share) of $10.00 per share)
-------------------- -------------------- -------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------ ------ ------ ------ ------- ------ ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital under
generally
accepted
accounting
principles, before
adjustments(1) $2,772 8.73% $4,134 12.40% $4,397 13.07% $4,659 13.72% $4,961 14.46%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Current tangible
capital:
Capital level $2,772 8.73% $4,134 12.40% $4,397 13.07% $4,659 13.72% $4,961 14.46%
Requirement(2) 476 1.50 500 1.50 505 1.50 509 1.50 514 1.50
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess $2,296 7.23% $3,634 10.90% $3,892 11.57% $4,150 12.22% $4,447 12.96%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Current core
capital:
Capital level $2,772 8.73% $4,134 12.40% $4,397 13.07% $4,659 13.72% $4,961 14.46%
Requirement(2) 952 3.00 1,000 3.00 1,009 3.00 1,018 3.00 1,029 3.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess $1,820 5.73% $3,134 9.40% $3,388 10.07% $3,641 10.72% $3,932 11.46%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Current risk-based
capital: (1)
Capital level(3) $2,868 19.59% $4,230 28.28% $4,493 29.91% $4,755 31.53% $5,057 33.37%
Requirement(2) 1,171 8.00 1,197 8.00 1,202 8.00 1,207 8.00 1,212 8.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess $1,697 11.59% $3,033 20.28% $3,291 21.91% $3,548 23.53% $3,845 25.37%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
</TABLE>
____________________________
(1) Assumes that the net proceeds received by the Bank will be invested in
assets having a risk-weighting of 0%.
(2) Tangible and core capital are shown as a percent of adjusted total assets
and risk-based capital levels are shown as a percent of risk-weighted, assets in
accordance with OTS regulations. Reflects a reduction for unearned ESOP and RRP
shares equal to 8% and 4%, respectively, of the Common Shares sold in the
Offering.
(3) Risk-weighted capital includes $96,000 of qualifying general loan loss
allowances.
-16-
<PAGE>
CAPITALIZATION
Set forth below is the historical capitalization of the Bank at March 31,
1996, and the pro forma consolidated capitalization of the Holding Company as
adjusted to give effect to the sale of Common Shares based on the Valuation
Range and estimated expenses. See "USE OF PROCEEDS" and "THE CONVERSION -
Pricing and Number of Common Shares to be Sold."
<TABLE>
<CAPTION>
Pro forma capitalization of the Holding Company
at March 31, 1996, assuming the sale of:
---------------------------------------------------------------------------
Historical 297,500 350,000 402,500 462,875
capitalization Common Shares Common Shares Common Shares Common Shares
of the Bank at (Offering price of (Offering price of (Offering price of (Offering price of
March 31, 1996 $10.00 per share) $10.00 per share) $10.00 per share) $10.00 per share)
-------------- ----------------- ------------------ ------------------ ------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits(1) $27,780 $27,780 $27,780 $27,780 $27,780
FHLB advances 842 842 842 842 842
------- ------- ------- ------- -------
Total deposits and borrowed funds $28,662 $28,662 $28,662 $28,662 $28,662
Capital and retained earnings:
Common Shares, no par value per
share: authorized - 1,000,000
shares; assumed outstanding - as - - - - -
shown(2)
Additional paid-in capital (3) - 2,724 3,249 3,774 4,378
Retained earnings 2,772 2,772 2,772 2,772 2,772
Less:
Common Shares acquired by the - (238) (280) (322) (370)
ESOP(4)
Common Shares acquired by the - (119) (140) (161) (185)
RRP(5)
Total capital and retained earnings $2,772 $5,139 $5,601 $6,063 $6,595
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
____________________________
(1) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Shares in the Conversion. Any such
withdrawals will reduce pro forma deposits by the amount of such
withdrawals.
(2) The number of Common Shares to be issued will be determined on the basis of
the final valuation of the Bank. See "THE CONVERSION - Pricing and Number
of Common Shares to be Sold." Common Shares assumed outstanding does not
reflect the issuance of any common shares which may be reserved for
issuance under the Stock Option Plan. See "MANAGEMENT - Stock Benefit
Plans -- Stock Option Plan."
(3) Reflects receipt of the proceeds from the sale of the Common Shares, net of
estimated expenses, at the minimum, mid-point, maximum and maximum, as
adjusted, of the Valuation Range.
(4) Assumes that 8.0% of the Common Shares sold in connection with the
Conversion will be acquired by the ESOP with funds borrowed by the ESOP
from the Holding Company for a term of seven years at a rate of 6.11%. The
ESOP loan will be secured solely by the Common Shares purchased by the
ESOP. The Bank has agreed, however, to use its best efforts to fund the
ESOP based on future earnings, which best efforts funding will reduce the
Bank's total capital and retained earnings, as reflected in the table. If
the ESOP is unable to purchase all or part of the Common Shares for which
it subscribes, the ESOP may purchase common shares on the open market or
may purchase authorized but unissued shares of the Holding Company. If the
ESOP purchases authorized but unissued shares from the Holding Company,
such purchases would have a dilutive effect of approximately 7.4% on the
interests of the Holding Company's shareholders. See "MANAGEMENT - Stock
Benefit Plans -- Employee Stock Ownership Plan" and "RISK FACTORS -
Potential Impact of Benefit Plans on Net Earnings and Shareholders'
Equity."
(5) Assumes that 4.0% of the Common Shares will be acquired in the open market
by the RRP after the Conversion at a price of $10 per share. There can be
no assurance that the RRP will be implemented, that a sufficient number of
shares will be available for purchase by the RRP, that shares could be
purchased at a price of $10 per share or that the shareholders will approve
the RRP if it is implemented during the first year after the Conversion. A
higher price per share, assuming the purchase of the entire 4.0% of the
shares, would reduce pro forma net earnings and pro forma shareholders'
equity. The RRP may purchase shares in the open market or may purchase
authorized but unissued shares from the Holding Company. If authorized but
unissued shares are purchased, the interests of existing shareholders would
be diluted approximately 3.85%. See "MANAGEMENT - Stock Benefit Plans --
Recognition and Retention Plan."
-17-
<PAGE>
PRO FORMA DATA
Set forth below are the pro forma consolidated net income of the Holding
Company for the nine months ended March 31, 1996, and for the year ended June
30, 1995, and the pro forma consolidated shareholders' equity of the Holding
Company at March 31, 1996, and June 30, 1995, along with the related pro forma
earnings per share and pro forma shareholders' equity per share amounts, giving
effect to the sale of the Common Shares in connection with the Conversion. The
computations are based on the assumed issuance of 297,500 Common Shares (minimum
of the Valuation Range), 350,000 Common Shares (mid-point of the Valuation
Range), 402,500 Common Shares (maximum of the Valuation Range) and 462,875
Common Shares (15% above the maximum of the Valuation Range). See "THE
CONVERSION - Pricing and Number of Common Shares to be Sold." The pro forma
data is based on the following assumptions: (i) the sale of the Common Shares
occurred at the beginning of the period and yielded the net proceeds indicated;
(ii) such net proceeds were invested at the beginning of the period to yield
annualized after-tax net returns of 3.60%; and (iii) no withdrawals from
existing deposit accounts were made to purchase the Common Shares. The assumed
returns are based on the one-year U.S. Treasury bill yield of 5.45% in effect at
March 31, 1996. This rate was used as an alternative to the arithmetic average
of the Banks' interest-earning assets and interest-bearing liabilities.
Management believes that the U.S. Treasury bill yield is more indicative of the
rate of return that can be achieved on the investment of the Conversion
proceeds. Actual yields may differ, however, from the assumed returns. The pro
forma consolidated net income amounts derived from the assumptions set forth
herein should not be considered indicative of the actual results of operations
of the Holding Company that would have been attained for any period if the
Conversion had been actually consummated at the beginning of such period.
As the table demonstrates, pro forma consolidated earnings per share and
pro forma consolidated shareholders' equity per share decrease as the amount of
Common Shares sold moves from the minimum of the Valuation Range to the adjusted
maximum of the Valuation Range. Conversely, the offering price as a multiple of
pro forma earnings per share and as a percent of pro forma shareholders' equity
per share increase as the amount of Common Shares sold moves from the minimum of
the Valuation Range to the adjusted maximum of the Valuation Range.
THE PRO FORMA DATA AND ACCOMPANYING NOTES SHOULD BE READ IN CONJUNCTION
WITH THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE HEREIN. THE
PRO FORMA DATA IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT PURPORT
TO REPRESENT WHAT THE HOLDING COMPANY'S FINANCIAL POSITION OR RESULTS OF
OPERATIONS ACTUALLY WOULD HAVE BEEN HAD THE AFOREMENTIONED TRANSACTIONS BEEN
COMPLETED AS OF THE DATE OR AT THE BEGINNING OF THE PERIODS INDICATED, OR TO
PROJECT THE HOLDING COMPANY'S FINANCIAL POSITION OR RESULTS OF OPERATIONS AT ANY
FUTURE DATE OR FOR ANY FUTURE PERIOD.
-18-
<PAGE>
<TABLE>
<CAPTION>
At and for the nine months ended March 31, 1996, assuming the sale of:
------------------------------------------------------------------------------
297,500 350,000 402,500 462,875
Common Shares Common Shares Common Shares Common Shares
(Offering price of (Offering price of (Offering price of (Offering price of
$10.00 per share) $10.00 per share) $10.00 per share) $10.00 per share)
------------------ ------------------ ------------------ -----------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $2,975 $3,500 $4,025 $4,629
Estimated expenses (251) (251) (251) (251)
------ ------ ------ ------
Estimated net proceeds 2,724 3,249 3,774 4,378
Less common stock acquired by the ESOP(1) (238) (280) (322) (370)
Less common stock acquired by the RRP(1) (119) (140) (161) (185)
------ ------ ------ ------
Net cash proceeds $2,367 $2,829 $3,291 $3,823
------ ------ ------ ------
------ ------ ------ ------
Net income:
Historical $ 66 $ 66 $ 66 $ 66
Pro forma net income on net proceeds 64 76 89 102
Pro forma adjustment for the ESOP (1) (17) (20) (23) (27)
Pro forma adjustment for the RRP (2) (12) (14) (16) (19)
------ ------ ------ ------
Pro forma net income $ 101 $ 108 $ 116 $ 122
------ ------ ------ ------
------ ------ ------ ------
Per share net income:
Historical $ 0.32 $ 0.27 $ 0.23 $ 0.21
Pro forma net income on net proceeds 0.31 0.31 0.32 0.32
Pro forma adjustment for the ESOP (1) (0.08) (0.08) (0.08) (0.08)
Pro forma adjustment for the RRP (2) (0.06) (0.06) (0.06) (0.06)
------ ------ ------ ------
Pro forma earnings per share(3)(4) $ 0.49 $ 0.44 $ 0.41 $ 0.39
------ ------ ------ ------
------ ------ ------ ------
Offering price as a multiple of pro forma
earnings per share 20.41 22.73 24.39 25.64
Shareholders' equity(5):
Historical $2,772 $2,772 $2,772 $2,772
Estimated net proceeds from the sale of
Common Shares 2,724 3,249 3,774 4,378
Less unearned ESOP shares(1) (238) (280) (322) (370)
Less unearned RRP shares(2) (119) (140) (161) (185)
------ ------ ------ ------
Pro forma shareholders' equity $5,139 $5,601 $6,063 $6,595
------ ------ ------ ------
------ ------ ------ ------
Per share shareholders' equity:
Historical $ 9.32 $ 7.92 $ 6.89 $ 5.99
Estimated net proceeds 9.16 9.29 9.38 9.46
Less unearned ESOP shares(1) (0.80) (0.80) (0.80) (0.80)
Less unearned RRP shares(2) (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
Pro forma shareholders' equity per
share(3) $17.28 $16.01 $15.07 $14.25
------ ------ ------ ------
------ ------ ------ ------
Ratio of offering price to pro forma 57.89% 62.49% 66.39% 70.19%
shareholders' equity per share
------ ------ ------ ------
------ ------ ------ ------
_____________________________
(Footnotes on page 21)
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
At and for the year ended June 30, 1995, assuming the sale of:
------------------------------------------------------------------------------
297,500 350,000 402,500 462,875
Common Shares Common Shares Common Shares Common Shares
(Offering price of (Offering price of (Offering price of (Offering price of
$10.00 per share) $10.00 per share) $10.00 per share) $10.00 per share)
------------------ ------------------ ------------------ -----------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $2,975 $3,500 $4,025 $4,629
Estimated expenses (251) (251) (251) (251)
------ ------ ------ ------
Estimated net proceeds 2,724 3,249 3,774 4,378
Less common stock acquired by the ESOP(1) (238) (280) (322) (370)
Less common stock acquired by the RRP(2) (119) (140) (161) (185)
------ ------ ------ ------
Net cash proceeds $2,367 $2,829 $3,291 $3,823
------ ------ ------ ------
------ ------ ------ ------
Net income:
Historical $ 125 $ 125 $ 125 $ 125
Pro forma net income on net proceeds 85 102 118 137
Pro forma adjustment for the ESOP(1) (22) (26) (30) (35)
Pro forma adjustment for the RRP(2) (16) (18) (21) (24)
------ ------ ------ ------
Pro forma net income $ 172 $ 183 $ 192 $ 203
------ ------ ------ ------
------ ------ ------ ------
Per share net income:
Historical $ 0.45 $ 0.38 $ 0.33 $ 0.29
Pro forma net income on net proceeds 0.31 0.31 0.32 0.32
Pro forma adjustment for the ESOP(1) (0.08) (0.08) (0.08) (0.08)
Pro forma adjustment for the RRP(2) (0.06) (0.06) (0.06) (0.06)
------ ------ ------ ------
Pro forma earnings per share(3)(6) $ 0.62 $ 0.55 $ 0.51 $ 0.47
------ ------ ------ ------
------ ------ ------ ------
Offering price as a multiple of pro forma
earnings per share 16.13 18.18 19.61 21.28
Shareholders' equity(5):
Historical $2,706 $2,706 $2,706 $2,706
Estimated net proceeds from the sale of
Common Shares 2,724 3,249 3,775 4,378
Less unearned ESOP shares(1) (238) (280) (322) (370)
Less unearned RRP shares(2) (119) (140) (161) (185)
------ ------ ------ ------
Pro forma shareholders' equity $5,073 $5,535 $5,998 $6,529
------ ------ ------ ------
------ ------ ------ ------
Per share shareholders' equity:
Historical $ 9.10 $ 7.73 $ 6.72 $ 5.85
Estimated net proceeds 9.16 9.29 9.38 9.46
Less unearned ESOP shares(1) (0.80) (0.80) (0.80) (0.80)
Less unearned RRP shares(2) (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
Pro forma shareholders' equity per share(3) $ 17.06 $ 15.82 $ 14.90 $ 14.11
------ ------ ------ ------
------ ------ ------ ------
Ratio of offering price to pro forma
shareholders' equity per share 58.64% 63.23% 67.12% 70.90%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
______________________________
(Footnotes on next page)
-20-
<PAGE>
(1) Assumes that 8.0% of the Common Shares sold in connection with the
Conversion will be purchased by the ESOP and that the funds used to acquire
such shares will be borrowed from the Holding Company with repayment
thereof secured solely by the Common Shares purchased by the ESOP. The
Bank has agreed, however, to use its best efforts to fund the ESOP based on
future earnings, which best efforts funding will reduce the income on the
equity raised in connection with the Conversion, as reflected in the table.
Assumes the level amortization of the ESOP loan over a period of seven
years, with assumed tax benefits of 34%. The amount of cash or other
assets that can be contributed to the ESOP each year is limited by certain
IRS regulations. The Bank intends to make the maximum contribution to the
ESOP permitted by such regulations, which could result in repayment of the
ESOP loan in fewer than seven years. A shorter repayment period could
result in increased compensation expense during the years in which payments
are made on the ESOP loan. See "MANAGEMENT - Employee Stock Ownership
Plan." The Board of Directors may elect to issue the ESOP shares from
authorized but unissued shares. The issuance of authorized but unissued
shares to the ESOP would have the effect of diluting the percentage
interest of existing shareholders by 7.41%.
(2) Assumes that 4.0% of the Common Shares sold in connection with the
Conversion will be purchased by the RRP after the Conversion at a price of
$10 per share and that one-fifth of the purchase price of the RRP shares
will be expensed in each of the first five years after the Conversion. If
the RRP is implemented in the first year after the completion of the
Conversion, it will be subject to various OTS requirements, including the
requirement that the RRP be approved by the shareholders of the Holding
Company. There can be no assurance that the RRP will be approved by the
shareholders, that a sufficient number of shares will be available for
purchase by the RRP or that the shares could be purchased at $10 per share.
A higher per share price, assuming the purchase of the entire 4.0% of the
shares, would reduce pro forma net earnings and pro forma shareholders'
equity. If an insufficient number of shares is available in the open
market to fund the RRP at the desired level, the Holding Company may issue
additional authorized shares. The issuance of authorized but unissued
shares in an amount equal to 4.0% of the Common Shares issued in the
Conversion would result in a 3.85% dilution in earnings per share and book
value per share on a pro forma basis. See "MANAGEMENT - Stock Benefit
Plans -- Recognition and Retention Plan."
(3) No effect has been given to shares reserved for issuance upon the exercise
of options pursuant to the Stock Option Plan. See "MANAGEMENT - Stock
Benefit Plans -- Stock Option Plan."
(4) Assumes that the ESOP holds 23,800 shares, 28,000 shares, 32,200 shares and
37,030 shares, at the minimum, mid-point, maximum and adjusted maximum of
the Valuation Range, respectively, for purposes of computing earnings per
share. Pursuant to SOP 93-6, only ESOP shares which will be allocated over
the period are included in the earnings per share calculation. The
application of SOP 93-6 to the nine months ended March 31, 1996, reflects
weighted average shares outstanding of 277,100 shares, 326,000 shares,
374,900 shares and 431,135 shares at the minimum, mid-point, maximum and
adjusted maximum of the Valuation Range, respectively. SOP 93-6 also
requires ESOP expense to be measured based on the fair value of the shares
to be allocated. The table reflects the ESOP cost at the $10 offering
price of the Common Shares in the Conversion, which may be more or less
than the fair value at which the shares are ultimately allocated.
(5) The effect of the Liquidation Account is not included in these
computations. For additional information concerning the Liquidation
Account, see "THE CONVERSION - Principal Effects of the Conversion --
Liquidation Account." The amounts shown do not reflect the federal income
tax consequences of the potential restoration of the bad debt reserves to
income for tax purposes, which would be required in the event of
liquidation. See "TAXATION - Federal Taxation."
(6) Assumes that ESOP shares of 23,800 shares, 28,000 shares, 32,200 shares and
37,030 shares, at the minimum, mid-point, maximum and adjusted maximum of
the Valuation Range, respectively, are outstanding for purposes of
computing earnings per share. Pursuant to SOP 93-6, only ESOP shares which
will be allocated over the period are included in the earnings per share
calculation. The application of SOP 93-6 to the year ended June 30, 1995,
would result in an earnings per share presentation of $.62, $.55, $.51 and
$.47, reflecting weighted average shares outstanding of 277,100 shares,
326,000 shares, 374,900 shares and 431,135 shares at the minimum, mid-
point, maximum and adjusted maximum of the Valuation Range, respectively.
SOP 93-6 also requires ESOP expense to be measured based on the fair value
of the shares to be allocated. The table reflects the ESOP cost at the $10
offering price of the Common Shares in the Conversion, which may be more or
less than the fair value at which the shares are ultimately allocated.
-21-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Bank is primarily engaged in the business of attracting savings
deposits from the general public and investing such funds in mortgage loans
secured by one- to four-family residential real estate located in the Bank's
primary market area. The Bank also originates loans for the construction or
improvement of one- to four-family residential real estate, loans secured by
multi-family residential real estate (over four units) and nonresidential real
estate and consumer loans, and invests in U.S. Government and agency
obligations, interest-bearing deposits in other financial institutions,
mortgage-backed securities and other investments permitted by law.
Prior to 1994, Foundation's primary business activity was offering
retirement savings accounts, with those specialized accounts constituting as
much as 60% of total deposits. Lending activity was not pursued aggressively,
and the loans that were originated during that time did not conform to secondary
market underwriting and documentation standards.
In 1994, the Bank experienced a management change following the death of
its long-time managing officer. The Bank's business plan was revised and a new
course was charted to diversify the business of the Bank. In general, the new
business plan focused on the restructuring of the Bank's deposit liabilities,
primarily the discontinuation of short-term adjustable-rate individual
retirement accounts ("IRAs"), and the development of a lending program that
emphasized the active origination of loans.
The restructuring of the deposit liabilities occurred over a period of
approximately 18 months in 1994 and 1995. As existing accounts matured during
that period, the account holders were encouraged to transfer their retirement
accounts into more traditional fixed-rate time deposits. At March 31, 1996, the
Bank's deposits totalled $27.8 million, approximately 40% of which were IRAs
that were invested in the Bank's standard certificate of deposit products.
To increase its lending business, the Bank has become an approved
seller/servicer for the Federal National Mortgage Association ("FNMA") and has
established correspondent lending relationships with several national
institutional mortgage investors. Other enhancements to the lending function
include the addition to the Bank's staff of a loan originator and technological
improvements which enable the Bank to approve loans quickly, often within 24
hours of receipt of an application.
The principal determinants of the Bank's net income are the Bank's net
interest income and its operating expenses. As a result of its location in
downtown Cincinnati, the Bank generally has not attracted a significant number
of passbook and checking accounts, but has instead had to rely heavily on time
deposits. Moreover, the Bank has historically had to price its time deposits at
the top of the market to attract and retain accounts. These competitive
pressures have resulted in the Bank having a higher cost of funds than its peer
group. To some extent, the Bank has compensated for its lower than average net
interest income by maintaining expenses at levels below its peer group. Because
of its high concentration of certificate accounts, which are not as labor-
intensive as transaction accounts, and the automation of the lending function,
the Bank has approximately one-third fewer employees than its peer group and a
ratio of noninterest expense to assets that is approximately 50 basis points
lower than its peer group average.
ANALYSIS OF FINANCIAL CONDITION
The Bank's assets totalled $31.7 million at March 31, 1996, a decrease in
total assets of $111,500, or 0.4%, from June 30, 1995, assets of $31.8 million.
The decrease in asset levels was attributable to the repayment of FHLB advances
in the amount of $350,000, resulting in a 29.3% reduction of total borrowings.
During the nine-month period ended March 31, 1996, investment securities
declined by $650,000, or 61.9%, as a result of maturities and prepayments, and
mortgage-backed securities balances decreased by $575,000, or 10.4%, as a result
of increased levels of repayments as the underlying mortgages were refinanced by
borrowers seeking lower interest rates. Also during the period, deposits
increased $43,000, or 0.2%, accrued expenses increased $22,000, or 18.9%, and
advances from borrowers for taxes and insurance increased $96,369, or 246.6%, as
a result of both a new loan policy requiring borrowers to maintain escrow
accounts and the timing of such tax and insurance payments.
-22-
<PAGE>
The foregoing changes funded an increase in cash and interest bearing
accounts of $293,400, or 7.4%, an increase in loans receivable of $848,500, or
4.1%, and the repayment of FHLB advances of $350,000, or 29.3%. Retained
earnings increased $66,000, or 2.4%, as a result of equivalent net income for
the nine months ended March 31, 1996.
The Bank's allowance for losses on loans totalled $103,700 at March 31,
1996, as compared to $98,100 at June 30, 1995. The $5,600 increase in the
allowance during the nine-month period was the result of a $34,000 provision and
write-offs, net of recoveries, of $28,400.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTH PERIODS ENDED MARCH 31, 1996
AND 1995
GENERAL. The Bank's net income totalled $66,000 for the nine months ended
March 31, 1996, a decrease of $25,500, or 27.9%, from the $91,500 in net
earnings for the same period in 1995. The decrease in earnings was the result
of a decrease in net interest income of $28,400, or 4.7%, and an increase in the
provision for losses on loans of $25,000, or 277.8%. These amounts were
partially offset by an increase in other income of $4,900, or 10.4%, a reduction
in general and administrative expense of $12,000, or 2.4%, and a decrease of
$11,000 in federal income taxes.
NET INTEREST INCOME. Total interest income for the nine months ended March
31, 1996, increased $190,200, or 11.9%, compared to the same period in the 1995
fiscal year, while interest expense increased $218,600, or 22.1%, resulting in a
decrease in net interest income of $28,400, or 4.7%. During the nine-month
period, which was a period of rising interest rates, the Bank's liabilities were
repricing more rapidly than its assets.
Interest income on loans increased $133,000, or 10.9%, for the nine months
ended March 31, 1996, as compared to the 1995 period. The increase resulted
from a higher portfolio balance and an increased weighted average yield. From
July 1, 1995, to March 31, 1996, the weighted average yield on loans increased
approximately 30 basis points, despite borrowers refinancing to obtain lower
interest rates. Interest income on mortgage-backed securities decreased $8,700,
or 3.6%, due to lower portfolio balances, but aided by increased yields as the
adjustable rate securities repriced upward. From July 1, 1994, to March 31,
1996, the weighted average yield on the Bank's mortgage-backed securities
increased approximately 75 basis points. Interest on investments increased
$1,100, or 2.2%, and interest on interest-bearing deposits increased $64,800, or
86.2%, due to higher balances and higher interest rates. From July 1, 1995, to
March 31, 1996, the yield on interest-bearing deposits increased approximately
75 basis points.
Interest expense on deposits for the nine months ended March 31, 1996,
increased $220,800, or 23.3%, as a result of higher interest rates paid on
deposits. From June 30, 1994, to March 31, 1996, the weighted cost of deposits
increased 114 basis points. Interest on borrowings for the nine month period
decreased $2,200, or 5.3%, from 1995 to 1996, as the level of FHLB advances was
reduced.
An increase in interest rates generally would likely cause a decline in the
Bank's net income. Because the Bank has a significant amount of fixed-rate
loans in its loan portfolio, in a rising interest rate environment the Bank's
interest income on its loan portfolio tends to increase relatively slowly as
refinancing activity declines and fixed-rate loans are prepaid at a slower pace
than in a declining interest rate environment. The eventual repricing of the
Bank's adjustable-rate loans, which comprise approximately half of the Bank's
loan portfolio, will assist the Bank in moderating a decline in net income in a
rising interest rate environment, although the index used on the Bank's ARMs
typically lags changes in market rates and the caps on interest rate changes may
restrict the full repricing of ARMs to market rates. In comparison, the
interest the Bank pays on its deposits increases more rapidly because the Bank's
deposits generally have shorter periods to repricing.
Although both interest income and the cost of funds increased during the
nine months ended March 31, 1996, interest rates have been more volatile for
assets. The downward pressure on rates during the first quarter of 1996 was
greater in the 15 year to 30 year range than in the short end of the rate curve.
Consequently, mortgage loan rates dropped rapidly, resulting in higher-yielding
mortgage loans being refinanced for lower rates. The Bank sold all of the long-
term, fixed-rate loans it originated during the period, which resulted in an
increase in lower-yielding cash and interest-bearing deposits. Rates then
stabilized in March 1996, effectively slowing the refinancing activity. The
Bank intends to reduce its cash balances by reinvesting in the mortgage market
at market rates which are currently 100 basis points higher than rates were in
February 1996.
-23-
<PAGE>
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans totalled
$34,000 for the nine months ended March 31, 1996, an increase of $25,000, or
277.8%, when compared to the $9,000 provision for the same period in 1995.
Additions to the allowance for loan losses are generally predicated on past loss
experience, the level of nonperforming loans, charge-offs, the outstanding
portfolio balance and the inherent risk related to the lending function. The
increase in loans receivable and the current period write-offs influenced the
need for an increase in the provision for loan losses. The allowance for loan
losses is a general reserve and not allocated to specific loans. After giving
effect to loan charge-offs of $28,000 incurred during the period, all of which
related to loans secured by one- to four-family residences, the provision
resulted in a net increase of approximately $5,600 in the allowance for loan
losses.
OTHER INCOME. Other income totalled $52,000 for the nine months ended
March 31, 1996, an increase of $4,900, or 10.4%, from the $47,100 in other
income for the comparable 1995 period. Gain on sale of loans increased $4,800,
or 177.0%, due to a higher volume of loan sales as loan rates declined to levels
below management's requirements for portfolio investment. Other operating
income increased $1,200, or 17.4%, which was offset by a decrease in net
investment property income of $1,100, or 2.7%, due to higher real estate taxes.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense decreased by $12,000, or 2.4%, for the nine months ended March 31,
1996, as compared to the same period in 1995. The decline resulted primarily
from a decrease in compensation, fees and benefits of $13,500, or 4.9%, which
was partially offset by an increase in franchise tax of $1,400, or 5.9%. The
decrease in compensation, fees, and benefits was due to the increase in loan
originations and the related deferral of expenses under SFAS No. 91 and the cost
cutting measures implemented by management.
FEDERAL INCOME TAXES. The provision for federal income taxes totalled
$32,100 for the nine months ended March 31, 1996, a decrease of $11,000, or
25.4%, from the $43,100 provision for the comparable 1995 period, as a result of
a reduction of $38,300, or 28.5%, in pretax earnings for the current period.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
GENERAL. The Bank's net income totalled $125,400 for the year ended June
30, 1995, a decrease of $69,900, or 35.8%, from the $195,300 in net earnings for
the 1994 fiscal year. The decrease was the result of an increase in general,
administrative and other expense of $51,200, or 8.2%, and the absence of a gain
on sale of investments of $132,400 which occurred during the 1994 fiscal year.
These decreases were partially offset by higher net interest income after
provision for loan losses of $85,000, or 12.2%, resulting from higher spreads.
NET INTEREST INCOME. Total interest income for the year ended June 30,
1995, increased $93,300, or 4.5%. The higher total interest income was
partially offset by an increase in the cost of funds of $29,000, or 2.2%,
resulting in an increase in net interest income of $64,400, or 8.8%.
Interest on loans for the year ended June 30, 1995, increased $61,000, or
3.8%, primarily as a result of a $1.7 million increase in loans receivable.
Interest on mortgage-backed securities increased $34,300, or 12.0%, which more
than offset the effects of a $1.1 million decrease in the portfolio as the
adjustable-rate securities repriced upward. Interest on investment securities
increased $41,500, or 150.2%, as the securities were held for the full year in
1995, compared to 9.5 months in 1994. Interest on interest-bearing deposits
decreased $43,500, or 27.0%, as the average amount invested declined, due to
increased mortgage demand.
Interest paid on deposits for the year ended June 30, 1995, increased
$11,700, or 0.9%, the result of a larger portfolio balance and higher rates paid
for savings. Interest on borrowings increased $17,300, or 41.2%, due to a
$300,000 six-month FHLB advance which was obtained in February 1995 and repaid
in September 1995.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year
ended June 30, 1995, was $12,000, a decrease of $20,600, or 63.2%, from the 1994
provision. The decrease was predicated on the reduction in loans 90 or more
days delinquent and loans in foreclosure.
OTHER INCOME. Other income for the year ended June 30, 1995, was $69,700,
a decrease of $134,200 from 1994. In the 1995 period, other income included
$12,200 in gains on sale of loans. Prior to that time, the Bank had not sold
loans. Investment property income decreased $14,500, or 22.3%, due to a new
lease at a lower rental figure and higher real
-24-
<PAGE>
estate taxes. Other operating income increased $1,700, or 30.7%, due to higher
fees collected. Other income for 1994 included nonrecurring gain on sale of
equipment of $1,200 and a gain on sale of investments of $132,400, resulting
from the sale of Federal Home Loan Mortgage Corporation ("FHLMC") stock.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense increased $51,200, or 8.2%, for the year ended June 30, 1995, as
compared to the 1994 fiscal year. The increase was principally the result of an
increase in compensation, fees and benefits totaling $72,400, or 24.8%, due to
the addition of one new employee and two new directors. Computer processing
expense increased $3,000, or 9.8%, and franchise taxes increased $500, or 1.7%.
These increases were partially offset by a decrease in deposit insurance
expense of $3,600, or 5.5%, and a decrease in other operating expense of
$20,100, or 15.3%, resulting from cost-saving measures instituted by management.
FEDERAL INCOME TAXES. Federal income taxes for the year ended June 30,
1995, decreased by $30,600, or 39.0%, as a direct result of lower net earnings
for the 1995 fiscal year, compared to 1994.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1994 AND 1993
GENERAL. Net income for the year ended June 30, 1994, totalled $195,300,
an increase of $68,800, or 54.3%, as compared to the 1993 fiscal year. The
increase was the result of an increase in other income of $67,700, or 49.6%, a
decrease in general, administrative and other expense of $12,200, or 1.9%, and a
decrease in the provision for loan losses of $50,000, or 60.5%, which were
partially offset by a decrease in net interest income of $68,000, or 8.5%.
During the first half of the 1994 fiscal year, which was a time of significant
refinancing activity generally, the Bank experienced significant loan payoffs,
but was inactive with respect to loan originations. The higher volume of
payoffs resulted in increased levels of cash, interest-bearing deposits and
mortgage-backed securities. Total interest income for the year ended June 30,
1994, decreased $228,200, or 9.9%, primarily the result of decreased interest
on loans. The cost of funds also decreased $160,200, or 10.7%, due to lower
deposit levels and a declining weighted average cost as interest rates generally
declined.
NET INTEREST INCOME. Interest income on loans for the year ended June 30,
1994, decreased $288,200, or 15.3%, as the portfolio was reduced due to
refinancing by borrowers to obtain lower rates. Interest on mortgage-backed
securities increased $54,300, or 23.4%, due to increased portfolio balances as
funds generated by loan prepayments were used to purchase mortgage-backed
securities. Interest on investment securities increased $14,700, or 113.3%, due
to increased portfolio balances, and interest on interest-bearing deposits
decreased $8,900, or 5.3%, as the average balance declined.
Interest expense on deposits for the year ended June 30, 1994, decreased
$202,200, or 13.5%, as the Bank experienced an outflow of deposits as depositors
sought higher-yielding investments in the declining rate environment. Interest
expense on borrowings increased $42,000 as FHLB advances were obtained for the
first time as an alternative source to replace the declining deposit levels.
PROVISION FOR LOSSES ON LOANS. The provision for loan losses for the year
ended June 30, 1994, decreased by $50,000, or 60.5%, as a result of the lower
level of nonaccrual loans. The allowance for loan losses is a general reserve
and not allocated to specific loans.
OTHER INCOME. Other income for the year ended June 30, 1994, increased
$67,700, or 49.6%, resulting from a $71,000 gain on sale of FHLMC stock, a
$1,200 nonrecurring gain on sale of equipment and an increase in investment
property income of $700, or 1.0%, which were partially offset by a decrease of
$5,300, or 49.7%, in other operating income.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense for the year ended June 30, 1994, decreased $12,300, or 1.9%,
compared to the 1993 fiscal year, resulting from a decrease in compensation,
fees and benefits of $14,200, or 4.6%, and a decrease in occupancy and
equipment of $6,600, or 7.9%, due to benefits paid in connection with the death
of the Bank's former managing officer in 1993. These amounts were partially
offset by increased deposit insurance costs of $5,300, or 8.9%, increased
franchise tax of $2,200, or 7.7%, and increased computer servicing costs of
$1,700, or 6.2%.
FEDERAL INCOME TAXES. Federal income tax for the year ended June 30, 1994,
decreased $6,800, or 8.0%, due to changes in accounting for taxes.
-25-
<PAGE>
YIELDS EARNED AND RATES PAID. The following table sets forth certain
average balance sheet information, including the average yield on interest-
earning assets and the average cost of interest-bearing liabilities for the
years indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of interest-earning assets or interest-
bearing liabilities, respectively, for the years presented. Average balances
are derived from monthly balances, which include nonaccruing loans in the loan
portfolio.
<TABLE>
<CAPTION>
Nine months ended March 31,
------------------------------------------------------------------------------------
1996 1995
--------------------------------------- ---------------------------------------
Average Interest Average Average Interest Average
outstanding earned/ yield/ outstanding earned/ yield/
balance paid rate balance paid rate
----------- -------- ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 3,216 $ 140 5.80% $ 1,922 $ 75 5.20%
Investment securities 1,164 51 5.84 1,302 51 5.22
Mortgage-backed securities 5,218 234 5.98 6,137 242 5.26
Loans receivable 21,608 1,358 8.38 20,231 1,225 8.07
------- ------ ------- ------
Total interest-earning assets 31,206 1,783 7.62 29,592 1,593 7.18
Non-interest-earning assets 585 537
------- -------
Total assets $31,791 $30,128
------- -------
------- -------
Interest-bearing liabilities:
NOW and money market accounts $ 2,055 $ 42 2.73% $ 3,076 $ 60 2.60
Passbook savings accounts 1,189 25 2.80 1,613 35 2.89
Certificates of deposit 24,452 1,100 6.00 21,467 851 5.29
------- ------ ------- ------
Total deposits 27,696 1,167 5.62 26,156 946 4.82
FHLB advances 931 39 5.59 995 42 5.63
------- ------ ------ ------- ------ ------
Total interest-bearing
liabilities 28,627 1,206 5.62 27,151 988 4.85
------ ------ ------ ------
Non-interest-bearing liabilities 412 347
------- -------
Total liabilities 29,039 27,498
Retained earnings 2,752 2,631
------- -------
Total liabilities and retained
earnings $31,791 $30,128
------- -------
------- -------
Net interest income $ 577 $ 605
------ ------
Interest rate spread 2.00% 2.33%
------ ------
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 2.47% 2.73%
------ ------
Average interest-earning assets to
average interest-bearing liabilities 109.01% 108.99%
------ ------
<CAPTION>
Year ended June 30,
------------------------------------------------------------------------------------
1995 1994
--------------------------------------- ---------------------------------------
Average Interest Average Average Interest Average
outstanding earned/ yield/ outstanding earned/ yield/
balance paid rate balance paid rate
----------- -------- ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 2,200 $ 117 5.32% $ 4,727 $ 161 3.41%
Investment securities 1,304 69 5.29 573 28 4.89
Mortgage-backed securities 6,028 321 5.33 6,478 286 4.41
Loans receivable 20,318 1,655 8.15 19,242 1,594 8.28
------- ------ -------- -------
Total interest-earning assets 29,850 2,162 7.24 31,020 2,069 6.67
Non-interest-earning assets 553 543
------- -------
Total assets $30,403 $31,563
------- -------
------- -------
Interest-bearing liabilities:
NOW and money market accounts $ 2,964 $ 79 2.67 $ 3,425 $ 99 2.89
Passbook savings accounts 1,539 45 2.92 2,245 67 2.98
Certificates of deposit 21,858 1,185 5.42 22,318 1,131 5.07
------- ------ ------- ------
Total deposits 26,361 1,309 4.97 27,988 1,297 4.63
FHLB advances 1,046 59 5.64 815 42 5.16
------- ------ ------ ------- ------ ------
Total interest-bearing
liabilities 27,407 1,368 4.99 28,803 1,339 4.65
------ ------ ------ ------
Non-interest-bearing liabilities 350 296
------- -------
Total liabilities 27,757 29,099
Retained earnings 2,646 2,464
------- -------
Total liabilities and retained
earnings $30,403 $31,563
------- -------
------- -------
Net interest income $ 794 $ 730
------ ------
Interest rate spread 2.25% 2.02%
------ ------
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 2.66% 2.35%
------ ------
Average interest-earning assets to
average interest-bearing liabilities 108.92% 107.70%
------ ------
<CAPTION>
Year ended June 30,
---------------------------------------
1993
---------------------------------------
Average Interest Average
outstanding earned/ yield/
balance paid rate
----------- -------- -------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 5,472 $ 170 3.11%
Investment securities 244 13 5.32
Mortgage-backed securities 4,268 232 5.44
Loans receivable 21,028 1,882 8.95
------- ------
Total interest-earning assets 31,012 2,297 7.41
Non-interest-earning assets 561
-------
Total assets $31,573
-------
-------
Interest-bearing liabilities:
NOW and money market accounts $ 2,870 $ 96 3.34
Passbook savings accounts 2,698 145 5.37
Certificates of deposit 23,325 1,258 5.39
------- -------
Total deposits 28,893 1,499 5.19
FHLB advances - - -
------- ------- ------
Total interest-bearing
liabilities 28,893 1,499 5.19
----- ----
Non-interest-bearing liabilities 337
-------
Total liabilities 29,230
Retained earnings 2,343
-------
Total liabilities and retained
earnings $31,573
-------
-------
Net interest income $ 798
------
Interest rate spread 2.22%
------
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 2.57%
------
Average interest-earning assets to
average interest-bearing liabilities 107.33%
-------
</TABLE>
-26-
<PAGE>
The following table sets forth, at the dates indicated, the weighted
average yields earned on the Bank's interest-earning assets, the weighted
average interest rates paid on interest-bearing liabilities and the interest
rate spread between the weighted average yields and rates at the dates
presented.
<TABLE>
<CAPTION>
At June 30,
At March 31, ------------------------------------
1996 1995 1994 1993
------------ ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield on loans 8.14% 8.25% 7.80% 8.35%
Weighted average yield on investment securities
portfolio 6.33 5.72 4.99 5.30
Weighted average yield on mortgage-backed securities 5.41 4.52 5.06 5.30
Weighted average yield on interest-bearing deposits 5.24 5.96 4.11 3.53
Weighted average yield on all interest-earning assets 7.27 7.19 6.63 7.28
Weighted average rate paid on deposits 5.58 5.62 4.40 4.88
Weighted average rate paid on FHLB advances 5.51 5.85 5.50 -
Weighted average rate paid on all interest-bearing
liabilities 5.58 5.57 4.48 4.88
Interest rate spread 1.69 1.62 2.15 2.40
</TABLE>
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest income and interest expense during the years
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume) and (iii) total changes in rate
and volume. The combined effects of changes in both volume and rate, which
cannot be separately identified, have been allocated proportionately to the
change due to volume and the change due to rate:
<TABLE>
<CAPTION>
Nine months ended March 31,
--------------------------------------
1996 vs. 1995
--------------------------------------
Increase
(decrease) due to Total
-------------------- increase
Volume Rate (decrease)
------ ---- ----------
<S> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $ 55 $ 10 $ 65
Investments (5) 5 -
Mortgage-backed securities (39) 31 (8)
Loans receivable 86 47 133
---- ---- ----
Total interest income 97 93 190
---- ---- ----
Interest-bearing liabilities
Deposits 58 163 221
FHLB advances (3) - (3)
---- ---- ----
Total interest expense 55 163 218
---- ---- ----
Increase (decrease) in net
interest income $ 42 $(70) $(28)
---- ---- ----
---- ---- ----
<CAPTION>
Year ended June 30,
-----------------------------------------------------------------------------------
1995 vs. 1994 1994 vs. 1993
-------------------------------------- ---------------------------------------
Increase Increase
(decrease) due to Total (decrease) due to Total
-------------------- increase -------------------- increase
Volume Rate (decrease) Volume Rate (decrease)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $(109) $ 65 $(44) $ (24) $ 15 $ (9)
Investments 39 2 41 16 (1) 15
Mortgage-backed securities (21) 56 35 104 (50) 54
Loans receivable 88 (27) 61 (154) (134) (288)
----- ---- ---- ----- ----- -----
Total interest income (3) 96 93 (58) (170) (228)
----- ---- ---- ----- ----- -----
Interest-bearing liabilities
Deposits (78) 90 12 (46) (156) (202)
FHLB advances 13 4 17 21 21 42
----- ---- ---- ----- ----- -----
Total interest expense (65) 94 29 (25) (135) (160)
----- ---- ---- ----- ----- -----
Increase (decrease) in net
interest income $ (62) $ 2 $ 64 $ (33) $ (35) $ (68)
----- ---- ---- ----- ----- -----
----- ---- ---- ----- ----- -----
</TABLE>
ASSET AND LIABILITY MANAGEMENT
The Bank, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than
its interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, the Bank uses the "net portfolio value" ("NPV") methodology
recently adopted by the OTS as part of its capital regulations. Although the
Bank is not currently subject to the NPV regulation because such regulation does
not apply to institutions with
-27-
<PAGE>
less than $300 million in assets and risk-based capital in excess of 12%, the
application of the NPV methodology illustrates certain aspects of the Bank's
interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV which would
result from a theoretical 200 basis point (1 basis point equals .01%) change in
market interest rates.
Presented below, as of December 31, 1995, is an analysis of the Bank's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis points in market interest rates. The table also
contains the policy limits set by the Board of Directors of the Bank as the
maximum change in NPV that the Board of Directors deems advisable in the event
of various changes in interest rates. Such limits have been established with
consideration of the dollar impact of various rate changes and the Bank's strong
capital position.
As illustrated in the table, NPV is more sensitive to rising rates than
declining rates. Such difference in sensitivity occurs principally because, as
rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when
interest rates are declining. Thus, in a rising interest rate environment,
because the Bank has a significant amount of fixed-rate loans in its loan
portfolio, the amount of interest the Bank would receive on its loans would
increase relatively slowly as loans are slowly prepaid and new loans are made at
higher rates. Moreover, the interest the Bank would pay on its deposits would
increase rapidly because the Bank's deposits generally have shorter periods to
repricing. The assumptions used in calculating the amounts in this table are
OTS assumptions.
December 31, 1995
-----------------------
Change in interest Board limit $ change % change
rate (basis points) % change in NPV in NPV
------------------- ----------- ------- -------
(Dollars in thousands)
+400 (60)% $(1,678) (64)%
+300 (50) (1,185) (45)
+200 (35) (717) (28)
+100 (20) (302) (12)
0 0 0 0
-100 20 118 5
-200 35 90 3
-300 50 94 4
-400 60 171 7
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
In a rising interest rate environment, the Bank's net interest income could
be expected to be negatively affected. Moreover, rising interest rates could
negatively affect the Bank's earnings due to diminished loan demand.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's principal sources of funds are deposits, loan and mortgage-
backed securities repayments, maturities of securities and other funds provided
by operations. The Bank also has the ability to borrow from the FHLB of
Cincinnati. See "REGULATION - Federal Home Loan Banks." While scheduled loan
repayments and maturing investments are relatively predictable, deposit flows
and early loan and mortgage-backed securities prepayments are more influenced by
interest rates, general economic conditions and competition. The Bank maintains
investments in liquid assets based upon management's assessment of (i) the need
for funds, (ii) expected deposit flows, (iii) the yields available on short-term
liquid
-28-
<PAGE>
assets and (iv) the objectives of the asset/liability management program.
During the fiscal year ended June 30, 1995, the Bank was able to increase total
deposits through a combined strategy involving both advertising and deposit
pricing.
OTS regulations presently require the Bank to maintain an average daily
balance of investments in United States Treasury securities, federal agency
obligations and other investments having maturities of five years or less in an
amount equal to 5% of the sum of the Bank's average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. The
liquidity requirement, which may be changed from time to time by the OTS to
reflect changing economic conditions, is intended to provide a source of
relatively liquid funds upon which the Bank may rely if necessary to fund
deposit withdrawals or other short-term funding needs. At March 31, 1996, the
Bank's regulatory liquidity ratio was 15.7%. At such date, the Bank had
commitments to originate loans totaling approximately $726,000 and one
commitment to sell a loan in the amount of $71,000. The Bank considers its
liquidity and capital reserves sufficient to meet its outstanding short- and
long-term needs. At March 31, 1996, the Bank had no material commitments for
capital expenditures. See Notes 9 and 10 of the Notes to the Financial
Statements.
The Bank's liquidity, primarily represented by cash and cash equivalents,
is a result of the funds used in or provided by the Bank's operating, investing
and financing activities. These activities are summarized below for the nine
months ended March 31, 1996, and for the years ended June 30, 1995, 1994 and
1993.
<TABLE>
<CAPTION>
Year ended June 30,
Nine months ended -------------------------------------
March 31, 1996 1995 1994 1993
----------------- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Net income $ 66 $ 125 $ 195 $ 127
Adjustments to reconcile net income to net cash from
operating activities 192 12 (95) (30)
------ ------ ------- ------
Net cash from operating activities 258 137 100 97
Net cash provided by (used in) investment activities 342 718 (1,518) (13)
Net cash provided by (used in) financing activities (307) 626 (759) 1,445
------ ------ ------- ------
Net change in cash and cash equivalents 293 1,481 (2,177) 1,529
Cash and cash equivalents at beginning of period 3,943 2,462 4,639 3,110
------ ------ ------- ------
Cash and cash equivalents at end of period $4,236 $3,943 $ 2,462 $4,639
------ ------ ------- ------
------ ------ ------- ------
</TABLE>
The Bank is required by applicable law and regulations to meet certain
minimum capital standards. Such capital standards include a tangible capital
requirement, a core capital requirement or leverage ratio and a risk-based
capital requirement. See "REGULATION - Office of Thrift Supervision --
Regulatory Capital Requirements."
The tangible capital requirement requires savings associations to maintain
"tangible capital" of not less than 1.5% of the association's adjusted total
assets. Tangible capital is defined in OTS regulations as core capital minus
any intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 3% of the association's total
assets. The OTS has proposed to increase such requirement to 4% to 5%, except
for those associations
-29-
<PAGE>
with the highest examination rating and acceptable levels of risk. See
"REGULATION - Office of Thrift Supervision -- Regulatory Capital Requirements."
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of the Bank includes a general loan loss allowance of $96,000
at March 31, 1996.
The following table summarizes the Bank's regulatory capital requirements
and actual capital at March 31, 1996. See Note 9 of the Notes to the Financial
Statements for a reconciliation of capital under generally accepted accounting
principles ("GAAP") and regulatory capital amounts.
<TABLE>
<CAPTION>
Excess of actual
capital over current Applicable
Actual capital Current requirement requirement asset total
---------------------- ----------------------- ----------------------- -----------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1996
- ------------------
Tangible capital $2,772 8.7% $ 476 1.5% $2,296 7.2% $31,733
Core capital 2,772 8.7 952 3.0 1,820 5.7 31,733
Risk-based capital 2,868 19.6 1,171 8.0 1,697 11.6 14,640
June 30, 1995
- ------------------
Tangible capital $2,706 8.5% $ 478 1.5% $2,228 7.0% $31,844
Core capital 2,706 8.5 955 3.0 1,751 5.5 31,844
Risk-based capital 2,776 19.3 1,153 8.0 1,623 11.3 14,418
</TABLE>
IMPACT OF NEW ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan." Under the provisions of SFAS No. 114, a
loan is considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. SFAS No. 114 requires creditors to
measure impairment of a loan based on the present value of expected future cash
flows, discounted at the loan's effective interest rate. If the measure of the
impaired loan is less than the recorded investment in the loan, a creditor must
recognize an impairment by recording a valuation allowance with a corresponding
charge to bad debt expense. SFAS No. 114 also applies to restructured loans and
eliminates the requirement to classify loans that are in-substance foreclosures
as foreclosed assets, except for loans where the creditor has physical
possession of the underlying collateral, but not legal title. SFAS No. 114
applies to financial statements for fiscal years beginning after December 15,
1994. In October 1994, the FASB issued SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures," which amends SFAS
No. 114 to allow a creditor to use existing methods for recognizing interest
income on impaired loans. The Bank will be required to adopt SFAS No. 114 for
the year ending June 30, 1996, and does not anticipate that the implementation
of SFAS No. 114 and its amendment, SFAS No. 118, will have a material impact on
its results of operations or financial position.
In November 1993, the American Institute of Certified Public Accountants
("AICPA") issued SOP 93-6, "Employers' Accounting for Employee Stock Ownership
Plans," which is effective for fiscal years beginning after December 15, 1993.
SOP 93-6 became applicable to the Bank for its fiscal year which began July 1,
1996. SOP 93-6 requires the application of its guidance for shares acquired by
ESOPs after June 30, 1992, but not yet committed to be released as of the
beginning of the year SOP 93-6 is adopted. SOP 93-6 will, among other things,
change the measure of compensation expense recorded by employers for leveraged
ESOPs from the cost of ESOP shares to the fair value of ESOP shares. Under SOP
93-6, the Holding 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 ESOP shares differs from the
cost of such shares, this differential will be charged or credited to equity.
Employers with internally leveraged ESOPs, such as the Holding Company, will not
report the loan receivable from the ESOP as an asset and will not report the
ESOP debt from the employer as a liability. See "MANAGEMENT - Stock Benefit
Plans -- Employee Stock Ownership Plan."
-30-
<PAGE>
In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair
Value of Financial Statements," which requires 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 will be required to adopt SFAS No. 107 for
the year ended June 30, 1996. Management does not anticipate that the
implementation of SFAS No. 107 will have a material impact on the results of
operations or financial position of the Bank.
In October 1994, the FASB issued SFAS No. 119, "Disclosures About
Derivative Financial Instruments and Fair Value of Financial Instruments." SFAS
No. 119 requires disclosures about the amounts, nature and terms of derivative
financial instruments which do not result in off-balance-sheet risk of
accounting loss. SFAS No. 119 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 are
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 are recorded at fair
value, with unrealized gains and losses excluded from operations and reported as
a separate component of stockholders' equity. The Bank adopted SFAS No. 115
effective July 1, 1995. The adoption of SFAS No. 115 did not have an impact on
the Bank's results of operations or financial position. The Bank holds all
investments as "held to maturity" carried at amortized cost.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." SFAS No. 122 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. SFAS No. 122
is effective for fiscal years beginning after December 15, 1995. Management
does not expect an impact from the adoption of SFAS No. 122.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed of. The standard requires an impairment loss to be recognized when the
carrying amount of the asset exceeds the fair value of the asset. The fair
value of the asset is the amount at which the asset would be bought or sold in a
current transaction between willing parties, that is, other than in a forced
liquidation sale. An entity that recognizes an impairment loss shall disclose
additional information in the financial statements related to the impaired
asset. All long-lived assets and certain identifiable intangibles to be
disposed of and for which management has committed to a plan to dispose of the
assets, whether by sale or abandonment, shall be reported at the lower of the
carrying amount or fair value less cost to sell. Subsequent revisions in
estimates of fair value less cost to sell shall be reported as adjustments to
the carrying amount of assets to be disposed of, provided that the carrying
amount of the asset does not exceed the carrying amount of the asset before an
adjustment was made to reflect the decision to dispose of the asset. SFAS No.
121 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 that now required or
generally made in the financial statements about the risks and uncertainties
existing as of the date of such 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. SOP 94-6 is effective for financial statements issued
for fiscal years ending after December 15, 1995.
-31-
<PAGE>
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages all entities
to adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to retain their existing accounting method
are required to disclose in a footnote to the financial statements pro forma net
income and, if presented, earnings per share, as if SFAS No. 123 had been
adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995. Companies are required, however, to disclose information for awards
granted in their first fiscal year ending after December 15, 1994. Management
has not completed an analysis of the potential effects of SFAS No. 123 on its
financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
established accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The standards are based on
a consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered
and derecognizes liabilities when extinguished. SFAS No. 125 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. SFAS No. 125 supersedes SFAS
No. 122. SFAS No. 125 is effective for transactions occurring after December
31, 1996. Management does not expect an impact from adoption of SFAS No. 125.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes thereto included herein
have been prepared in accordance with GAAP. GAAP requires the Bank to measure
financial position and operating results in terms of historical dollars.
Changes in the relative value of money due to inflation or recession are
generally not considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
inflation rate. While interest rates are greatly influenced by changes in the
inflation rate, they do not change at the same rate or in the same magnitude as
the inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as on changes in monetary and fiscal
policies.
-32-
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth selected financial condition data for the
Bank at June 30, 1996, and March 31, 1996, and selected earnings data for the
Bank for the year ended June 30, 1996, and 1995. The results of operations
presented below are not necessarily indicative of the results that may be
expected for any other period. This information should be read in conjunction
with the financial statements and notes thereto included herein.
June 30, March 31,
SELECTED FINANCIAL CONDITION AND OTHER DATA: 1996 1996
-------- --------
(Dollars in thousands)
Assets $30,835 $31,738
Cash and equivalents 1,173 4,236
Investment securities 1,178 674
Mortgage-backed securities 4,641 4,957
Loans receivable, net 23,267 21,359
Deposits 26,951 27,780
FHLB advances 825 842
Retained earnings 2,793 2,772
Three months ended Year ended
June 30, June 30,
--------------------- -------------------
SUMMARY OF EARNINGS: 1996 1995 1996 1995
-------- -------- -------- --------
Interest income $576 $569 $2,359 $2,162
Interest expense 385 380 1,592 1,368
-------- -------- -------- --------
Net interest income 191 189 767 794
Provision for loan losses 10 3 44 12
-------- -------- -------- --------
Net interest income after
provision/for loan losses 181 186 723 782
Other income 13 23 65 70
General, administrative and other
expense 179 170 675 679
-------- -------- -------- --------
Net income before provision for
income taxes(credit) 15 39 113 173
Provision for income taxes (5) 5 27 48
-------- -------- -------- --------
Net income $ 20 $ 34 $ 86 $ 125
-------- -------- -------- --------
-------- -------- -------- --------
-33-
<PAGE>
<TABLE>
<CAPTION>
At or for the three months ended At or for the year ended
June 30, June 30,
SELECTED FINANCIAL RATIOS: 1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Performance Ratios:
Return on average assets .26% .44% .27% .41%
Return on average equity 2.87 5.05 3.11 4.72
Interest rate spread 2.01 2.04 2.00 2.25
Net interest margin 2.49 2.47 2.47 2.66
Non-interest expense to average
assets 2.29 2.18 2.13 2.23
Average equity to average assets 8.91 8.63 8.72 8.71
Equity to assets, end of period 9.06 8.50 9.06 8.50
Nonperforming assets to average
assets - .62 - .64
Nonperforming loans to total loans - .95 - .95
Asset Quality Ratios:
Allowance for loan losses to gross
loans .47 .47 .47 .47
Allowance for loan losses to
nonperforming loans - 50.52 - 50.52
Net (charge-offs) recoveries to
average loans .05 - .14 .07
Average interest-earning assets to
average interest-bearing liabilities 109.54 108.68 109.14 108.92
</TABLE>
The following table summarizes the Bank's regulatory capital requirements and
actual capital at June 30, 1996:
<TABLE>
<CAPTION>
Excess of actual capital Applicable
Actual capital Current requirement over current requirement asset total
--------------------- -------------------- ------------------------ -----------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
June 30, 1996
- -------------
Tangible capital $2,792 9.1% $ 462 1.5% 2,330 7.6% $30,831
Core capital 2,792 9.1 925 3.0 1,867 6.1 30,831
Risk-based capital 2,903 19.4 1,198 8.0 1,705 11.4 14,980
June 30, 1995
- -------------
Tangible capital $2,706 8.5% $ 478 1.5% $2,228 7.0% $31,844
Core capital 2,706 8.5 955 3.0 1,751 5.5 31,844
Risk-based capital 2,776 19.3 1,153 8.0 1,623 11.3 14,418
</TABLE>
FINANCIAL CONDITION. Total assets decreased $903,000, or 2.8%, to $30.8
million at June 30, 1996, from $31.7 million at March 31, 1996. Cash and
equivalents decreased $3.1 million, or 72.3%, and mortgage-backed securities
decreased $316,000, or 6.4%, during the same period. Approximately $829,000
from these two sources were used to fund the decrease in deposits and the
balance was used to purchase investment securities, which increased
approximately $504,000, and to originate loans. Loans receivable increased $1.9
million during the quarter.
RESULTS OF OPERATIONS. Net income for the three month period ended June
30, 1996, was $20,000, compared to $34,000 for the same period in 1995, a
decrease of 41.2%. Interest income increased $7,000, or 1.2%, for the three
months ended June 30, 1996, primarily due to higher interest rates and a
slightly larger volume of average interest-earning assets. Total interest
expense increased $5,000 for the quarter, due to a higher cost of funds and an
increase in average interest-bearing liabilities. Total other income decreased
$10,000, or 43.5%, for the quarter ended June 30, 1996, as a result of
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<PAGE>
fewer gains on sales of loans. Total general, administrative and other expense
increased $9,000 for the three months ended June 30, 1996, due to higher
employee benefit costs. Federal income taxes decreased $10,000 for the quarter,
due to lower earnings and year-end tax adjustments. The provision for loan
losses increased $7,000 for the three months ended June 30, 1996, compared to
the same periods in 1995, due to management's decision to increase the reserve
for loan losses as a result of the increase in loans receivable and the related
inherent risk in lending.
Net income for the year ended June 30, 1996, was $86,000, compared to
$125,000 for the year ended June 30, 1995, a decrease of 31.2%. Interest income
increased $197,000, or 8.35%, for the year ended June 30, 1996, compared to
1995, as a result of higher interest rates and a larger volume of interest-
earning assets. Total interest expense increased $224,000 for the year ended
June 30, 1996, due to a higher cost of funds and an increase in average
interest-bearing liabilities. Total other income decreased $5,000, or 7.14%,
for the year, as a result of fewer gains on sales of loans. Total general,
administrative and other expense decreased approximately $5,000 for the year
ended June 30, 1996, due to decreases in operating expenses as a result of cost-
saving measures implemented by management. Federal income taxes decreased
$21,000 for the year ended June 30, 1996, compared to 1995, as a result of lower
earnings. The provision for loan losses increased $32,000 for the year ended
June 30, 1996, compared to the same period in 1995, due to management's decision
to increase the reserve for loan losses as a result of the increase in loans
receivable and the related inherent risk in lending.
An increase in interest rates generally would likely cause a decline in the
Bank's net income. Because the Bank has a significant amount of fixed-rate
loans in its loan portfolio, in a rising interest rate environment the Bank's
interest income on its loan portfolio tends to increase relatively slowly as
refinancing activity declines and fixed-rate loans are prepaid at a slower pace
than in a declining interest rate environment. The eventual repricing of the
Bank's adjustable-rate loans, which comprise approximately half of the Bank's
loan portfolio, will assist the Bank in moderating a decline in net income in a
rising interest rate environment, although the index used on the Bank's ARMs
typically lags changes in market rates and the caps on interest rate changes may
restrict the full repricing of ARMs to market rates. In comparison, the
interest the Bank pays on its deposits increases more rapidly because the Bank's
deposits generally have shorter periods to repricing.
THE BUSINESS OF THE BANK
GENERAL
The Bank is a mutual savings and loan association which was organized under
Ohio law in 1888 as "The Foundation Building and Loan Company." In February
1942, the name of the Bank was changed to "The Foundation Savings and Loan
Company" and in October 1990, the Bank adopted its present name. As an Ohio
savings and loan association, the Bank is subject to supervision and regulation
by the OTS, the Division and the FDIC. The Bank is a member of the FHLB of
Cincinnati and the deposits of the Bank are insured up to applicable limits by
the FDIC in the SAIF. See "REGULATION."
The Bank conducts business from its office at 25 Garfield Place in
Cincinnati, Ohio. The principal business of the Bank is the origination of
permanent mortgage loans secured by first mortgages on one- to four-family
residential real estate located in Hamilton County, Ohio and the contiguous Ohio
counties of Clermont, Butler and Warren and the Kentucky counties of Boone and
Kenton. The Bank also originates mortgage loans secured by multifamily real
estate (over four units) and nonresidential real estate in its primary market
area. See "Lending Activities." In addition to real estate lending, the Bank
originates a limited number of secured and unsecured consumer loans. For
liquidity and interest rate risk management purposes, the Bank invests in
interest-bearing deposits in other financial institutions, U.S. Government and
agency obligations, mortgage-backed securities and other investments permitted
by applicable law. See "Investment Activities." Funds for lending and other
investment activities are obtained primarily from savings deposits, which are
insured up to applicable limits by the FDIC, and principal repayments on loans.
Advances from the FHLB of Cincinnati are utilized from time to time when other
sources of funds are inadequate to fund loan demand. See "Deposits and
Borrowings."
Interest on loans and investments is the Bank's primary source of income.
The Bank's principal expense is interest paid on deposit accounts. Operating
results are dependent to a significant degree on the "net interest income" of
the Bank, which is the difference between interest income earned on loans,
mortgage-backed securities and other investments and interest paid on deposits
and borrowings. Like most thrift institutions, the Bank's interest income and
interest expense are
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<PAGE>
significantly affected by general economic conditions and by the policies of
various regulatory authorities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
MARKET AREA
The Bank conducts business from its office in Cincinnati, Ohio. The Bank's
primary market area for lending and deposit activity is Hamilton County, Ohio.
The Bank also frequently receives deposits from, and makes loans to, customers
in the contiguous Ohio counties of Clermont, Butler and Warren and the Kentucky
counties of Kenton and Boone.
Located in southwest Ohio and served by both Interstates 75 and 71,
Hamilton County is a major center for manufacturing, wholesaling and retailing.
Major employers in Hamilton County include manufacturing companies, such as
Procter & Gamble Co., G.E. Aircraft Engines and Cincinnati Milacron,
wholesale/retail businesses, such as The Kroger Co., and government entities,
such as the City of Cincinnati, the University of Cincinnati and the Cincinnati
Public Schools.
Hamilton County's population, approximately 866,000, has remained
relatively unchanged since 1990. By contrast, the period from 1990 to 1995 was
characterized by 5.7% growth in the national population and 2.8% in the
population of Ohio. Hamilton County had a higher per capita income than either
Ohio or the United States during the period from 1990 to 1995. In 1995, the per
capita income level in Hamilton County was $18,004 compared to $15,708 for Ohio
and $16,405 for the nation. The median household income in Hamilton County was
$29,498 in 1995, compared to $29,276 and $28,255 in Ohio and the United States,
respectively. Housing in Hamilton County is 58.3% owner-occupied, compared to
67.5% in Ohio and 64.2% in the United States. The median housing value in
Hamilton County in 1990 was $72,246, compared to $63,457 in the State of Ohio
and $79,098 in the United States.
An economic indicator that pertains more directly to the banking and thrift
industries is the issuance of new housing permits. In 1994, 1,676 new housing
permits were issued in Hamilton County, a 12.9% decrease from 1993, compared to
increases of 5.2% and 8.8% in Ohio and the United States, respectively. Another
key economic indicator is the rate of unemployment. Unemployment has declined
16.4% in Hamilton County since 1993, from 5.5% to 4.6%, compared to declines of
7.7% in Ohio and 7.4% in the United States.
The Bank competes with commercial banks, other savings associations and
credit unions for deposits. The Bank's market penetration in Hamilton County is
0.9% of savings association deposits and 0.2% of all financial institution
deposits.
LENDING ACTIVITIES
GENERAL. The Bank's principal lending activity is the origination of
conventional real estate loans secured by one- to four-family homes located in
the Bank's primary market area. Loans secured by multifamily properties
containing five units or more and nonresidential properties are also offered by
the Bank. The Bank does not originate first mortgage loans insured by the
Federal Housing Authority or guaranteed by the Veterans Administration. In
addition to real estate lending, the Bank originates a limited number of
consumer loans, including loans secured by deposit accounts, automobile loans
and unsecured loans.
-36-
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information in respect of the composition of the Bank's loan portfolio at the
dates indicated:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------
At March 31, 1996 1995 1994 1993
-------------------- -------------------- -------------------- --------------------
Percent Percent Percent Percent
of total of total of total of total
Amount net loans Amount net loans Amount net loans Amount net loans
------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $18,990 88.91% $18,300 89.22% $16,714 88.93% $17,305 88.52%
Nonresidential 1,302 6.09 1,124 5.48 882 4.69 1,030 5.27
Multifamily 798 3.74 636 3.10 688 3.66 722 3.69
Commercial loans - - - - - - 2 0.01
Consumer loans:
Property improvement
loans - - - - 14 0.07 19 0.10
Passbook loans 58 0.27 111 0.54 66 0.35 579 2.96
Other consumer loans 353 1.65 501 2.44 566 3.01 81 0.41
------- ------ ------- ------ ------- ------ ------- ------
Total loans $21,501 100.66% $20,672 100.78% $18,930 100.72% $19,738 100.96%
------- ------ ------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------ ------- ------
Less:
Loans in process 5 0.02 15 0.07 - - 5 0.02
Allowance for loan
losses 104 0.49 98 0.48 72 0.38 101 0.52
Deferred loan fees 33 0.15 48 0.23 58 0.31 74 0.38
Unearned discounts - - - - 6 0.03 8 0.04
------- ------ ------- ------ ------- ------ ------- ------
Net loans $21,359 100.00% $20,511 100.00% $18,794 100.00% $19,550 100.00%
------- ------ ------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------ ------- ------
</TABLE>
LOAN MATURITY. The following table sets forth certain information as of
March 31, 1996, regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity. Demand loans and other
loans having no stated schedule of repayments or no stated maturity are reported
as due in one year or less.
<TABLE>
<CAPTION>
Due during the year ending Due 4-5 Due 6-10 Due 11-20 Due more
March 31, years years years than 20
------------------------------ after after after years after
1997 1998 1999 3/31/96 3/31/96 3/31/96 3/31/96 Total
------ ------ ------ ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to four-family $573 $669 $713 $1,577 $4,050 $3,992 $7,411 $18,985
Nonresidential 65 68 67 133 345 351 273 1,302
Multifamily 30 33 36 78 221 284 116 798
---- ---- ---- ------ ------ ------ ------ -------
Total real estate $668 $770 $816 $1,788 $4,616 $4,627 $7,800 $21,085
Consumer loans:
Passbook loans 52 212 58 31 - - - 353
Other consumer 17 4 - 37 - - - 58
---- ---- ---- ------ ------ ------ ------ -------
Total $737 $986 $874 $1,856 $4,616 $4,627 $7,800 $21,496
---- ---- ---- ------ ------ ------ ------ -------
---- ---- ---- ------ ------ ------ ------ -------
</TABLE>
-37-
<PAGE>
The following table sets forth the dollar amount of all loans due after one
year from March 31, 1996, which have predetermined interest rates and have
floating or adjustable interest rates:
Due more than one year after
March 31, 1996
--------------------------------
(In thousands)
Fixed rates of interest $10,022
Adjustable rates of interest 10,737
--------
$20,759
--------
--------
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending
activity of the Bank is the origination of permanent conventional loans secured
by one- to four-family residences, primarily single-family residences, located
within the Bank's primary market area. Each of such loans is secured by a first
mortgage on the underlying real estate and improvements thereon, if any. At
March 31, 1996, the Bank's one- to four-family residential real estate loan
portfolio was approximately $19.0 million, or 88.9% of total loans.
OTS regulations and Ohio law limit the amount which the Bank may lend in
relationship to the appraised value of the real estate and improvements at the
time of loan origination. In accordance with such regulations and laws, the
Bank typically makes loans on owner-occupied one- to four-family residences of
up to 80% of the value of the real estate and improvements (the "Loan-to-Value
Ratio" or "LTV") and also makes loans with higher LTVs. The Bank makes loans on
non-owner-occupied or investment properties with maximum LTVs of 75%. Since
1994, the Bank has required that the principal amount of any loan which exceeds
80% LTV at the time of origination be covered by private mortgage insurance at
the expense of the borrower.
Fixed-rate loans are offered by the Bank, currently for terms of up to 30
years. Adjustable-rate residential real estate loans ("ARMs") are also offered
by the Bank for terms of up to 30 years. The interest rate adjustment periods
on the ARMs are one and three years, with adjustments tied to the one-year and
three-year U.S. Treasury bill rate. In addition, the Bank offers loans on which
the interest rates remain fixed for a period of three, five, seven or ten years
and then adjust annually according to the one-year U.S. Treasury bill rate. The
new interest rate at each change date is determined by adding 2.5% to 3.0% to
the prevailing index. The maximum allowable adjustment at each adjustment date
is 2%, with a maximum adjustment of 6% over the term of the loan.
The initial rate on ARMs originated by the Bank is sometimes less than the
sum of the index at the time of origination plus the specified margin. Such
loans may be subject to greater risk of default as the interest rate adjusts to
the fully-indexed level. The Bank attempts to reduce the risks by underwriting
such loans on the basis of the payment amount the borrower will be required to
pay during the second year of the loan, assuming the maximum possible rate
increase.
Adjustable-rate loans decrease the Bank's interest rate risk but involve
other risks, primarily credit risk, because as interest rates rise the payment
by the borrower rises to the extent permitted by the terms of the loan, thereby
increasing the potential for default. At the same time, the marketability of
the underlying property may be adversely affected by higher interest rates. The
Bank believes that these risks have not had a material adverse effect on the
Bank to date.
The Bank makes a limited number of loans for the construction and
improvement of single-family houses. At March 31, 1996, the Bank's loan
portfolio included approximately $124,000 in improvement loans, .58% of total
loans, net of the total of $5,000 in undisbursed portions of such loans.
LOANS SECURED BY MULTIFAMILY REAL ESTATE. In addition to loans on one- to
four-family properties, the Bank originates loans secured by multifamily
properties containing over four units. Multifamily loans are offered with fixed
or adjustable rates for terms of up to 20 years and have a maximum LTV of 75%.
-38-
<PAGE>
Multifamily lending is generally considered to involve a higher degree of
risk than one- to four-family residential lending because the borrower typically
depends upon income generated by the project to cover operating expenses and
debt service. The profitability of a project can be affected by economic
conditions, government policies and other factors beyond the control of the
borrower. The Bank attempts to reduce the risk associated with multifamily
lending by evaluating the creditworthiness of the borrower and the projected
income from the project and by obtaining personal guarantees on loans made to
corporations and partnerships. The Bank requests that borrowers submit rent
rolls and financial statements annually to enable the Bank to monitor the loan.
At March 31, 1996, loans secured by multifamily properties totaled
approximately $798,000, or 3.7% of total loans.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. At March 31, 1996,
approximately $1.3 million, or 6.1%, of the Bank's total loans were secured by
permanent mortgages on nonresidential real estate. Such loans have both fixed
and adjustable rates, terms of up to 20 years and LTVs of up to 70%. Among the
properties securing nonresidential real estate loans are office buildings and
other non-residential properties located in the Bank's primary market area. For
the last five years, the amount of the Bank's nonresidential real estate loans
as a percent of total loans has ranged from a low of 4.7% at June 30, 1994, to a
high of 6.1% at March 31, 1996.
Although the loans secured by nonresidential real estate typically have
higher interest rates than one- to four-family residential real estate loans,
nonresidential real estate lending is generally considered to involve a higher
degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. The Bank has endeavored to reduce
such risk by limiting loan amounts and evaluating the credit history and past
performance of the borrower, the location of the real estate, the financial
condition of the borrower, the quality and characteristics of the income stream
generated by the property and appraisals supporting the property's valuation and
by obtaining personal guarantees from borrowers.
COMMERCIAL LOANS. In prior years, the Bank has made commercial loans to
businesses in its primary market area. Such loans are typically secured by a
security interest in inventory, accounts receivable or other assets of the
borrower. At March 31, 1996, the Bank had no commercial loan portfolio.
CONSUMER LOANS. The Bank occasionally makes various types of consumer
loans, including loans made to depositors on the security of their deposit
accounts, automobile loans and other secured loans and unsecured personal loans.
Consumer loans are made at fixed rates of interest and for terms of up to five
years. At March 31, 1996, the Bank had approximately $411,000, or 1.9% of total
loans, invested in consumer loans.
Consumer loans, particularly consumer loans which are unsecured or are
secured by rapidly depreciating assets such as automobiles, may entail greater
risk than do residential real estate loans. Repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance. The risk of default on consumer loans increases
during periods of recession, high unemployment and other adverse economic
conditions.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from a
number of sources, including continuing business with depositors and borrowers,
solicitations by the Bank's lending staff and walk-in customers.
Loan applications for permanent real estate loans are taken by a loan
originator. The Bank typically obtains a credit report, verification of
employment and other documentation concerning the creditworthiness of the
borrower. An appraisal of the fair market value of the real estate which will
secure the loan is prepared by a fee appraiser approved by the Board of
Directors. Upon the completion of the appraisal and the receipt of information
on the credit history of the borrower, the application for a loan is submitted
for review in accordance with the Bank's underwriting guidelines. Loans of
amounts less than $250,000 and which meet secondary market standards may be
approved by management, while loans of amounts greater than $250,000 or which do
not meet secondary market standards must be submitted to the full Board of
Directors.
Under the Bank's loan guidelines, if a real estate loan application is
approved, title insurance is obtained on the real estate which will secure the
mortgage loan. Borrowers are required to carry satisfactory fire and casualty
insurance and flood insurance, if applicable, and to name the Bank as an insured
mortgagee.
-39-
<PAGE>
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. The
Bank also evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
LOAN ORIGINATIONS, PURCHASES AND SALES. The Bank has sold a limited number
of loans in the secondary market in recent years. The Bank sells loans in order
to improve its liquidity or to manage its interest rate risk. The Bank has
released the right to service virtually all of the loans it has sold.
The following table presents the Bank's loan origination, purchase and sale
activity for the periods indicated:
<TABLE>
<CAPTION>
Nine months ended
March 31, Year ended June 30,
------------------- -------------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans receivable-beginning of period $20,511 $18,794 $18,794 $19,550 $22,038
Loans originated:
One- to four-family residential 5,780 3,910 5,090 2,707 5,834
Nonresidential 268 210 370 - 95
Multifamily residential 194 - - - -
Consumer 53 49 127 201 435
Passbook 24 - 50 54 14
------- ------- ------- ------- -------
Total loans originated 6,319 4,169 5,637 2,962 6,378
Reductions:
Principal repayments 4,375 2,093 3,331 3,770 8,847
Loans sold 1,115 182 564 - -
------- ------- ------- ------- -------
Total reductions 5,490 2,275 3,895 3,770 8,847
Other changes, net(1) 19 (18) (25) 52 (19)
------- ------- ------- ------- -------
Loans receivable, end of period $21,359 $20,670 $20,511 $18,794 $19,550
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
- -------------------------------
(1) Other items consist of loans in process, deferred loan fees and
allowances for loan losses
LOANS TO ONE BORROWER LIMITS. OTS regulations generally limit the
aggregate amount that a savings association may lend to any one borrower to an
amount equal to 15% of the association's unimpaired capital and unimpaired
surplus (collectively, "Unimpaired Capital"). A savings association may loan to
one borrower and certain related persons or entities an additional amount not to
exceed 10% of the association's Unimpaired Capital if the additional amount is
fully secured by certain forms of "readily marketable collateral." Real estate
is not considered "readily marketable collateral." In addition, the regulations
require that loans to certain related or affiliated borrowers be aggregated for
purposes of such limits. The level of unimpaired capital and surplus
notwithstanding, a savings association may lend up to $500,000 to any one
borrower or group of related borrowers. See "REGULATION - Office of Thrift
Supervision -- Lending Limit."
Based on such limits, the Bank was able to lend $500,000 to one borrower at
March 31, 1996. The largest amount the Bank had outstanding to one borrower and
related persons or entities at March 31, 1996, was approximately $456,000,
consisting of two loans, the largest of which was $306,075. Each of such loans
is secured by commercial real estate located in the Bank's primary market area
and is performing in accordance with its terms.
LOAN ORIGINATION AND OTHER FEES. The Bank realizes loan origination fee
and other fee income from its lending activities and also realizes income from
late payment charges, application fees and fees for other miscellaneous
services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with SFAS No. 91 as
an adjustment to yield over the life of the related loan.
-40-
<PAGE>
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. The Bank
attempts to maintain a high level of asset quality through sound underwriting
policies and aggressive collection efforts.
Borrowers who become one to 30 days delinquent are not considered seriously
delinquent unless delinquency at such level continues for several months, in
which case a borrower is treated as chronically delinquent. Chronically
delinquent borrowers are referred to debt counseling, are advised to consider
selling the subject property and, if such efforts are unsuccessful, foreclosure
proceedings are initiated. In the absence of chronic delinquency, borrowers
who are one to 30 days delinquent receive delinquency notices at the end of the
month. Borrowers who are 30 to 59 days delinquent for two consecutive months or
who are 60 to 89 days delinquent receive telephone calls or personalized
letters. Borrowers who become more than 90 days delinquent receive default
notices and, absent corrective action, foreclosure proceedings are instituted.
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
<TABLE>
<CAPTION>
At June 30,
------------------------------
At March 31, 1996 1995
------------------------------- ------------------------------
Percent Percent
of total of total
Number Amount loans Number Amount loans
------ ------ ------- ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 4 $129 .60% 9 $468 2.26%
60 - 89 days 1 2 .01 3 48 .23
90 days and over 2 111 .52 4 194 .95
---- ---- ---- ---- ---- ----
Total delinquent loans 7 $242 1.13% 16 $710 3.44%
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
<CAPTION>
At June 30,
------------------------------------------------------------------
1994 1993
------------------------------ ------------------------------
Percent Percent
of total of total
Number Amount loans Number Amount loans
------ ------ ------- ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 8 $469 2.48% 4 $123 .62%
60 - 89 days 4 115 .61% 5 157 .80
90 days and over 1 93 .49 5 333 1.70
---- ---- ---- ---- ---- ----
Total delinquent loans 13 $677 3.58% 14 $613 3.12%
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
</TABLE>
Nonperforming assets include nonaccruing loans, accruing loans which are
delinquent 90 days or more, real estate acquired by foreclosure or by deed-in-
lieu thereof, in-substance foreclosures and repossessed assets. The Bank ceases
to accrue interest on real estate loans if the collateral value is not adequate,
in the opinion of management, to cover the outstanding principal and interest.
-41-
<PAGE>
The following table sets forth information with respect to the accrual and
nonaccrual status of the Bank's loans and other nonperforming assets at the
dates indicated:
<TABLE>
<CAPTION>
At March 31, At June 30,
------------------ ------------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent 90+ days $111 $70 $194 $ - $ -
Loans accounted for on a nonaccrual basis:
Real estate
One- to four-family - - - 93 333
Multifamily - - - - -
Nonresidential - - - - -
Consumer - - - - -
---- ---- ---- ---- ----
Total nonaccrual loans - - - - -
---- ---- ---- ---- ----
Total nonperforming loans $111 $70 $194 $93 $333
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Real estate owned - - - - -
---- ---- ---- ---- ----
Total nonperforming assets $111 $70 $194 $93 $333
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Allowance for loan losses $104 $98 $ 98 $72 $101
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Nonperforming assets as a percent
of total assets .35% .23% .61% 0.30% 1.05%
Nonperforming loans as a percent
of total loans .52% .34% .95% 0.49% 1.70%
Allowance for loan losses as a
percent of nonperforming loans 93.69% 140.00% 50.52% 77.42% 30.33%
</TABLE>
For the quarter ended March 31, 1996, the Bank had no gross interest income
which would have been recorded had nonaccruing loans been current in accordance
with their original terms.
Real estate acquired by the Bank as a result of foreclosure proceedings is
classified as real estate owned ("REO") until it is sold. When property is so
acquired it is recorded by the Bank at the estimated fair value of the real
estate, less estimated selling expenses, at the date of acquisition, and any
write-down resulting therefrom is charged to the allowance for loan losses.
Interest accrual, if any, ceases no later than the date of acquisition of the
real estate, and all costs incurred from such date in maintaining the property
are expensed. Costs relating to the development and improvement of the property
are capitalized to the extent of fair value.
The Bank classifies its own assets on a quarterly basis in accordance with
federal regulations. Problem assets are classified as "substandard," "doubtful"
or "loss." "Substandard" assets have one or more defined weaknesses and are
characterized by the distinct possibility that the Bank will sustain some loss
if the deficiencies are not corrected. "Doubtful" assets have the same
weaknesses as "substandard" assets, with the additional characteristics that (i)
the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, questionable and (ii) there is a high
possibility of loss. An asset classified "loss" is considered uncollectible and
of such little value that its continuance as an asset of the Bank is not
warranted.
-42-
<PAGE>
The aggregate amounts of the Bank's classified assets at the dates
indicated were as follows:
At March 31, At June 30,
---------------- --------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(In thousands)
Classified assets:
Substandard $431 $474 $441 $367 $516
Doubtful - - - - -
Loss 6 4 28 - 50
---- ---- ---- ---- ----
Total classified assets $437 $478 $469 $367 $566
---- ---- ---- ---- ----
---- ---- ---- ---- ----
The Bank establishes general allowances for loan losses for any loan
classified as substandard or doubtful. If an asset, or portion thereof, is
classified as loss, the Bank must either establish a specific allowance for loss
in the amount of 100% of the portion of the asset classified loss or charge off
the amount of the loss classification. See "Allowance for Loan Losses."
Generally, the Bank has elected to charge off the portion of any real estate
loan deemed to be uncollectible.
The Bank analyzes each classified asset on a quarterly basis to determine
whether changes in the classifications are appropriate under the circumstances.
Such analysis focuses on a variety of factors, including the amount of any
delinquency and the reasons for the delinquency, if any, the use of the real
estate securing the loan, the status of the borrower and the appraised value of
the real estate. As such factors change, the classification of the asset will
change accordingly.
ALLOWANCE FOR LOAN LOSSES. Management, with oversight by the Board,
reviews on a quarterly basis the allowance for loan losses as it relates to a
number of relevant factors, including but not limited to, trends in the level of
delinquent and nonperforming assets and classified loans, current and
anticipated economic conditions in the primary lending area, past loss
experience and possible losses arising from specific problem assets. To a
lesser extent, management also considers loan concentrations to single borrowers
and changes in the composition of the loan portfolio. While management believes
that it uses the best information available to determine the allowance for loan
losses, unforeseen market conditions could result in adjustments and net income
could be significantly affected if circumstances differ substantially from the
assumptions used in making the final determination.
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated:
<TABLE>
<CAPTION>
Nine months ended
March 31, Year ended June 30,
------------------ ------------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 98 $72 $72 $101 $ 15
Charge-offs(1) (28) (1) (4) (96) -
Recoveries(1) - 18 18 34 3
---- --- --- --- ----
Net (charge-offs) recoveries(1) (28) 17 14 (62) 3
Provision for loan losses 34 9 12 33 83
---- --- --- --- ----
Balance at end of period $104 $98 $98 $72 $101
---- --- --- --- ----
---- --- --- --- ----
Ratio of net (charge-offs) recoveries
to average loans outstanding
during the period .13% .08% .07% .32% -%
Ratio of allowance for loan losses
to total loans .48 .47 .47 .38 .51
</TABLE>
- -----------------------------------
(1) All charge-offs and recoveries relate to loans secured by one- to four-
family real estate, except $70,000 of charge-offs and $21,000 of recoveries
during the year ended June 30, 1994, and the recoveries during the year
ended June 30, 1995, totalling $18,000, which relate to loans secured by
non-residential real estate.
-43-
<PAGE>
Management does not allocate portions of the allowance to particular types
of loans.
INVESTMENT ACTIVITIES
Federal regulation and Ohio law permit the Bank to invest in various types
of investments, including interest- bearing deposits in other financial
institutions, U.S. Treasury and agency obligations, mortgage-backed securities
and certain other specified investments. The Board of Directors of the Bank has
adopted an investment policy which authorizes management, under the supervision
of the Investment Committee of the Board, to make investments in U.S. Government
and agency securities, deposits in the FHLB, certificates of deposit in
federally-insured financial institutions, banker's acceptances issued by major
U.S. banks, corporate debt securities rated by a major statistical rating firm
as at least "AA," or equivalent, and municipal or other tax free obligations.
Laird L. Lazelle, the Bank's President, Michael S. Schwartz, the Chairman of the
Board and Dianne K. Rabe, its Vice President, have primary responsibility for
implementation of the investment policy. The Bank's investment policy is
designed primarily to provide and maintain liquidity within regulatory
guidelines, to maintain a balance of high quality investments to minimize risk
and to maximize return without sacrificing liquidity and safety. See
"REGULATION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Analysis of Financial Condition, and - Liquidity and
Capital Resources."
The following table sets forth the composition of the Bank's interest-
bearing deposits and investment securities at the dates indicated:
<TABLE>
<CAPTION>
At March 31, At June 30,
------------------- --------------------------------------------------------------------
1996 1995 1994 1993
------------------- ----------------- ------------------ --------------------
Carrying Fair Carrying Fair Carrying Fair Carrying Fair
value value value value value value value value
---------- ----- -------- ----- ------- ----- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 85 $ 85 $ 786 $ 786 $ 1,827 $ 1,827 $3,477 $3,477
Certificates of deposit - - - - 1,400 1,400 1,400 1,400
Investment securities:
Federal funds 4,136 4,136 3,100 3,100 575 575 500 500
U.S. Government obligations 400 393 1,050 1,035 1,050 1,004 233 233
FHLB stock 274 274 260 260 241 241 11 155
Mortgage-backed securities 4,957 4,831 5,532 5,409 6,593 6,444 5,303 5,345
------ ------ ------- ------- ------- ------- ------- -------
Total investments $9,852 $9,719 $10,728 $10,590 $11,686 $11,491 $10,924 $11,110
------ ------ ------- ------- ------- ------- ------- -------
------ ------ ------- ------- ------- ------- ------- -------
</TABLE>
-44-
<PAGE>
The maturities of the Bank's interest-bearing deposits and investment
securities at June 30, 1995, are indicated in the following table:
<TABLE>
<CAPTION>
At June 30, 1995
---------------------------------------------------------------------
After one through After five
One year or less five years through ten years
---------------------- ---------------------- -----------------
Carrying Average Carrying Average Carrying
value yield value yield value
-------- ------- -------- ------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 786 5.95% $ - -% $ -
Investment securities:
Federal funds 3,100 6.00 - - -
U.S. Government
obligations 650 4.98 400 4.81 -
Mortgage-backed
securities 131 3.28 91 7.25 146
FHLB stock - - - - -
------ ---- ----
Total $4,667 5.77% $491 5.26% $146
------ ---- ----
------ ---- ----
<CAPTION>
At June 30, 1995
----------------------------------------------------------------------------
After five After ten
through ten years years Total
----------------- ------------------------ ---------------------------
Average Carrying Average Carrying Weighted
yield value yield value average yield
------- -------- ------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-bearing deposits -% $ - -% $ 786 5.95%
Investment securities:
Federal funds - - - 3,100 6.00%
U.S. Government
obligations - - - 1,050 4.92%
Mortgage-backed
securities 6.92 5,164 5.83 5,532 5.82%
FHLB stock - 260 6.50 260 6.50%
------- -------
Total 6.92% $5,424 5.86% $10,728 5.81%
------- -------
------- -------
</TABLE>
The maturities of the Bank's interest-bearing deposits and investment
securities at March 31, 1996, are indicated in the following table:
<TABLE>
<CAPTION>
At March 31, 1996
------------------------------------------------------------------------
After one through After five
One year or less five years through ten years
---------------------- ---------------------- -----------------
Carrying Average Carrying Average Carrying
value yield value yield value
-------- ------- -------- ------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 85 4.95% $ - -% $ -
Investment securities:
Federal funds 4,136 5.25 - - -
U.S. Government obligations 250 5.75 150 6.06 -
Mortgage-backed securities 105 6.56 116 7.27 122
FHLB stock - - - - -
------ ----- ---- ----
Total $4,576 5.30% $266 6.59% $122
------ ----- ---- ----
------ ----- ---- ----
<CAPTION>
At March 31, 1996
-------------------------------------------------------------------------
After five After ten
through ten years years Total
----------------- ----------------------- ------------------------
Average Carrying Average Carrying Weighted
yield value yield value average yield
------- -------- ------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-bearing deposits -% $ - -% $ 85 4.95%
Investment securities:
Federal funds - - - 4,136 5.25
U.S. Government obligations - - - 400 5.87
Mortgage-backed securities 7.30 4,614 5.28 4,957 5.41
FHLB stock - 274 7.00 274 7.00
------ ------
Total 7.30% $4,888 5.38% $9,852 5.40%
------ ------
------ ------
</TABLE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of the Bank's
funds for use in lending and other investment activities. In addition to
deposits, the Bank derives funds from interest payments and principal repayments
on loans and income on earning assets. Loan payments are a relatively stable
source of funds, while deposit inflows and outflows fluctuate more in response
to general interest rates and money market conditions. The Bank also utilizes
FHLB advances as an alternative source of funds. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
DEPOSITS. Deposits are attracted principally from within the Bank's
primary market area through the offering of a broad selection of deposit
instruments, including NOW accounts, demand deposit accounts, money market
accounts, regular passbook savings accounts, term certificate accounts, IRAs and
Keogh accounts. Interest rates paid, maturity terms, service fees and
withdrawal penalties for the various types of accounts are established
periodically by management of the Bank based on the Bank's liquidity
requirements, growth goals and interest rates paid by competitors. The Bank
does not use brokers to attract deposits. The amount of deposits from outside
the Bank's primary market area is not significant.
At March 31, 1996, the Bank's certificates of deposit totaled $24.7, or
89.0% of total deposits. Of such amount, approximately $18.8 million in
certificates of deposit mature within one year. Based on past experience and
the Bank's prevailing pricing strategies, management believes that a substantial
percentage of such certificates will be renewed with the Bank at maturity. If
there is a significant deviation from historical experience, the Bank can
utilize borrowings from the FHLB of Cincinnati as an alternative source of
funds.
-45-
<PAGE>
The following table sets forth the dollar amount of deposits in the various
types of accounts offered by the Bank at the dates indicated:
<TABLE>
<CAPTION>
At March 31, At June 30,
--------------------------------------------------------
1996 1995 1994 1993
---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent
of total of total of total of total
Amount deposits Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook savings
accounts (1) $1,085 3.91% $1,288 4.64% $1,835 6.71% 2,880 9.91%
NOW and money market
accounts (2) 1,962 7.06 2,507 9.04 3,306 12.09 3,313 11.40
------- ------- ------- ------ ------- ------ ------- ------
Total transaction
accounts 3,047 10.97 3,795 13.68 5,141 18.80 6,193 21.31
Certificates of deposit
3.00% or less 105 .38 425 1.53 250 .91 - -
3.01 - 5.00% 1,593 5.73 4,157 14.99 18,975 69.38 6,550 22.54
5.01 - 7.00% 22,892 82.40 18,892 68.11 2,236 8.18 14,155 48.71
7.01 - 9.00% 143 .52 468 1.69 746 2.73 2,164 7.44
------- ------- ------- ------ ------- ------ ------- ------
Total certificates of
deposit (3) 24,733 89.03 23,942 86.32 22,207 81.20 22,869 78.69
------- ------- ------- ------ ------- ------ ------- ------
Total deposits $27,780 100.00 % $27,737 100.00% $27,348 100.00% $29,062 100.00%
------- ------- ------- ------ ------- ------ ------- ------
------- ------- ------- ------ ------- ------ ------- ------
</TABLE>
- ------------------------
(1) The weighted average rate on passbook savings accounts was 2.52%, 2.87% and
2.84% at March 31, 1996, and June 30, 1995 and 1994, respectively.
(2) The weighted average rate on NOW and money market accounts was 2.56%, 2.77%
and 2.81% at March 31, 1996, and June 30, 1995 and 1994, respectively.
(3) The weighted average rate on all certificates of deposit was 5.96%, 6.01%
and 4.91% at March 31, 1996, and June 30, 1995 and 1994, respectively.
The following table shows rate and maturity information for the Bank's
certificates of deposit at March 31, 1996:
Amount Due
---------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
---- -------- --------- ---------- ------- -----
(In thousands)
3.00% or less $ 105 $ - $ - $ - $ 105
3.01% to 5.00% 1,280 78 161 74 $ 1,593
5.01% to 7.00% 17,226 4,514 646 506 $22,892
7.01% to 9.00% 143 - - - $ 143
------- ------ ---- ---- -------
Total certificates
of deposit $18,754 $4,592 $807 $580 $24,733
------- ------ ---- ---- -------
------- ------ ---- ---- -------
-46-
<PAGE>
The following table presents the amount of the Bank's certificates of
deposit of $100,000 or more by the time remaining until maturity at March 31,
1996:
Maturity Amount
-------- ------
(In thousands)
Three months or less $ 847
Over 3 months to 6 months 781
Over 6 months to 12 months 611
Over 12 months 442
------
Total $2,681
------
------
The following table sets forth the Bank's deposit account balance activity
for the periods indicated:
<TABLE>
<CAPTION>
Nine months ended
March 31, Year ended June 30,
------------------ ----------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance $27,737 $27,348 $27,348 $29,062 $27,617
Net increase(decrease)
before interest credited (1,124) (2,517) (920) (3,011) (54)
Interest credited 1,167 946 1,309 1,297 1,499
Ending balance 27,780 25,777 27,737 27,348 29,062
------- ------- ------- ------- -------
Net increase (decrease) $ 43 $(1,571) $ 389 $(1,714) $ 1,445
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
BORROWINGS. The FHLB system functions as a central reserve bank providing
credit for its member institutions and certain other financial institutions.
See "REGULATION - Federal Home Loan Banks." As a member in good standing of the
FHLB of Cincinnati, the Bank is authorized to apply for advances from the FHLB
of Cincinnati, provided certain standards of creditworthiness have been met.
Under current regulations, an association must meet certain qualifications to be
eligible for FHLB advances. The extent to which an association is eligible for
such advances will depend upon whether it meets the Qualified Thrift Lender Test
(the "QTL Test"). See "REGULATION - Office of Thrift Supervision -- Qualified
Thrift Lender Test." If an association meets the QTL Test, it will be eligible
for 100% of the advances it would otherwise be eligible to receive. If an
association does not meet the QTL Test, it will be eligible for such advances
only to the extent it holds specified QTL Test assets. At March 31, 1996, the
Bank was in compliance with the QTL Test.
During the year ended June 30, 1995, the Bank obtained advances from the
FHLB of Cincinnati as indicated in the following table:
Nine months ended
March 31, Year ended June 30,
----------------- -------------------------
1996 1995 1995 1994 1993
------ ------ ----- ------ ------
(Dollars in thousands)
Average balance outstanding 931 995 1,046 815 -
Maximum amount outstanding
at any month end during
the period 1,186 1,213 1,213 1,000 -
Balance outstanding at end
of period 842 1,208 1,192 955 -
Weighted average interest
rate during the period 6.02% 5.36% 5.64% 5.16% -
Weighted average interest
rate at end of period 5.51% 5.84% 5.85% 5.50% -
-47-
<PAGE>
COMPETITION
The Bank competes for deposits with other savings associations, savings
banks, commercial banks and credit unions and with the issuers of commercial
paper and other securities, such as shares in money market mutual funds. The
primary factors in competing for deposits are interest rates and convenience of
office location. In making loans, the Bank competes with other savings
associations, savings banks, commercial banks, mortgage brokers, consumer
finance companies, credit unions, leasing companies and other lenders. The Bank
competes for loan originations primarily through the interest rates and loan
fees it charges and through the efficiency and quality of services it provides
to borrowers.
Competition in Hamilton County is intense due to the number of financial
institutions serving the area. Competition is affected by, among other things,
the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable. The Bank does not offer all of the products and services offered
by some of its competitors, particularly commercial banks. The Bank monitors
the product offerings of its competitors and adds new products when it can do so
competitively and cost effectively. The Bank's deposit market share in Hamilton
County is negligible.
The size of financial institutions competing with the Bank is likely to
increase as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions. Such
increased competition may have an adverse effect upon the Bank.
PROPERTIES
The Bank leases the property at 25 Garfield Place where its office is
located.
EMPLOYEES
As of March 31, 1996, the Bank had eight full-time employees and no part-
time employees. The Bank provides health and long-term disability benefits,
life insurance, a 401(k) plan and a profit sharing plan for its employees. The
Bank believes that relations with its employees are excellent. None of the
employees of the Bank is represented by a collective bargaining unit.
LEGAL PROCEEDINGS
The Bank is not presently involved in any material legal proceedings. From
time to time, the Bank is a party to legal proceedings incidental to its
business to enforce its security interest in collateral pledged to secure loans
made by the Bank.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
THE HOLDING COMPANY. The Board of Directors of the Holding Company
consists of seven members divided into two classes. Each of the directors of
the Bank is also a director of the Holding Company. The terms of Ms. Emden,
Mr. Silverglade and Mr. Silverman will expire in 1996 and the terms of Ms.
Dickhaut, Mr. Lazelle, Mr. Levitch and Mr. Schwartz will expire in 1997.
The executive officers of the Holding Company are Laird L. Lazelle,
President and Dianne K. Rabe, Secretary and Treasurer.
THE BANK. The Constitution of the Bank provides for a Board of Directors
consisting of not less than five nor more than seven directors, with the number
to be fixed or changed by the members by resolution at the annual meeting. The
Board of Directors currently consists of seven directors divided into three
classes. One class of directors is elected each year. Each director serves for
a three-year term. The Board of Directors met 27 times during the year ended
June 30, 1995, for regular and special meetings. No director attended fewer
than 75% of the aggregate of such meetings and all meetings of the committees of
which such director was a member.
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<PAGE>
The following table presents certain information with respect to the
present directors of the Bank, each of whom is also a director of the Holding
Company, and the executive officers of the Bank:
<TABLE>
<CAPTION>
Year of
Position(s) with the commencement Term
Name Age(1) Bank of directorship expires
---- --- ----------------- --------------- -------
<S> <C> <C> <C> <C>
Mardelle Dickhaut 63 Director and Secretary 1989 1996
Ruth C. Emden 69 Director 1994 1997
Laird L. Lazelle 57 Director and President 1994 1997
Robert E. Levitch 62 Director 1964 1998
Margo A. Liebert 52 Treasurer - -
Dianne K. Rabe 44 Vice President - -
Michael S. Schwartz 51 Chairman of the Board 1967 1998
Paul L. Silverglade 70 Director 1988 1996
Ivan J. Silverman 55 Director 1992 1997
</TABLE>
____________________________
(1) As of March 31, 1996.
MARDELLE DICKHAUT has served as Secretary of the Bank since 1979 and as a
director since 1989. Mrs. Dickhaut was employed at the Bank for 23 years prior
to her retirement in 1995.
RUTH C. EMDEN has served as a director of the Bank since 1994. Mrs. Emden
is the widow of Narvin I. Emden, who served the Bank as President, Managing
Officer and Director for over 46 years. Mrs. Emden is active in community
service.
LAIRD L. LAZELLE is President and Chief Executive Officer of both the
Holding Company and the Bank and is the designated Managing Officer of the Bank.
Mr. Lazelle joined the Bank in January 1994. Mr. Lazelle has over 36 years of
financial institution experience, most recently as President and Chief Executive
Officer of The TriState Bancorp.
ROBERT E. LEVITCH has served as a director of the Bank since 1964. Mr.
Levitch has been a corrections officer with the Hamilton County Sheriff's
Department since 1980.
MARGO A. LIEBERT has served as Treasurer of the Bank since 1979 and is the
chief accounting officer of the Bank. Mrs. Liebert has been employed by the
Bank for 29 years.
DIANNE K. RABE is Vice President and chief operating officer of the Bank
and Secretary/Treasurer of the Holding Company. Mrs. Rabe is a Certified Public
Accountant. Mrs. Rabe came to the Bank from another Cincinnati thrift
institution in 1992.
MICHAEL S. SCHWARTZ is an attorney at law practicing in Cincinnati, Ohio
and operates a title insurance agency. Mr. Schwartz is legal counsel to the
Bank and also provides title services for loans granted by the Bank. Mr.
Schwartz has served as a director of the Bank since 1967 and succeeded his
father as Chairman of the Board in 1993.
PAUL L. SILVERGLADE retired as the Corporate Office Personnel Director for
Federated Department Stores in 1981, after serving for 33 years. Mr.
Silverglade has been a director of the Bank since 1988 and serves as Chairman of
the Compensation Committee.
IVAN J. SILVERMAN is an investment consultant and Associate Vice President
with Gradison Division of McDonald & Company Securities, Inc. Mr. Silverman is
also the Mayor of the City of Montgomery, Ohio. Mr. Silverman has served as a
director of the Bank since 1992 and serves as Chairman of the Audit Committee.
-49-
<PAGE>
COMMITTEES OF DIRECTORS
The Board of Directors of the Bank has an Audit Committee and a
Compensation Committee. The full Board of Directors serves as a nominating
committee.
The members of the Audit Committee are Mr. Silverman, Ms. Emden, Mr.
Levitch and Mr. Silverglade. The Audit Committee is responsible for selecting
and recommending to the Board of Directors a firm to serve as auditors for the
Bank. The Audit Committee met one time during the year ended June 30, 1995.
The Compensation Committee is comprised of Mr. Silverglade, Mr. Silverman
and Mr. Schwartz. The function of the Compensation Committee is to determine
compensation for the Bank's employees and to make recommendations to the Board
of Directors regarding employee benefits and related matters. The Compensation
Committee met once during the year ended June 30, 1995.
COMPENSATION
Each director of the Bank currently receives a fee of $7,500 per year.
The following table presents certain information regarding the cash
compensation received by Laird L. Lazelle, President of the Bank during the
fiscal year ended June 30, 1995. No other executive officer of the Bank
received compensation exceeding $100,000 during that period:
SUMMARY COMPENSATION TABLE
Annual compensation
-----------------------------------
Other annual
Name and principal position Year Salary Bonus compensation(1)
- --------------------------- ---- ------ ----- ---------------
Laird L. Lazelle 1995 $69,488 $5,200 $6,000
President and
Chief Executive Officer
___________________________
(1) Consists of directors fees. Does not include amounts attributable to
miscellaneous benefits received by the named executive officer, the cost of
which was less than 10% of his annual salary and bonus.
DEFINED CONTRIBUTION PLAN
The Bank maintains a tax-qualified defined benefit plan (the "Pension
Plan") covering employees age 21 or older who have completed at least one year
of service to the Bank. Pursuant to the Pension Plan, a participant may elect
to allocate up to the lesser of 9% of his salary or $7,000 (multiplied by an
adjustment factor) to his account annually. The Bank makes a 50% matching
contribution and may also make additional discretionary contributions pursuant
to the Pension Plan. The Bank's contributions become vested at the rate of one-
fifth each year after two years of employment. The Bank's expense for
contributions to the Pension Plan for the nine months ended March 31, 1996, and
for the years ended June 30, 1995 and 1994, was $5,053, $10,585 and $10,167,
respectively.
STOCK BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. The Holding Company intends to establish
the ESOP for the benefit of employees of the Holding Company and its
subsidiaries, including the Bank, who are age 21 or older and who have completed
at least one year of service with the Holding Company and its subsidiaries. The
ESOP will provide an ownership interest in the Holding Company to all full-time
employees of the Holding Company. The Board of Directors of the Holding Company
believes that the ESOP will be in the best interests of the Holding Company and
its shareholders.
-50-
<PAGE>
The ESOP trust intends to borrow funds from the Holding Company with which
to acquire up to 8.0% of the Common Shares sold in the Conversion. Such loan
will be secured by the Common Shares purchased with the proceeds, and will be
repaid by the ESOP over a period of approximately seven years with discretionary
contributions to the ESOP and earnings on ESOP assets. Common Shares purchased
with such loan proceeds will be held in a suspense account for allocation among
participants as the loan is repaid.
The amount of cash or other assets that can be contributed to the ESOP each
year is limited by certain IRS regulations. The Bank intends to make the
maximum contribution to the ESOP permitted by such regulations, which could
result in repayment of the ESOP loan in fewer than seven years. A shorter
repayment period could result in increased compensation expense during the years
in which payments are made on the ESOP loan. See "PRO FORMA DATA."
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of compensation. Except for
participants who retire, become disabled or die during the plan year, all other
participants must have completed at least 1,000 hours of service in order to
receive an allocation. Benefits become fully vested after five years of
service. Existing employees of the Holding Company and the Bank will be given
credit for years of service to the Bank prior to the effective date of the ESOP
for vesting purposes. Vesting will be accelerated upon retirement at or after
age 65, death, disability, termination of the ESOP or a change in control of the
Bank. Shares allocated to the account of a participant whose employment by the
Bank terminates prior to having satisfied the vesting requirement will be
forfeited. Forfeitures will be reallocated among remaining participating
employees. Benefits may be paid either in the Holding Company's common shares
or in cash. Benefits may be payable upon retirement, death, disability or
separation from service. Benefits payable under the ESOP cannot be estimated.
A Committee appointed by the Board of Directors of the Holding Company will
administer the ESOP. The Common Shares and other ESOP funds will be held and
invested by a trustee (the "ESOP Trustee"). The ESOP Committee may instruct the
ESOP Trustee regarding investments of funds contributed to the ESOP. The ESOP
Trustee must vote all allocated shares held in the ESOP in accordance with the
instructions of the participating employees. Shares for which employees do not
give instructions and unallocated shares will be voted by the ESOP Trustee.
The tax-qualified status of the ESOP and its purchase of the Common Shares
of the Holding Company are subject to the subsequent approval of the
Commissioner of the IRS (the "Commissioner"). The Holding Company will submit
to the Commissioner an application for approval of the ESOP. Although no
assurances can be given, the Holding Company expects that the ESOP will be
approved by the Commissioner.
STOCK OPTION PLAN. After the completion of the Conversion, the Board of
Directors of the Holding Company intends to adopt the Stock Option Plan, subject
to approval by the shareholders of the Holding Company. The purposes of the
Stock Option Plan include retaining and providing incentives to the directors,
officers and employees of the Holding Company and its subsidiaries by
facilitating their purchase of a stock interest in the Holding Company.
Options granted to officers and key employees under the Stock Option Plan
may be "incentive stock options" within the meaning of Section 422 of the Code
(an "ISO"). Options granted under the Stock Option Plan to directors who are
not full-time employees of the Holding Company will not qualify under the Code
and thus will not be incentive stock options ("Non-qualified Options").
Although any eligible director, officer or employee of the Holding Company may
receive Non-qualified Options, it is anticipated that the non-employee directors
of the Holding Company will receive Non-qualified Options and other eligible
participants will receive ISOs.
The option exercise price shall be determined by the Committee at the time
of grant; provided, however, that the exercise price for an ISO or for any
option if the Stock Option Plan is implemented by the Holding Company during the
first year following the completion of the Conversion must not be less than 100%
of the fair market value of the shares on the date of the grant. No stock
option will be exercisable after the expiration of ten years from the date that
it is granted; provided, however, that in the case of an ISO granted to an
employee who owns more than 10% of the Bank's outstanding common shares at the
time an ISO is granted under the Stock Option Plan, the exercise price of the
ISO may not be less than 110% of the fair market value of the shares on the date
of the grant, and the ISO shall not be exercisable after the expiration of five
years from the date it is granted.
-51-
<PAGE>
An option recipient cannot transfer or assign an option other than by will
or in accordance with the laws of descent and distribution. "Termination for
cause," as defined in the Stock Option Plan, will result in the annulment of any
outstanding options.
The Holding Company will receive no monetary consideration for the granting
of options under the Stock Option Plan. Upon the exercise of options, the
Holding Company will receive payment of cash, common shares of the Holding
Company or a combination of cash and common shares from option recipients in
exchange for shares issued.
The Committee may grant options under the Stock Option Plan at such times
as they deem most beneficial to the Holding Company on the basis of the
individual participant's responsibility, tenure and future potential to the
Holding Company.
A number of shares equal to 10% of the Common Shares to be issued in
connection with the Conversion is expected to be reserved for issuance by the
Holding Company upon the exercise of options to be granted to certain directors,
officers and employees of the Holding Company and its subsidiaries from time to
time under the Stock Option Plan. Assuming the issuance of 462,875 Common
Shares in the Conversion, 46,288 Common Shares will be reserved for issuance
under the Stock Option Plan. No determination has been made regarding the
recipients of awards under the Stock Option Plan or the number of shares to be
awarded to individual recipients.
In accordance with OTS regulations, if the Stock Option Plan is implemented
by the Holding Company during the first year following the completion of the
Conversion, the following restrictions will apply: (i) the Stock Option Plan
must be approved by the shareholders of the Holding Company at an annual or
special meeting of shareholders, in either case to be held no earlier than six
months after the completion of the Conversion; (ii) awards to directors who are
not full-time employees of the Holding Company or the Bank may not exceed 5% of
the plan shares per person and 30% in the aggregate of the total number of
shares reserved for issuance under the plan, (iii) awards to directors or other
persons who are full-time employees of the Holding Company or the Bank may not
exceed 25% of the plan shares per person, and (iv) options will become
exercisable at the rate of one-fifth per year commencing no earlier than one
year from the date the Stock Option Plan is approved by the shareholders,
subject to acceleration of vesting only in the event of the death or disability
of a participant.
RECOGNITION AND RETENTION PLAN. After the completion of the Conversion,
the Bank intends to adopt the RRP. The purpose of the RRP is to provide
directors and certain key employees of the Bank with an ownership interest in
the Bank in a manner designed to compensate such directors and key employees for
services to the Bank. The Bank expects to contribute sufficient funds to
enable the RRP to purchase up to 18,515 Common Shares, assuming the issuance of
462,875 Common Shares in connection with the Conversion.
The RRP Committee will consist of three directors who are not employees of
the Bank. The RRP Committee will administer the RRP and determine the number of
shares to be granted to eligible participants. Compensation expense in the
amount of the fair market value of the RRP shares will be recognized as the
shares are earned.
No determination has been made regarding recipients of RRP awards or the
number of shares to be awarded to individual recipients. In accordance with OTS
regulations, if the RRP is implemented during the first year following the
completion of the Conversion, the following restrictions will apply: (i) the
RRP must be approved by the shareholders of the Holding Company; (ii) awards to
directors who are not full-time employees of the Holding Company or the Bank may
not exceed 5% of the plan shares per person and 30% in the aggregate of the
total number of shares reserved for issuance under the plan; (iii) awards to
directors or other persons who are full-time employees of the Holding Company or
the Bank may not exceed 25% of the plan shares per person; and (iv) RRP shares
will be earned and nonforfeitable at the rate of one-fifth per year on each of
the first five anniversaries of the award, subject to acceleration only in the
event of the death or disability of a participant.
EMPLOYMENT AGREEMENT
The Bank currently has no employment agreements with any of its officers.
The Bank intends to enter into an employment agreement with Laird L. Lazelle
(the "Employment Agreement") upon the completion of the Conversion. The
Employment Agreement will provide for a term of three years and a salary and
performance review by the Board of Directors not less often than annually and
will provide for inclusion of Mr. Lazelle in any formally established employee
-52-
<PAGE>
benefit, bonus, pension and profit-sharing plans for which senior management
personnel are eligible. The Employment Agreement will also provide for vacation
and sick leave in accordance with the Bank's prevailing policies.
The Employment Agreement will be terminable by the Bank at any time. In
the event of termination by the Bank for "just cause," as defined in the
Employment Agreement, Mr. Lazelle will have no right to receive any compensation
or other benefits for any period after such termination. In the event of
termination by the Bank other than (i) for just cause, (ii) at the end of the
term of the Employment Agreement or (iii) in connection with a "change of
control," as defined in the Employment Agreement, Mr. Lazelle will be entitled
to a continuation of salary payments for the remainder of the term of the
Employment Agreement and a continuation of benefits substantially equal to those
being provided at the date of termination of employment until the earliest to
occur of the end of the term of the Employment Agreement or the date Mr. Lazelle
becomes employed full-time by another employer.
The Employment Agreement also contains provisions with respect to the
occurrence within six months prior to or one year following a "change of
control" of (1) the termination of employment of Mr. Lazelle for any reason
other than just cause, retirement or termination at the end of the term of the
agreement, or (2) a constructive termination resulting from change in the
capacity or circumstances in which Mr. Lazelle is employed or a material
reduction in his responsibilities, authority, compensation or other benefits
provided under the Employment Agreement without his written consent. In the
event of any such occurrence, Mr. Lazelle will be entitled to payment of an
amount equal to three times his then current annual salary. In addition, Mr.
Lazelle would be entitled to continued coverage under all benefit plans until
the earliest of the end of the term of the Employment Agreement or the date on
which he is included in another employer's benefit plans as a full-time
employee. The maximum which Mr. Lazelle may receive, however, is limited to an
amount which will not result in the imposition of a penalty tax pursuant to
Section 280G(b)(3) of the Code. A "change of control," as defined in the
Employment Agreement, generally refers to the acquisition by any person or
entity of the ownership or power to vote 25% or more of the voting stock of the
Bank or the Holding Company, the control of the election of a majority of the
directors of the Bank or the Holding Company or the acquisition of control, as
defined in the regulations of the OTS, of the Bank or the Holding Company.
The aggregate payments that would have been made to Mr. Lazelle under the
Employment Agreement, assuming his termination at March 31, 1996, following a
change of control, would have been approximately $195,000.
CERTAIN TRANSACTIONS WITH THE BANK
In accordance with the OTS regulations, the Bank makes loans to executive
officers and directors of the Bank in the ordinary course of business and on the
same terms and conditions, including interest rates and collateral, as those of
comparable loans to other persons. Other than loans made to executive officers
and directors prior to 1989 for which closing costs were waived by the Bank, all
outstanding loans to executive officers and directors comply with such policy,
do not involve more than the normal risk of collectibility or present other
unfavorable features and are current in their payments. Loans to all directors
and executive officers of the Bank and their related interests totalled $247,127
at March 31, 1996.
REGULATION
GENERAL
As a savings and loan association incorporated under the laws of Ohio, the
Bank is subject to regulation, examination and oversight by the OTS and the
Superintendent of the Division (the "Ohio Superintendent"). Because the Bank's
deposits are insured by the FDIC, the Bank also is subject to general oversight
by the FDIC. The Bank must file periodic reports with the OTS, the Ohio
Superintendent and the FDIC concerning its activities and financial condition.
Examinations are conducted periodically by federal and state regulators to
determine whether the Bank is in compliance with various regulatory requirements
and is operating in a safe and sound manner. The Bank is a member of the FHLB
of Cincinnati.
The Holding Company will be a savings and loan holding company within the
meaning of the Home Owners Loan Act, as amended (the "HOLA"). Consequently, the
Holding Company will be subject to regulation, examination and oversight by the
OTS and will be required to submit periodic reports thereto. Because the
Holding Company and the Bank
-53-
<PAGE>
are corporations organized under Ohio law, they are also subject to the
provisions of the Ohio Revised Code applicable to corporations generally.
The United States Congress is considering legislation to recapitalize the
SAIF. See "- Federal Deposit Insurance Corporation -- Assessments." In
connection with such legislation, Congress may eliminate the OTS and may require
that the Bank be regulated under federal law in the same fashion as banks. As a
result, the Bank may become subject to additional regulation, examination and
oversight by the FDIC. In addition, the Holding Company might become a bank
holding company, subject to examination, regulation and oversight by the Board
of Governors of the Federal Reserve ("FRB"), including greater activity and
capital requirements than imposed on it by the OTS.
OHIO SAVINGS AND LOAN LAW
The Ohio Superintendent is responsible for the regulation and supervision
of Ohio savings and loan associations in accordance with the laws of the State
of Ohio. Ohio law prescribes the permissible investments and activities of Ohio
savings and loan associations, including the types of lending that such
associations may engage in and the investments in real estate, subsidiaries and
corporate or government securities that such associations may make. The ability
of Ohio associations to engage in these state-authorized investments and
activities is subject to oversight and approval by the FDIC, if such investments
or activities are not permissible for a federally chartered savings and loan
association.
The Ohio Superintendent also has approval authority over any mergers
involving or acquisitions of control of Ohio savings and loan associations. The
Ohio Superintendent may initiate certain supervisory measures or formal
enforcement actions against Ohio associations. Ultimately, if the grounds
provided by law exist, the Ohio Superintendent may place an Ohio association in
conservatorship or receivership.
The Ohio Superintendent conducts regular examinations of the Bank
approximately once a year. Such examinations are usually conducted jointly with
one or both federal regulators. The Ohio Superintendent imposes assessments on
Ohio associations based on their asset size to cover the cost of supervision and
examination.
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all federally chartered
savings and loan associations and all other savings and loan associations the
deposits of which are insured by the FDIC. The OTS issues regulations governing
the operation of savings and loan associations, regularly examines such
associations and imposes assessments on savings associations based on their
asset size to cover the costs of this supervision and examination. The OTS also
may initiate enforcement actions against savings and loan associations and
certain persons affiliated with them for violations of laws or regulations or
for engaging in unsafe or unsound practices. If the grounds provided by law
exist, the OTS may appoint a conservator or receiver for a savings and loan
association.
REGULATORY CAPITAL REQUIREMENTS. The Bank is required by OTS regulations
to meet certain minimum capital requirements. For information regarding the
Bank's regulatory capital at March 31, 1996, and pro forma regulatory capital
after giving effect to the Conversion, see "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources" and "REGULATORY CAPITAL COMPLIANCE."
Current capital requirements call for tangible capital of 1.5% of adjusted
total assets, core capital (which for the Bank consists solely of tangible
capital) of 3.0% of adjusted total assets and risk-based capital (which for the
Bank consists of core capital and general valuation allowances) of 8.0% of risk-
weighted assets (assets, including certain off-balance sheet items, are weighted
at percentage levels ranging from 0% to 100% depending on the relative risk).
The OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and an acceptable
level of risk will be required to maintain core capital of from 4% to 5%,
depending on the association's examination rating and overall risk. The Bank
does not anticipate that it will be adversely affected if the core capital
requirement regulation is amended as proposed.
-54-
<PAGE>
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio as determined under the methodology of the OTS. If
the measured interest rate risk is above the level deemed normal under the
regulation, the association will be required to deduct one-half of such excess
exposure from its total capital when determining its risk-based capital. In
general, an association with less than $300 million in assets and a risk-based
capital ratio in excess of 12% will not be subject to the interest rate risk
component, and the association qualifies for such exemption. Pending
implementation of the interest rate risk component, the OTS has the authority to
impose a higher individualized capital requirement on any savings association it
deems to have excess interest rate risk. The OTS also may adjust the risk-based
capital requirement on an individualized basis to take into account risks due to
concentrations of credit and non-traditional activities. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset
and Liability Management."
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings and
loan associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. The OTS has defined
these capital levels as follows: (i) well-capitalized associations must have
total risk-based capital of at least 10%, core risk-based capital (consisting
only of items that qualify for inclusion in core capital) of at least 6% and
core capital of at least 5%; (ii) adequately capitalized associations are those
that meet the regulatory minimum of total risk-based capital of 8%, core risk-
based capital (consisting only of items that qualify for inclusion in core
capital) of 4%, and core capital of 4% (except for associations receiving the
highest examination rating, in which case the level is 3%) but are not well-
capitalized; (iii) undercapitalized associations are those that do not meet
regulatory limits, but that are not significantly undercapitalized; (iv)
significantly undercapitalized associations have total risk-based capital of
less than 6%, core risk-based capital (consisting only of items that qualify for
inclusion in core capital) of less than 3% or core capital of less than 3%; and
(v) critically undercapitalized associations are those with core capital of less
than 2% of total assets. In addition, the OTS generally can downgrade an
association's capital category, notwithstanding its capital level, if, after
notice and opportunity for hearing, the association is deemed to be engaging in
an unsafe or unsound practice because it has not corrected deficiencies that
resulted in it receiving a less than satisfactory examination rating on matters
other than capital or it is deemed to be in an unsafe or unsound condition. An
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Undercapitalized associations
will be subject to increased monitoring and asset growth restrictions and will
be required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. Critically undercapitalized institutions must be placed
in conservatorship or receivership within 90 days of reaching that
capitalization level, except under limited circumstances. The Bank's capital at
March 31, 1996, meets the standards for a well-capitalized institution.
Federal law prohibits a savings and loan association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (i) an amount equal to 50% of the association's total assets at
the time the association became undercapitalized or (ii) the amount that is
necessary to bring the association into compliance with all capital standards
applicable to such association at the time the association fails to comply with
its capital restoration plan.
LIQUIDITY. OTS regulations require that savings associations maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each member institution to maintain an average
daily balance of short-term liquid assets of not less than 1% of the total of
its net withdrawable savings accounts and borrowings payable in one year or
less. Monetary penalties may be imposed upon member institutions failing to
meet liquidity requirements. The eligible liquidity of the Bank at March 31,
1996, was approximately $4.6 million, or 15.69%, which exceeded the 5% liquidity
requirement by approximately $3.1 million. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources."
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QUALIFIED THRIFT LENDER TEST. Savings and loan associations are required
to maintain a specified level of investments in assets that are designated as
qualifying thrift investments. Such investments are generally related to
domestic residential real estate and manufactured housing and include stock
issued by any FHLB, the Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Association. The QTL test requires that 65% of an
institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business and 20% of liquid assets) consist
of qualified thrift investments on a monthly average basis in 9 out of every 12
months. The OTS may grant exceptions to the QTL test under certain
circumstances. If a savings and loan association fails to meet the QTL Test,
the Bank and its holding company will be subject to certain operating
restrictions. A savings and loan association that fails to meet the QTL Test
will not be eligible for new FHLB advances. See "- Federal Home Loan Banks."
At March 31, 1996, the Bank had QTL investments in excess of 65% of its total
portfolio assets.
LENDING LIMIT. OTS regulations generally limit the aggregate amount that a
savings association can lend to one borrower or group of related borrowers to an
amount equal to 15% of the association's unimpaired capital, which is defined
for this purpose as total capital for regulatory purposes. A savings
association may loan to one borrower an additional amount not to exceed 10% of
the association's unimpaired capital if the additional amount is fully secured
by certain forms of "readily marketable collateral." Real estate is not
considered "readily marketable collateral." Notwithstanding the level of
unimpaired capital and surplus, a savings association may lend up to $500,000 to
any one borrower or group of related borrowers. See "THE BUSINESS OF THE BANK -
Lending Activities -- Loan Originations, Purchases and Sales."
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to insiders are also
subject to Sections 22(g) and (h) of the Federal Reserve Act ("FRA"), which
place restrictions on loans to executive officers, directors and principal
shareholders and their related interests. Generally, such loans must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's unimpaired capital and surplus or 200%
of unimpaired capital and surplus for eligible adequately capitalized
institutions with less than $100 million in assets. See "- Lending Limits."
Most loans to directors, executive officers and principal shareholders must be
approved in advance by a majority of the "disinterested" members of the board of
directors of the association with any "interested" director not participating.
All loans to directors, executive officers and principal shareholders must be
made on terms substantially the same as offered in comparable transactions with
the general public. Loans to executive officers are subject to additional
limits. The Bank was in compliance with such restrictions at March 31, 1996.
See "MANAGEMENT - Certain Transactions with the Bank."
Savings associations must comply with Sections 23A and 23B of the FRA,
pertaining to transactions with affiliates. An affiliate of a savings
association is any company or entity that controls, is controlled by or is under
common control with the savings and loan association. The Holding Company will
be an affiliate of the Bank. Generally, Sections 23A and 23B of the FRA
(i) limit the extent to which a savings and loan association or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such institution's capital stock and surplus, (ii) limit the aggregate
of all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus, and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable to the association, as
those provided in transactions with a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and other similar types of transactions. In addition to the limits in
Sections 23A and 23B, a savings association may not make any loan or other
extension of credit to an affiliate unless the affiliate is engaged only in
activities permissible for a bank holding company and may not purchase or invest
in securities of any affiliate except shares of a subsidiary. The Bank was in
compliance with these requirements and restrictions at March 31, 1996.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various restrictions
or requirements on the ability of associations to make capital distributions,
according to ratings of associations based on their capital level and
supervisory condition. Capital distributions, for purposes of such regulation,
include, without limitation, payments of cash dividends, repurchases and certain
other acquisitions by an association of its shares and payments to stockholders
of another association in an acquisition of such other association.
For purposes of the capital distribution regulations, each institution is
categorized in one of three tiers. Tier 1 consists of associations that,
before and after the proposed capital distribution, meet their fully phased-in
capital requirement. Associations in this category may make capital
distributions during any calendar year equal to the greater of 100% of their net
income, current year-to-date, plus 50% of the amount by which the lesser of such
association's tangible, core or risk-based capital exceeds its fully phased-in
capital requirement for such capital component, as measured at the beginning of
the calendar year, or the amount authorized for a tier 2 association. Tier 2
consists of associations that, before
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and after the proposed capital distribution, meet their current minimum, but not
fully phased-in capital requirement. Associations in this category may make
capital distributions up to 75% of their net income over the most recent four
quarters. Tier 3 associations do not meet their current minimum capital
requirement and must obtain OTS approval of any capital distribution. A tier 1
association deemed to be in need of more than normal supervision by the OTS may
be downgraded to a tier 2 or tier 3 association.
The Bank meets the requirements for a tier 1 association and has not been
notified of any need for more than normal supervision. The Bank will also be
prohibited from declaring or paying any dividends or from repurchasing any of
its stock if, as a result, the net worth of the Bank would be reduced below the
amount required to be maintained for the liquidation account established in
connection with the Conversion. In addition, as a subsidiary of the Holding
Company, the Bank will also be required to give the OTS 30 day's notice prior to
declaring any dividend on its stock. The OTS may object to the dividend during
that 30-day period based on safety and soundness concerns. Moreover, the OTS
may prohibit any capital distribution otherwise permitted by regulation if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
In December 1994, the OTS issued a proposal to amend the capital
distributions limits. Under that proposal, associations not owned by a holding
company with a CAMEL examination rating of 1 or 2 could make a capital
distribution without notice to the OTS, if they remain adequately capitalized,
as described above, after the distribution is made. Any other association
seeking to make a capital distribution that would not cause the association to
fall below the capital levels to qualify as adequately capitalized or better,
would have to provide notice to the OTS. Except under limited circumstances and
with OTS approval, no capital distributions would be permitted if it caused the
association to become undercapitalized or worse.
HOLDING COMPANY REGULATION. After the Conversion, the Holding Company
will be a savings and loan holding company within the meaning of the HOLA. As
such, the Holding Company will register with the OTS and will be subject to OTS
regulations, examination, supervision and reporting requirements, in addition to
the reporting requirements of the SEC. Congress is considering legislation
which may require that the Holding Company become a bank holding company
regulated by the FRB. Bank holding companies with more than $150 million in
assets are subject to capital requirements similar to those imposed on the Bank.
They are also subject to more restrictive activity and investment limits than
savings and loan holding companies, although they have more extensive interstate
acquisition authority than savings and loan holding companies. No assurances
can be given that such legislation will be enacted, and the Holding Company
cannot be certain of the impact such legislation may have on its future
operations.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings and loan association or savings and loan holding
company, without prior approval of the OTS, or from acquiring or retaining more
than 5% of the voting shares of a savings and loan association or holding
company thereof, which is not a subsidiary. Under certain circumstances, a
savings and loan holding company is permitted to acquire, with the approval of
the OTS, up to 15% of the previously unissued voting shares of an
undercapitalized savings and loan association for cash without such savings and
loan association being deemed to be controlled by such holding company. Except
with the prior approval of the OTS, no director or officer of a savings and loan
holding company or person owning or controlling by proxy or otherwise more than
25% of such company's stock may also acquire control of any savings institution,
other than a subsidiary institution, or any other savings and loan holding
company.
The Holding Company will be a unitary savings and loan holding company.
Under current law, there are generally no restrictions on the activities of
unitary savings and loan holding companies, and such companies are the only
financial institution holding companies which may engage in commercial,
securities and insurance activities without limitation. The broad latitude
under current law is restricted if the OTS determines that there is reasonable
cause to believe that the continuation by a savings and loan holding company of
an activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings and loan association. The OTS may impose
such restrictions as deemed necessary to address such risk, including limiting
(i) payment of dividends by the savings and loan association; (ii) transactions
between the savings and loan association and its affiliates; and (iii) any
activities of the savings and loan association that might create a serious risk
that the liabilities of the holding company and its affiliates may be imposed on
the savings and loan association. Notwithstanding the foregoing rules as to
permissible business activities of a unitary savings and loan holding company,
if the savings and loan association subsidiary of a holding company fails to
meet the QTL Test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. At March 31,
1996, the Bank met the QTL Test. See "- Qualified Thrift Lender Test."
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If the Holding Company were to acquire control of another savings
institution, other than through a merger or other business combination with the
Bank, or if the Bank failed to meet the QTL Test, the Holding Company would
become a multiple savings and loan holding company. Unless the acquisition is
an emergency thrift acquisition and each subsidiary savings and loan association
meets the QTL Test, the activities of the Holding Company and any of its
subsidiaries (other than the Bank or other subsidiary savings and loan
associations) would thereafter be subject to activity restrictions. The HOLA
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof that is not a savings institution shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity other than (i)
furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi)
those activities previously directly authorized by federal regulation as of
March 5, 1987, to be engaged in by multiple holding companies; or (vii) those
activities authorized by the FRB as permissible for bank holding companies
[unless the OTS by regulation prohibits or limits such activities for savings
and loan holding companies] and which have been approved by the OTS prior to
being engaged in by a multiple holding company.
The OTS may approve an acquisition resulting in the formation of a multiple
savings and loan holding company that controls savings and loan associations in
more than one state only if the multiple savings and loan holding company
involved controls a savings and loan association that operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). As under prior law, the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings and
loan associations in more than one state in the case of certain emergency thrift
acquisitions.
No subsidiary savings and loan association of a savings and loan holding
company may declare or pay a dividend on its permanent or nonwithdrawable stock
unless it first gives the OTS 30 days advance notice of such declaration and
payment. Any dividend declared during such period or without the giving of such
notice shall be invalid.
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the BIF for commercial banks and
state savings banks and the SAIF for savings associations, state savings banks
that converted from savings associations and banks that have acquired deposits
from savings associations. The BIF and the SAIF are each required to maintain
designated levels of reserves. The FDIC has examination authority over all
insured depository institutions, including the Bank, and has authority to
initiate enforcement actions against federally insured savings associations if
the FDIC does not believe the OTS has taken appropriate action to safeguard
safety and soundness and the deposit insurance fund.
The deposit accounts of the Bank and of other savings associations are
insured by the FDIC in the SAIF. The reserves of the SAIF are currently below
the level required by law, because of a higher than anticipated reduction in the
amount of SAIF deposits and because a significant portion of the assessments
paid into the fund are used to pay the principal and interest on bonds issued by
FICO to pay the cost of resolving past thrift failures. The deposit accounts of
commercial banks are insured by the BIF administered by the FDIC, except to the
extent that such banks have acquired SAIF deposits. The reserves of the BIF
reached the level required by law in May 1995.
ASSESSMENTS. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. Such risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
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Because of the differing reserve levels of the SAIF and the BIF, deposit
insurance assessments paid by healthy commercial banks were recently reduced
significantly below the level paid by healthy savings associations. Assessments
paid by healthy savings associations exceeded those paid by healthy commercial
banks by approximately $.19 per $100 in deposits in late 1995 and will exceed
them by $.23 per $100 in deposits beginning in 1996. Such premium disparity
could have a negative competitive impact on the Bank and other institutions with
SAIF deposits.
Congress is considering legislation to recapitalize the SAIF and to
eliminate the significant premium disparity between the BIF and the SAIF.
Currently, the recapitalization plan provides for the payment of a special
assessment based on SAIF-insured deposits held at March 31, 1995, in order to
increase SAIF reserves to the level required by law. Certain banks holding
SAIF-insured deposits would pay a lower special assessment. In addition, the
cost of prior thrift failures would be shared by both the SAIF and the BIF.
Such cost sharing might increase BIF assessments by $.02 to $.025 per $100 in
deposits. SAIF assessments for healthy savings associations would be set at a
significantly lower level after the special assessment is paid by all SAIF
institutions and could never be reduced below the level set for healthy BIF
institutions.
The recapitalization plan also provides for the merger of the SAIF and BIF
on January 1, 1998. However, the proposed SAIF recapitalization legislation
currently provides for an elimination of the federal thrift charter or of the
separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. The Bank would be regulated under federal law as a bank, and,
as a result, would become subject to the more restrictive activity limitations
imposed on national banks. Under current tax laws, savings associations
meeting certain requirements have been able to deduct from income for tax
purposes amounts designated as reserved for bad debts. See Note 13 of the Notes
to the Financial Statements. Congress has passed, but the President has not yet
signed, legislation requiring, generally, that even if a savings association
does not convert to a bank, bad debt reserves taken after 1987 using the
percentage of taxable income method must be included in future taxable income of
the association over a six-year period, beginning with the 1996 tax year,
although a two-year delay may be permitted for institutions meeting a
residential mortgage loan origination test. The requirement that the Bank be
regulated as a bank and the proposed tax legislation could have an adverse
effect on the Holding Company, although until such proposals are enacted, the
extent of such effect is uncertain.
The special assessment has been estimated to be as high as $.85 per $100 of
deposits and as low as $.69 per $100 of deposits. The Bank had $25.8 million in
deposits at March 31, 1995. If the one-time special assessment in the
legislative proposal is enacted into law, an assessment of $.85 per $100 of
deposits or $.69 per $100 of deposits would cause the Bank to pay an additional
assessment of approximately $219,000 or $178,000, respectively, net of tax
effects, which would reduce capital and earnings for the quarter in which the
special assessment is recorded. However, it is expected that quarterly SAIF
assessments would be reduced significantly after such special assessment is
paid.
No assurances can be given that the SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. In addition, the Holding
Company can give no assurances that the disparity between BIF and SAIF
assessments will be eliminated and cannot be certain of the impact of its being
regulated as a bank holding company, the Bank being regulated as a bank or the
change in tax accounting for bad debt reserves until the legislation requiring
such change is enacted. If the proposed legislation is not enacted, SAIF
premiums may increase and the disparity between BIF and SAIF premiums may become
more pronounced, which would negatively impact the Bank.
FRB RESERVE REQUIREMENTS
FRB regulations currently require savings associations to maintain reserves
of 3% of net transaction accounts (primarily NOW accounts) up to $52.0 million
(subject to an exemption of $4.3 million) and of 10% of net transaction accounts
over $52.0 million. At March 31, 1996, the Bank was in compliance with the
FRB's reserve requirements.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances. See
"THE BUSINESS OF THE BANK - Deposits and Borrowings." The Bank is a member of
the FHLB of Cincinnati and must maintain an investment in the capital stock of
the FHLB of Cincinnati in an amount equal to the greater of 1% of the aggregate
outstanding principal amount of the Bank's residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, and 5%
of its advances from the FHLB. The Bank is in compliance with this requirement
with an investment of $274,000 in stock of the FHLB of Cincinnati at March 31,
1996.
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FHLB advances to members, such as the Bank, who meet the QTL Test are
generally limited to the lower of (i) 25% of the member's assets and (ii) 20
times the member's investment in FHLB stock. At March 31, 1996, the Bank's
maximum limit on advances was approximately $5.48 million. The granting of
advances is subject also to the FHLB's collateral and credit underwriting
guidelines.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities representing
a whole interest in such loans; securities issued, insured or guaranteed by the
U.S. Government or an agency thereof; deposits in any FHLB; or other real estate
related collateral (up to 30% of the member association's capital) acceptable to
the applicable FHLB, if such collateral has a readily ascertainable value and
the FHLB can perfect its security interest in the collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance. The FHLBs have established an
"Affordable Housing Program" to subsidize the interest rate of advances to
member associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Cincinnati reviews and accepts proposals for subsidies under that program twice
a year. The Bank has not participated in such program.
TAXATION
FEDERAL TAXATION
The Holding Company is subject to the federal tax laws that apply to
corporations generally. With certain exceptions, the Bank is also subject to
the federal tax laws and regulations which apply to corporations generally. One
such exception permits thrift institutions, such as the Bank, which meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Code to establish a reserve for bad debts and to make annual
additions thereto which may, within specified limits, be deducted in computing
taxable income. Legislation passed by Congress but not yet signed by the
President, however, will eliminate this bad debt reserve provision and will
require the recapture of post-1987 bad debt reserves over a six-year period
beginning in the 1996 tax year. See "REGULATION - Federal Deposit Insurance
Corporation -- Assessments."
For purposes of the bad debt reserve deduction, loans are categorized as
"qualifying real property loans," which generally include loans secured by
improved real estate, and "nonqualifying loans," which include all other types
of loans. The amount of the bad debt reserve deduction for "nonqualifying
loans" is computed under the experience method. A thrift institution may elect
annually to compute its allowable addition to its bad debt reserves for
qualifying loans under either the experience method or the percentage of taxable
income method. For 1995, 1994 and 1993, the Bank used the percentage of taxable
income method.
Under the experience method, the bad debt deduction for an addition to the
reserve for "qualifying real property loans" or "nonqualifying loans" is an
amount determined under a formula based upon a moving average of the bad debts
actually sustained by a thrift institution over a period of years or an amount
necessary to maintain a minimum reserve level amount for a statutory base year.
The percentage of specially computed taxable income that is used to compute
the percentage bad debt deduction is 8%. The percentage bad debt deduction thus
computed is reduced by the amount permitted as a deduction for nonqualifying
loans under the experience method. The availability of the percentage of
taxable income method permits qualifying thrift institutions to be taxed at a
lower effective federal income tax rate than that applicable to corporations
generally. The effective maximum federal income tax rate applicable to a
qualifying thrift institution (exclusive of any minimum tax or environmental
tax), assuming the maximum percentage bad debt deduction, is approximately
31.3%.
If less than 60% of the total dollar amount of an institution's assets (on
a tax basis) consist of specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
governmental
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obligations), such institution may not deduct any addition to a bad debt reserve
and generally must include reserves in excess of that allowable under the
experience method in income over a six-year period. At March 31, 1996, at least
60% of the Bank's total assets were specified assets. No representation can be
made as to whether the Bank will meet the 60% test for subsequent taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year. Additionally, the total bad
debt deduction attributable to "qualifying real property loans" cannot exceed
the greater of (i) the amount deductible under the experience method and (ii)
the amount which, when added to the bad debt deduction for "nonqualifying
loans," equals the amount by which 12% of the amount comprising savings accounts
at year-end exceeds the sum of surplus, undivided profits and reserves at the
beginning of the year. At March 31, 1996, and for all prior years, the 6% and
12% limitations did not restrict the percentage bad debt deduction available to
the Bank. It is not expected that these limitations will be a limiting factor
in the foreseeable future.
In addition to the regular income tax, the Bank is subject to an
alternative minimum tax which is imposed at a minimum tax rate of 20% on
"alternative minimum taxable income" (which is the sum of a corporation's
regular taxable income, with certain adjustments, and tax preference items),
less any available exemption. Such tax preference items include (i) 100% of the
excess of a thrift institution's bad debt deduction over the amount that would
have been allowable based on actual experience and (ii) interest on certain tax-
exempt bonds issued after August 7, 1986. In addition, 75% of the amount by
which a corporation's "adjusted current earnings" exceeds its alternative
minimum taxable income computed without regard to this preference item and prior
to reduction by net operating losses, is included in alternative minimum taxable
income. Net operating losses can offset no more than 90% of alternative minimum
taxable income. The alternative minimum tax is imposed to the extent it exceeds
the corporation's regular income tax. Payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. In
addition, for taxable years after 1986 and before 1996, the Bank is also subject
to an environmental tax equal to 0.12% of the excess of alternative minimum
taxable income for the taxable year (determined without regard to net operating
losses and the deduction for the environmental tax) over $2.0 million.
To the extent earnings appropriated to a thrift institution's bad debt
reserves for qualifying real property loans and deducted for federal income tax
purposes exceed the allowable amount of such reserves computed under the
experience method, and to the extent of the institution's supplemental reserves
for losses on loans (the "Excess"), such Excess may not, without adverse tax
consequences, be utilized for payment of cash dividends or other distributions
to a shareholder (including distributions in dissolution or liquidation) or for
any other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the Excess; and third, out of such other accounts as may be proper. As of March
31, 1996, the Bank's Excess for tax purposes totaled approximately $614,000.
The Bank believes it had approximately $1.9 million of accumulated earnings and
profits for tax purposes as of March 31, 1996, which would be available for
dividend distributions, provided regulatory restrictions applicable to the
payment of dividends are met. See "DIVIDEND POLICY." No representation can be
made as to whether the Bank will have current or accumulated earnings and
profits in subsequent periods.
The tax returns of the Bank have been closed by statute or audited through
1992. In the opinion of management, any examination of open returns would not
result in a deficiency which could have a material adverse effect on the
financial condition of the Bank.
OHIO TAXATION
The Bank is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of the Bank's book
net worth determined in accordance with GAAP. As a "financial institution," the
Bank is not subject to any tax based upon net income or net profits imposed by
the State of Ohio.
The Holding Company is subject to the Ohio corporation franchise tax and a
special litter tax. The franchise tax, as applied to the Holding Company, is a
tax measured by both net earnings and net worth. The rate of tax is the greater
of (i) 5.1% on the first $50,000 of computed Ohio taxable income and 8.9% of
computed Ohio taxable income in excess of $50,000 and (ii) 0.582% times taxable
net worth.
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In computing its tax under the net worth method, the Holding Company may
exclude 100% of its investment in the capital stock of the Bank after the
Conversion, as reflected on the balance sheet of the Holding Company, as long as
it owns at least 25% of the issued and outstanding capital stock of the Bank.
The calculation of the exclusion from net worth is based on the ratio of the
excludable investment (net of any appreciation or goodwill included in such
investment) to total assets multiplied by the net value of the stock. As a
holding company, the Holding Company may be entitled to various other deductions
in computing taxable net worth that are not generally available to operating
companies.
THE CONVERSION
THE OTS AND THE DIVISION HAVE APPROVED THE PLAN, SUBJECT TO THE APPROVAL OF
THE PLAN BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON THE PLAN AND SUBJECT TO
THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS AND THE
DIVISION. OTS AND DIVISION APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN.
GENERAL
The Board of Directors of the Bank has unanimously adopted the Plan and
recommends that the Voting Members of the Bank approve the Plan at the Special
Meeting. During and upon completion of the Conversion, the Bank will continue
to provide the services presently offered to depositors and borrowers, will
maintain its existing office and will retain its existing management and
employees.
Based on the current Valuation Range, between 297,500 and 462,875 Common
Shares are expected to be offered in the Subscription Offering and the
concurrent Community Offering at a price of $10 per share. The actual number of
shares sold in connection with the Conversion will be determined upon completion
of the Offering based on the final valuation of the Bank, as converted. See
"Pricing and Number of Common Shares to be Sold."
The Common Shares will be offered in the Subscription Offering to the ESOP
and certain depositors and borrowers of the Bank. Any Common Shares not
subscribed for in the Subscription Offering may be sold to the general public in
the Community Offering in a manner which will seek to achieve the widest
distribution of the Common Shares, but which will give preference to natural
persons residing in Hamilton County, Ohio. Under OTS regulations, the Community
Offering must be completed within 45 days following the expiration of the
Subscription Offering, unless such period is extended by the Bank with the
approval of the OTS and the Division. If the Community Offering is determined
not to be feasible, an occurrence that is not currently anticipated, the Boards
of Directors of the Holding Company and the Bank will consult with the OTS and
the Division to determine an appropriate alternative method of selling
unsubscribed Common Shares up to the minimum of the Valuation Range. No
alternative sales methods are currently planned.
OTS and Ohio regulations require the completion of the Conversion within 24
months after the date of the approval of the Plan by the Voting Members of the
Bank. The commencement and completion of the Conversion will be subject to
market conditions and other factors beyond the Bank's control. Due to changing
economic and market conditions, no assurance can be given as to the length of
time that will be required to complete the sale of the Common Shares. If delays
are experienced, significant changes may occur in the estimated pro forma market
value of the Bank. In such circumstances, the Bank may also incur substantial
additional printing, legal and accounting expenses in completing the Conversion.
In the event the Conversion is not successfully completed, the Bank will be
required to charge all Conversion expenses against current earnings.
REASONS FOR THE CONVERSION
The principal factors considered by the Bank's Board of Directors in
reaching the decision to pursue a mutual-to-stock conversion were the uncertain
future of the mutual form of ownership generally and the numerous competitive
disadvantages which the Bank faces if it continues in mutual form. These
disadvantages relate to a variety of factors, including growth opportunities,
employee retention and regulatory uncertainty.
If the Bank is to continue to grow and prosper, the mutual form of
organization is the least desirable form from a competitive standpoint. The
opportunities for a mutual to expand through mutual-to-mutual mergers or
acquisitions are limited because cash is the only form of consideration a mutual
institution can offer to another institution. Although the
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Bank does not have any specific acquisitions planned at this time, the
Conversion will position the Bank to take advantage of any acquisition
opportunities which may present themselves. Because a conversion to stock form
is a time-consuming and complex process, the Bank cannot wait until an
acquisition is imminent to embark on the conversion process.
As an increasing number of the Bank's competitors convert to stock form and
acquire the ability to use stock-based compensation programs, the Bank, in
mutual form, would be at a disadvantage when it comes to attracting and
retaining qualified management. The Bank believes that the ESOP, the Stock
Option Plan and the RRP are important tools in achieving such goals, even though
the Bank will be required to wait until after the Conversion to implement the
Stock Option Plan and the RRP. See "MANAGEMENT - Stock Benefit Plans."
Another benefit of the Conversion will be an increase in capital.
Notwithstanding the Bank's current capital position, the importance of higher
levels of capital cannot be ignored in the current interest rate environment.
As has been amply demonstrated in the past, changing accounting principles,
interest rate shifts and changing regulations can threaten even well-capitalized
institutions. As a mutual institution, the Bank can only increase capital
through retained earnings or the issuance of subordinated debentures, which do
not count as tier 1 capital for regulatory capital purposes. Capital that may
seem unnecessary now may help the Bank withstand future threats to its capital.
See "REGULATION - Office of Thrift Supervision -- Regulatory Capital
Requirements."
PRINCIPAL EFFECTS OF THE CONVERSION
VOTING RIGHTS. Savings account holders and borrowers who are members of
the Bank in its mutual form will have no voting rights in the Bank as converted
and will not participate, therefore, in the election of directors or otherwise
control the Bank's affairs. Voting rights in the Holding Company will be held
exclusively by its shareholders, and voting rights in the Bank will be held
exclusively by the Holding Company. Each holder of the Holding Company's common
shares will be entitled to one vote for each share owned on any matter to be
considered by the Holding Company's shareholders. See "DESCRIPTION OF
AUTHORIZED SHARES."
SAVINGS ACCOUNTS AND LOANS. Savings accounts in the Bank, as converted,
will be equivalent in amount, interest rate and other terms to the present
savings accounts in the Bank and the existing FDIC insurance on such deposits
will not be affected by the Conversion. The Conversion will not affect the
terms of loan accounts or the rights and obligations of borrowers under their
individual contractual arrangements with the Bank.
TAX CONSEQUENCES. The consummation of the Conversion is expressly
conditioned on receipt by the Bank of a private letter ruling from the Internal
Revenue Service or an opinion of counsel to the effect that the Conversion will
constitute a tax-free reorganization as defined in Section 368(a) of the Code.
The Bank intends to proceed with the Conversion based upon an opinion rendered
by its special counsel, Vorys, Sater, Seymour and Pease, to the following
effect:
(1) The Conversion constitutes a reorganization within the meaning of
Section 368(a)(1)(F) of the Code, and no gain or loss will be recognized by
the Bank in its mutual form or in its stock form as a result of the
Conversion. The Bank in its mutual form and the Bank in its stock form
will each be a "party to a reorganization" within the meaning of Section
368(b) of the Code;
(2) No gain or loss will be recognized by the Bank upon the receipt
of money from the Holding Company in exchange for the capital stock of the
Bank, as converted;
(3) The assets of the Bank will have the same basis in its hands
immediately after the Conversion as they had in its hands immediately prior
to the Conversion, and the holding period of the assets of the Bank after
the Conversion will include the period during which the assets were held by
the Bank before the Conversion;
(4) No gain or loss will be recognized by the deposit account holders
of the Bank upon the issuance to them, in exchange for their respective
withdrawable deposit accounts in the Bank immediately prior to the
Conversion, of withdrawable deposit accounts in the Bank immediately after
the Conversion, in the same dollar amount as their withdrawable deposit
accounts in the Bank immediately prior to the Conversion, plus, in the case
of Eligible Account Holders, the interests in the Liquidation Account of
the Bank, as described below;
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(5) The basis of the withdrawable deposit accounts in the Bank held
by its deposit account holders immediately after the Conversion will be the
same as the basis of their deposit accounts in the Bank immediately prior
to the Conversion. The basis of the interests in the Liquidation Account
received by the Eligible Account Holders will be zero. The basis of the
nontransferable subscription rights received by Eligible Account Holders
and Other Eligible Members will be zero (assuming that at distribution such
rights have no ascertainable fair market value);
(6) No gain or loss will be recognized by Eligible Account Holders or
Other Eligible Members upon the distribution to them of nontransferable
subscription rights to purchase Common Shares (assuming that at
distribution such rights have no ascertainable fair market value), and no
taxable income will be realized by such Eligible Account Holders or Other
Eligible Members as a result of their exercise of such nontransferable
subscription rights;
(7) The basis of the Common Shares purchased by members of the Bank
pursuant to the exercise of subscription rights will be the purchase price
thereof (assuming that such rights have no ascertainable fair market value
and that the purchase price is not less than the fair market value of the
shares on the date of such exercise), and the holding period of such shares
will commence on the date of such exercise. The basis of the Common Shares
purchased other than by the exercise of subscription rights will be the
purchase price thereof (assuming in the case of the other subscribers that
the opportunity to buy in the Subscription Offering has no ascertainable
fair market value), and the holding period of such shares will commence on
the day after the date of the purchase;
(8) For purposes of Section 381 of the Code, the Bank will be treated
as if there had been no reorganization. The taxable year of the Bank will
not end on the effective date of the Conversion. Immediately after the
Conversion, the Bank in its stock form will succeed to and take into
account the tax attributes of the Bank in its mutual form immediately prior
to the Conversion, including the Bank's earnings and profits or deficit in
earnings and profits;
(9) The bad debt reserves of the Bank in its mutual form immediately
prior to the Conversion will not be required to be restored to the gross
income of the Bank in its stock form as a result of the Conversion and
immediately after the Conversion such bad debt reserves will have the same
character in the hands of the Bank in its stock form as they would have had
if there had been no Conversion. The Bank in its stock form will succeed
to and take into account the dollar amounts of those accounts of the Bank
in its mutual form which represent bad debt reserves in respect of which
the Bank in its mutual form has taken a bad debt deduction for taxable
years ending on or before the Conversion; and
(10) Regardless of book entries made for the creation of the
Liquidation Account, the Conversion will not diminish the accumulated
earnings and profits of the Bank available for the subsequent distribution
of dividends within the meaning of Section 316 of the Code. The creation
of the Liquidation Account on the records of the Bank will have no effect
on its taxable income, deductions for additions to reserves for bad debts
under Section 593 of the Code or distributions to stockholders under
Section 593(e) of the Code.
For Ohio tax purposes, the tax consequences of the Conversion will be as
follows:
(1) The Bank is a "financial institution" for State of Ohio tax
purposes, and the Conversion will not change such status;
(2) The Bank is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of
the Bank's equity capital determined in accordance with GAAP, and the
Conversion will not change such status;
(3) As a "financial institution," the Bank is not subject to any tax
based upon net income or net profit imposed by the State of Ohio, and the
Conversion will not change such status;
(4) The Conversion will not be a taxable transaction to the Bank in
its mutual or stock form for purposes of the Ohio corporate franchise tax.
As a consequence of the Conversion, however, the annual Ohio corporate
franchise tax liability of the Bank will increase if the taxable net worth
of the Bank (i.e., book net worth
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computed in accordance with GAAP at the close of the Bank's taxable year
for federal income tax purposes) increases thereby; and
(5) The Conversion will not be a taxable transaction to any deposit
account holder or borrower member of the Bank in its mutual or stock form
for purposes of the Ohio corporate franchise tax and the Ohio personal
income tax.
The Bank has received an opinion from Keller to the effect that the
subscription rights have no ascertainable fair market value because the rights
are received by specified persons at no cost, may not be transferred and are of
short duration. The IRS could challenge the assumption that the subscription
rights have no ascertainable fair market value.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each depositor in the Bank would receive a
pro rata share of any assets of the Bank remaining after payment of the claims
of all creditors, including the claims of all depositors to the withdrawable
value of their savings accounts. A depositor's pro rata share of such remaining
assets would be the same proportion of such assets as the value of such
depositor's savings deposits bears to the total aggregate value of all savings
deposits in the Bank at the time of liquidation.
In the event of a complete liquidation of the Bank in its stock form after
the Conversion, each savings depositor would have a claim of the same general
priority as the claims of all other general creditors of the Bank. Except as
described below, each depositor's claim would be solely in the amount of the
balance in such depositor's savings account plus accrued interest. The
depositor would have no interest in the assets of the Bank above that amount.
Such assets would be distributed to the shareholders of the Bank.
For the purpose of granting a limited priority claim to the assets of the
Bank in the event of a complete liquidation thereof to Eligible Account Holders
who continue to maintain savings accounts at the Bank after the Conversion, the
Bank will, at the time of Conversion, establish the Liquidation Account in an
amount equal to the retained earnings of the Bank as of March 31, 1996. The
Liquidation Account will not operate to restrict the use or application of any
of the regulatory capital of the Bank.
Each Eligible Account Holder will have a separate inchoate interest (the
"Subaccount") in a portion of the Liquidation Account for Qualifying Deposits
held on the Eligibility Record Date.
The balance of each initial Subaccount shall be an amount determined by
multiplying the amount in the Liquidation Account by a fraction, the numerator
of which is the closing balance in the account holder's account as of the close
of business on the Eligibility Record Date and the denominator of which is the
total amount of all Qualifying Deposits of Eligible Account Holders on the
Eligibility Record Date. The balance of each Subaccount may be decreased but
will never be increased. If, at the close of business on the last day of any
fiscal year subsequent to the Eligibility Record Date, the balance in the
savings account to which a Subaccount relates is less than the lesser of (i) the
deposit balance in such savings account at the close of business on any other
annual closing date subsequent to the Eligibility Record Date or (ii) the amount
of the Qualifying Deposit as of the Eligibility Record Date, the balance of the
Subaccount for such savings account shall be adjusted proportionately to the
reduction in such savings account balance. In the event of any such downward
adjustment, such Subaccount balance shall not be subsequently increased
notwithstanding any increase in the deposit balance of the related savings
account. If any savings account is closed, its related Subaccount shall be
reduced to zero upon such closing.
In the event of a complete liquidation of the converted Bank (and only in
such event), each Eligible Account Holder shall receive from the Liquidation
Account a distribution equal to the current balance in each of such account
holder's Subaccounts before any liquidation distribution may be made to the
shareholders of the Bank. Any assets remaining after satisfaction of such
liquidation rights and the claims of the Bank's creditors would be distributed
to the shareholders of the Bank. No merger, consolidation, purchase of bulk
assets or similar combination or transaction with another financial institution,
the deposits of which are insured by the FDIC, will be deemed to be a complete
liquidation for this purpose and, in any such transaction, the Liquidation
Account shall be assumed by the surviving institution.
COMMON SHARES. SHARES ISSUED UNDER THE PLAN CANNOT AND WILL NOT BE INSURED
BY THE FDIC. For a description of the characteristics of the Common Shares, see
"DESCRIPTION OF AUTHORIZED SHARES."
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INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the
Boards of Directors of the Holding Company and the Bank will be final. The Plan
may be amended by the Boards of Directors of the Holding Company and the Bank at
any time with the concurrence of the OTS and the Division. If the Bank
determines, upon advice of counsel and after consultation with the OTS and the
Division, that any such amendment is material, subscribers will be notified of
the amendment and will be provided the opportunity to increase, decrease or
cancel their subscriptions. Any person who does not affirmatively elect to
continue his subscription or elects to rescind his subscription before the date
specified in the notice will have all of his funds promptly refunded with
interest. Any person who elects to decrease his subscription will have the
appropriate portion of his funds promptly refunded with interest.
CONDITIONS AND TERMINATION
The completion of the Conversion requires the approval of the Plan by the
Voting Members of the Bank at the Special Meeting and completion of the sale of
the Common Shares within 24 months following the date of such approval. If
these conditions are not satisfied, the Plan will automatically terminate and
the Bank will continue its business in the mutual form of organization. The
Plan may be voluntarily terminated by the Board of Directors at any time before
the Special Meeting and at any time thereafter with the approval of the OTS and
the Division.
SUBSCRIPTION OFFERING
THE SUBSCRIPTION OFFERING WILL EXPIRE AT 4:00 P.M., EASTERN TIME, ON
SEPTEMBER 13, 1996. SUBSCRIPTION RIGHTS NOT EXERCISED BEFORE THE SUBSCRIPTION
EXPIRATION DATE WILL BE VOID, WHETHER OR NOT THE BANK HAS BEEN ABLE TO LOCATE
EACH PERSON ENTITLED TO SUCH SUBSCRIPTION RIGHTS.
Nontransferable subscription rights to purchase Common Shares are being
issued at no cost to all eligible persons and entities in accordance with the
preference categories established by the Plan, as described below. Each
subscription right may be exercised only by the person to whom it is issued and
only for his or her own account. EACH PERSON SUBSCRIBING FOR COMMON SHARES MUST
REPRESENT TO THE BANK THAT HE OR SHE IS PURCHASING THE COMMON SHARES FOR HIS OR
HER OWN ACCOUNT AND THAT HE OR SHE HAS NO AGREEMENT OR UNDERSTANDING WITH ANY
OTHER PERSON FOR THE SALE OR TRANSFER OF THE COMMON SHARES. ANY PERSON WHO
ATTEMPTS TO TRANSFER HIS OR HER SUBSCRIPTION RIGHTS MAY BE SUBJECT TO PENALTIES
AND SANCTIONS, INCLUDING LOSS OF THE SUBSCRIPTION RIGHTS.
The number of Common Shares which a person who has subscription rights may
purchase will be determined, in part, by the total number of Common Shares to be
issued and the availability of Common Shares for purchase under the preference
categories set forth in the Plan and certain other limitations. See
"Limitations on Purchases of Common Shares." The sale of any Common Shares
pursuant to subscriptions received is contingent upon approval of the Plan by
the Voting Members of the Bank at the Special Meeting.
The preference categories and preliminary purchase limitations which have
been established by the Plan, in accordance with applicable regulations, for the
allocation of Common Shares are as follows:
(a) Each Eligible Account Holder shall receive, without payment
therefor, the nontransferable right to purchase in the Subscription
Offering up to 2.5% of the total Common Shares sold in the Offering. If
the exercise of subscription rights in this Category 1 results in an over-
subscription, Common Shares will be allocated among subscribing Eligible
Account Holders in a manner which will, to the extent possible, make the
total allocation of each subscriber equal 100 shares or the amount
subscribed for, whichever is less. Any Common Shares remaining after such
allocation has been made will be allocated among the subscribing Eligible
Account Holders whose subscriptions remain unfilled in the proportion which
the amount of their respective Qualifying Deposits on the Eligibility
Record Date bears to the total Qualifying Deposits of all Eligible Account
Holders on such date. For purposes of this paragraph (a), increases in the
Qualifying Deposits of directors and executive officers of the Bank during
the twelve months preceding the Eligibility Record Date shall not be
considered. Notwithstanding the foregoing, Common Shares in excess of
402,500, the maximum of the Valuation Range, may be sold to the ESOP before
fully satisfying the subscriptions of Eligible Account Holders. No
fractional shares will be issued.
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(b) The ESOP shall receive, without payment therefor, the
nontransferable right to purchase in the Subscription Offering an aggregate
amount of up to 10% of the Common Shares sold in the Offering, provided
that shares remain available after satisfying the subscription rights of
Eligible Account Holders up to the maximum of the Valuation Range pursuant
to paragraph (a) above. Although the Plan and OTS regulations permit the
ESOP to purchase up to 10% of the Common Shares, the Holding Company
anticipates that the ESOP will purchase 8% of the Common Shares. If the
ESOP is unable to purchase all or part of the Common Shares for which it
subscribes, the ESOP may purchase Common Shares on the open market or may
purchase authorized but unissued shares of the Holding Company. If the
ESOP purchases authorized but unissued shares from the Holding Company,
such purchases could have a dilutive effect on the interests of the Holding
Company's shareholders. See "RISK FACTORS - Potential Impact of Benefit
Plans on Net Earnings and Shareholders' Equity."
(c) Each Other Eligible Member, other than an Eligible Account
Holder, shall receive, without payment therefor, the nontransferable right
to purchase in the Subscription Offering up to 2.5% of the Common Shares to
be sold in the Offering, provided that shares remain available after
satisfying the subscription rights of Eligible Account Holders and the ESOP
pursuant to paragraphs (a) and (b) above. In the event of an
oversubscription by Other Eligible Members, the available Common Shares
will be allocated among subscribing Other Eligible Members in the same
proportion that their subscriptions bear to the total amount of
subscriptions by all Other Eligible Members.
The Plan provides for the granting of subscription rights to "Supplemental
Eligible Account Holders" in the event that the Eligibility Record Date is more
than 15 months prior to the date of the latest amendment to the Bank's
conversion application filed with the OTS. Because the Eligibility Record Date
is less than 15 months prior to August 2, 1996, the date of the latest amendment
to the conversion application, no subscription rights will be granted to
"Supplemental Eligible Account Holders."
The subscription rights granted under this Plan are nontransferable. Each
subscription right may be exercised only by the person to whom it is issued and
only for such person's own account. Each person exercising subscription rights
will be required to certify that such person is purchasing for such person's own
account and that such person has no agreement or understanding for the sale or
transfer of the Common Shares to which such person subscribes. The Bank will
use the information provided on the Stock Order Form to ensure that those
persons subscribing in the Subscription Offering have subscription rights and
that the orders submitted do not exceed applicable purchase limitations. In
order to ensure proper identification of subscription rights and proper
allocations in the event of an oversubscription, it is the responsibility of
each subscriber to provide correct account verification information and the
correct address of the subscriber's primary residence.
The Bank will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons having subscription rights
reside. However, no such person will be offered or receive any Common Shares
under the Plan who resides in a foreign country or in a state of the United
States with respect to which each of the following apply: (i) under the
securities laws of such country or state, the granting of subscription rights or
the offer or sale of Common Shares to such persons would require the Holding
Company or its officers or directors to register as a broker or dealer or to
register or otherwise qualify its securities for sale in such country or state;
and (ii) such registration or qualification would be impracticable for reasons
of cost or otherwise.
COMMUNITY OFFERING
Concurrently with the Subscription Offering, the Holding Company is hereby
offering Common Shares in the Community Offering, subject to the limitations set
forth below, to the extent such shares remain available after the satisfaction
of all orders received in the Subscription Offering. If subscriptions are
received in the Subscription Offering for at least 462,875 Common Shares, Common
Shares may not be available for purchase in the Community Offering. All sales
of Common Shares in the Community Offering will be at the same price per share
as in the Subscription Offering. THE COMMUNITY OFFERING MAY BE TERMINATED AT
ANY TIME AFTER ORDERS FOR AT LEAST 462,875 COMMON SHARES HAVE BEEN RECEIVED, BUT
IN NO EVENT LATER THAN OCTOBER 28, 1996 (THE "COMMUNITY EXPIRATION DATE"),
WITHOUT THE CONSENT OF THE OTS AND THE DIVISION.
In the event shares are available for the Community Offering, members of
the general public, each together with his or her Associates and other persons
acting in concert with him or her, may purchase up to 2.5% of the total Common
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Shares sold in the Offering. If an insufficient number of Common Shares is
available to fill all of the orders received in the Community Offering, the
available Common Shares will be allocated in a manner to be determined by the
Boards of Directors of the Holding Company and the Bank, subject to the
following:
(i) Preference will be given to natural persons who are residents of
Hamilton County, Ohio, the county in which the office of the Bank is
located;
(ii) Orders received in the Community Offering will first be filled up
to the lesser of the number of shares subscribed for or 2% of the total
number of Common Shares offered, with any remaining shares allocated on an
equal number of shares per order basis until all orders have been filled;
and
(iii) The right of any person to purchase Common Shares in the
Community Offering is subject to the right of the Holding Company and the
Bank to accept or reject such purchases in whole or in part.
The term "resident," as used herein with respect to the Community Offering,
means any natural person who, on the date of submission of a Stock Order Form,
maintained a bona fide residence within Hamilton County, Ohio.
LIMITATIONS ON PURCHASES OF COMMON SHARES
The Plan provides for certain additional limitations to be placed upon the
purchase of Common Shares. To the extent Common Shares are available, the
minimum number of Common Shares that may be purchased by any party is 25, or
$250. No fractional shares will be issued. Purchases in the Offering are
further subject to the following limitations: (i) no Eligible Account Holder or
Other Eligible Member may purchase in the Offering more than 2.5% of the total
Common Shares sold in the Offering, (ii) no person, together with his or her
Associates and other persons acting in concert with him or her, may purchase in
the Community Offering more than 2.5% of the total Common Shares sold in the
Offering, and (iii) no person, together with his or her Associates and other
persons acting in concert with him or her, may purchase more than 5% of the
total Common Shares sold in the Offering. In connection with the exercise of
subscription rights arising from a deposit account or a loan account in which
two or more persons have an interest, the aggregate maximum number of Common
Shares which the persons having an interest in such account may purchase is 2.5%
of the total Common Shares sold in the Offering. Such limitations do not apply
to the ESOP. Subject to applicable regulations, the purchase limitation may be
increased or decreased after the commencement of the Offering by the Boards of
Directors. A person's associates consist of the following ("Associates"): (a)
any corporation or organization (other than the Bank) of which such person is an
officer, partner or, directly or indirectly, the beneficial owner of 10% or more
of any class of equity securities; (b) any trust or other estate in which such
person has a substantial beneficial interest or as to which such person serves
as trustee or in a similar fiduciary capacity; and (c) any relative or spouse of
such person, or relative of such spouse, who either has the same home as such
person or who is a director or officer of the Bank.
Executive officers and directors of the Bank, together with their
Associates, may not purchase, in the aggregate, more than 35% of the total
Common Shares sold in the Offering. Shares acquired by the ESOP will not,
pursuant to regulations governing the Conversion, be aggregated with the shares
purchased by the directors, officers and employees of the Bank.
Purchases of Common Shares in the Offering are also subject to the change
in control regulations of the OTS which restrict direct and indirect purchases
of 10% or more of the stock of any savings bank by any person or group of
persons acting in concert, under certain circumstances. See "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY AND THE BANK - Federal Law and Regulation."
After the Conversion, Common Shares, except for shares purchased by
affiliates of the Bank, will be freely transferable, subject to OTS and Division
regulations.
PLAN OF DISTRIBUTION
The offering of the Common Shares is made only pursuant to this Prospectus,
copies of which are available at the office of the Bank. Officers and directors
of the Bank will be available to answer questions about the Conversion and may
also hold informational meetings for interested persons. Such officers and
directors will not be permitted to make statements about the Holding Company or
the Bank unless such information is also set forth in this Prospectus, nor will
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they render investment advice. No officer, director or employee of the Holding
Company or the Bank will be compensated, directly or indirectly, for any
activities in connection with the offer or sale of Common Shares issued in the
Conversion.
To assist the Holding Company and the Bank in marketing the Common Shares,
the Holding Company and the Bank have retained Webb, a broker-dealer registered
with the SEC and a member of the NASD. Webb will consult with and advise the
Bank and assist with the sale of the Common Shares in connection with the
Conversion. The services to be rendered by Webb include the following: (1)
assisting the Holding Company and the Bank in conducting the Subscription
Offering and the Community Offering; (2) training and educating Bank personnel
about the Conversion process; (3) organizing and conducting meetings to provide
information to prospective investors about the Conversion; (4) keeping records
of orders for Common Shares; and (5) assisting in the collection of proxies from
members for use at the Special Meeting.
For its services, Webb will receive a financial advisory fee in the amount
of $50,000. Selected Dealers will receive fees equal to 4% of the purchase
price of Common Shares sold, if any, pursuant to Selected Dealer Agreements. In
addition, the Holding Company will reimburse Webb for certain expenses,
including reasonable legal fees. Such expenses shall not exceed $30,000. Webb
is not obligated to purchase any Common Shares.
The Holding Company and the Bank have agreed to indemnify Webb and its
directors, officers, employees, agents and any controlling person against any
and all loss, liability, claim, damage or expense arising out of any untrue
statement, or alleged untrue statement, of a material fact contained in the
Summary Proxy Statement or the Prospectus, any application to regulatory
authorities, any "blue sky" application, or any other related document prepared
or executed by or on behalf of the Holding Company or the Bank with its consent
in connection with, or in contemplation of, the Conversion, or any omission
therefrom of a material fact required to be stated therein, unless such untrue
statement or omission, or alleged untrue statement or omission, was made in
reliance upon certain information furnished to the Bank by Webb expressly for
use in the Summary Proxy Statement or the Prospectus.
The Common Shares will be offered principally by the distribution of this
Prospectus and through activities conducted at the Conversion Information
Center, which will be located at the office of the Bank. The Conversion
Information Center will be staffed by one or more of Webb's employees, who will
be responsible for mailing materials relating to the Offering, responding to
questions regarding the Conversion and the Offering and processing stock orders.
A conspicuous legend that the Common Shares are not a federally-insured or
guaranteed deposit or account appears on all offering documents used in
connection with the Conversion and will appear on the certificates representing
the Common Shares. Any person purchasing Common Shares will be required to
execute the Stock Order Form certifying such person's knowledge that the Common
Shares are not federally-insured or guaranteed and that the purchaser has
received a Prospectus and understands the investment risk involved.
Sales of Common Shares will be made by registered representatives
affiliated with Webb. Management and the employees of the Bank may participate
in the Offering in clerical capacities, providing administrative support in
effecting sales transactions or answering questions relating to the proper
execution of the Stock Order Form. Management of the Bank may answer questions
regarding the business of the Bank. Other questions of prospective purchasers,
including questions as to the nature of the investment, will be directed to
registered representatives. Management and the employees of the Bank have been
instructed not to solicit offers to purchase Common Shares or to provide advice
regarding the purchase of Common Shares.
The Bank's personnel will assist in the above-described sales activities
pursuant to an exemption from registration as a broker or dealer provided by
Rule 3a4-1 promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"). Rule 3a4-1 generally provides that an "associated person of an issuer"
of securities shall not be deemed a broker solely by reason of participation in
the sale of securities of such issuer if the associated person meets certain
conditions. Such conditions include, but are not limited to, that the
associated person participating in the sale of an issuer's securities not be
compensated in connection therewith at the time of participation, that such
person not be associated with a broker or dealer and that such person observe
certain limitations on his participation in the sale of securities. For
purposes of this exemption, "associated person of an issuer" is defined to
include any person who is a director, officer or employee of the issuer or a
company that controls, is controlled by or is under common control with the
issuer.
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EFFECT OF EXTENSION OF COMMUNITY OFFERING
If the Community Offering extends beyond October 28, 1996, persons who have
subscribed for Common Shares in the Subscription Offering or in the Community
Offering will receive a written notice that they have the right to increase,
decrease or rescind their subscriptions for Common Shares at any time prior to
20 days before the end of the extension period. Any person who does not
affirmatively elect to continue his subscription or elects to rescind his
subscription during any such extension will have all of his funds promptly
refunded with interest. Any person who elects to decrease his subscription
during any such extension shall have the appropriate portion of his funds
promptly refunded with interest.
USE OF STOCK ORDER FORMS
Subscriptions for Common Shares in the Subscription Offering and the
Community Offering may be made only by completing and submitting a Stock Order
Form. Any person who desires to subscribe for Common Shares in the Subscription
Offering must do so by delivering to the Bank, by mail or in person, prior to
4:00 p.m., Eastern Time, on September 13, 1996, a properly executed and
completed Stock Order Form, together with full payment of the subscription price
of $10 for each Common Share for which subscription is made. No facsimile or
photocopied Stock Order Forms will be accepted.
AN EXECUTED STOCK ORDER FORM, ONCE RECEIVED BY THE BANK, MAY NOT BE
MODIFIED, AMENDED OR RESCINDED WITHOUT THE CONSENT OF THE BANK, UNLESS (I) THE
COMMUNITY OFFERING IS NOT COMPLETED BY OCTOBER 28, 1996, OR (II) THE FINAL
VALUATION OF THE BANK, AS CONVERTED, IS LESS THAN $2,975,000 OR MORE THAN
$4,628,750. IF EITHER OF THOSE EVENTS OCCURS, PERSONS WHO HAVE SUBSCRIBED FOR
COMMON SHARES IN THE OFFERING WILL BE GIVEN A NOTICE THAT THEY HAVE A RIGHT TO
INCREASE, DECREASE OR RESCIND THEIR SUBSCRIPTIONS. ANY PERSON WHO DOES NOT
AFFIRMATIVELY ELECT TO CONTINUE HIS SUBSCRIPTION OR ELECTS TO RESCIND HIS
SUBSCRIPTION DURING ANY SUCH EXTENSION WILL HAVE ALL OF HIS FUNDS PROMPTLY
REFUNDED WITH INTEREST. ANY PERSON WHO ELECTS TO DECREASE HIS SUBSCRIPTION
DURING ANY SUCH EXTENSION WILL HAVE THE APPROPRIATE PORTION OF HIS FUNDS
PROMPTLY REFUNDED WITH INTEREST. IN ADDITION, IF THE MAXIMUM PURCHASE
LIMITATION IS INCREASED TO MORE THAN 2.5% OF THE COMMON SHARES, PERSONS WHO HAVE
SUBSCRIBED FOR 2.5% OF THE COMMON SHARES WILL BE GIVEN THE OPPORTUNITY TO
INCREASE THEIR SUBSCRIPTIONS.
PAYMENT FOR COMMON SHARES
Payment of the subscription price for all Common Shares for which
subscription is made must accompany a completed Stock Order Form in order for
such subscription to be valid. Payment for Common Shares may be made (i) in
cash, if delivered in person, (ii) by check, bank draft or money order, or (iii)
by authorization of withdrawal from savings accounts in the Bank (other than
non-self-directed IRAs and Keogh Accounts). The Bank cannot lend money or
otherwise extend credit to any person to purchase Common Shares.
Payments made in cash or by check, bank draft or money order will be placed
in a segregated savings account insured by the FDIC up to applicable limits
until the Conversion is completed or terminated. Interest will be paid by the
Bank on such account at the then current passbook savings account rate, which is
currently 2.44% with an annual percentage yield of 2.50%, from the date payment
is received until the Conversion is completed or terminated. Payments made by
check will not be deemed to have been received until such check has cleared for
payment.
Instructions for authorizing withdrawals from savings accounts are provided
in the Stock Order Form. Once a withdrawal has been authorized, none of the
designated withdrawal amount may be used by a subscriber for any purpose other
than to purchase Common Shares, unless the Conversion is terminated. All sums
authorized for withdrawal will continue to earn interest at the contract rate
for such account or certificate until the completion or termination of the
Conversion. Interest penalties for early withdrawal applicable to certificate
accounts will be waived in the case of withdrawals authorized for the purchase
of Common Shares. If a partial withdrawal from a certificate account results in
a balance less than the applicable minimum balance requirement, the certificate
will be cancelled and the remaining balance will earn interest at the Bank's
passbook rate subsequent to the withdrawal.
In order to utilize funds in an IRA or Keogh account maintained at the
Bank, the funds must be transferred to a self-directed IRA or Keogh account
that permits the funds to be invested in stock. The beneficial owner of the IRA
or Keogh account must direct the trustee of the account to use funds from such
account to purchase Common Shares in connection with the Conversion. THIS
CANNOT BE DONE THROUGH THE MAIL. Persons who are interested in utilizing IRAs
or
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Keogh accounts at the Bank to subscribe for Common Shares should contact the
Conversion Information Center at (513) 721-0120 for instructions and assistance.
Subscriptions will not be filled by the Bank until subscriptions have been
received in the Offering for up to 297,500 Common Shares, the minimum point of
the Valuation Range. If the Conversion is terminated, all funds delivered to
the Bank for the purchase of Common Shares will be returned with interest, and
all charges to savings accounts will be rescinded. If subscriptions are
received for at least 297,500 Common Shares, subscribers and other purchasers
will be notified by mail, promptly on completion of the sale of the Common
Shares, of the number of shares for which their subscriptions have been
accepted. The funds on deposit with the Bank for the purchase of Common Shares
will be withdrawn and paid to the Holding Company in exchange for the Common
Shares. Certificates representing Common Shares will be delivered promptly
thereafter. The Common Shares will not be insured by the FDIC.
If the ESOP subscribes for Common Shares in the Subscription Offering, it
will not be required to pay for the shares subscribed for at the time it
subscribes but may pay for such Common Shares upon consummation of the
Conversion.
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth certain information regarding the
subscription rights intended to be exercised by the directors and executive
officers of the Bank:
Percent of total Aggregate purchase
Name Total shares offering(1) price
- ---- ------------ ---------------- ------------------
Mardelle Dickhaut 3,500 1.00% $35,000
Ruth C. Emden 5,250 1.50 52,500
Laird L. Lazelle 8,750 2.50 87,500
Robert E. Levitch 7,000 2.00 70,000
Margo Liebert 2,500 0.71 25,000
Dianne K. Rabe 3,500 1.00 35,000
Michael S. Schwartz 8,750 2.50 87,500
Paul L. Silverglade 8,750 2.50 87,500
Ivan J. Silverman 8,750 2.50 87,500
All directors and
executive officers
as a group(2) 74,250 21.21% $742,500
_____________________________
(1) Assumes that 350,000 Common Shares will be sold in the Offering at $10 per
share and that a sufficient number of Common Shares will be available to
satisfy the intended purchases by directors and executive officers. See
"Pricing and Number of Common Shares to be Sold."
(2) Includes intended purchases by Associates of directors and executive
officers, to the extent known.
All purchases by executive officers and directors of the Bank are being
made for investment purposes only and with no present intent to resell.
PRICING AND NUMBER OF COMMON SHARES TO BE SOLD
The aggregate offering price of the Common Shares sold in the Offering will
be based on the pro forma market value of the shares as determined by an
independent appraisal of the Bank. Keller, a firm which evaluates and appraises
financial institutions, was retained by the Bank to prepare an appraisal of the
estimated pro forma market value of the Bank, as converted. Keller will receive
a fee of $15,000 for its appraisal and one update. Such amount includes out-of-
pocket expenses.
Keller was selected by the Board of Directors because it has extensive
experience in the valuation of thrift institutions, particularly in the mutual-
to-stock conversion context. The Board of Directors interviewed Keller's
principal, reviewed the credentials of Keller's appraisal personnel and obtained
references and recommendations from other
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companies which have engaged Keller. Keller is certified by the OTS as a
mutual-to-stock conversion appraiser. The Bank and Keller have no relationships
which would affect Keller's independence.
The appraisal was prepared by Keller in reliance upon the information
contained herein. Keller also considered the following factors, among others:
the present and projected operating results and financial condition of the Bank
and the economic and demographic conditions in the Bank's existing market area;
the quality and depth of the Bank's management and personnel; certain historical
financial and other information relating to the Bank; a comparative evaluation
of the operating and financial statistics of the Bank with those of other thrift
institutions; the aggregate size of the Offering; the impact of the Conversion
on the Bank's regulatory capital and earnings potential; the trading market for
stock of comparable thrift institutions and thrift holding companies; and
general conditions in the markets for such stocks.
Three valuation methods were used by Keller: price to book value; price to
earnings; and price to assets. The most emphasis was placed on the price to
book value method. The price to book value method compares the pro forma book
value of the Bank, which takes into consideration the going concern value of a
thrift institution, to the book value of the comparable group. Upward and
downward adjustments are made, as appropriate, to account for variations between
the Bank and the comparable group on specific factors. The net Conversion
proceeds are included for purposes of determining the pro forma book value of
the Bank. The book value method focuses on the Bank's financial condition and
does not give as much consideration to earnings. The price to earnings method
is used to ascertain the multiple of earnings at which the Bank is likely to
trade, based on the multiple of earnings at which a comparable group of thrift
institutions trades. The comparable group consisted of ten thrift institutions
located in the Midwest which had similar operating and financial characteristics
to the Bank. In calculating the price to earnings ratio, Keller used the Bank's
core earnings for the 12 months ended March 31, 1996. The use of core earnings
eliminates items which are not generated by the principle business activities of
the Bank. The price to assets method does not consider the Bank's financial
condition or earnings. Consequently, it is not heavily relied on in valuing
financial institutions.
The Pro Forma Value of the Bank, as converted, determined by Keller, is
$3,500,000, as of May 14, 1996. The Valuation Range established in accordance
with the Plan is $2,975,000 to $4,025,000, which, based upon a per share
offering price of $10, will result in the sale of between 297,500 and 402,500
Common Shares. The total number of Common Shares sold in the Offering will be
determined in the discretion of the Board of Directors, based on the Valuation
Range. Pro forma shareholders' equity per share and pro forma earnings per share
decrease moving from the low end to the high end of the Valuation Range. See
"PRO FORMA DATA."
In the event that Keller determines at the close of the Conversion that the
aggregate pro forma value of the Bank is higher or lower than the Pro Forma
Value, but is nevertheless equal to or greater than $2,975,000 or equal to or
less than $4,628,750, the Holding Company will make an appropriate adjustment by
raising or lowering the total number of Common Shares sold in the Offering
consistent with the final valuation. The total number of Common Shares sold in
the Offering will be determined in the discretion of the Board of Directors
consistent with the final valuation. If, due to changing market conditions, the
final valuation is less than $2,975,000 or more than $4,628,750, subscribers
will be given notice of such final valuation and the right to affirm, increase,
decrease or rescind their subscriptions. Any person who does not affirmatively
elect to continue his subscription or elects to rescind his subscription before
the date specified in the notice will have all of his funds promptly refunded
with interest. Any person who elects to decrease his subscription will have the
appropriate portion of his funds promptly refunded with interest.
THE APPRAISAL BY KELLER IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON SHARES OR
VOTING TO APPROVE THE CONVERSION. IN PREPARING THE VALUATION, KELLER HAS RELIED
UPON AND ASSUMED THE ACCURACY AND COMPLETENESS OF THE AUDITED FINANCIAL
STATEMENTS AND STATISTICAL INFORMATION PROVIDED BY THE BANK. KELLER DID NOT
INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY
THE BANK, NOR DID KELLER VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE
BANK. THE VALUATION CONSIDERS THE BANK ONLY AS A GOING CONCERN AND SHOULD NOT
BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF THE BANK. MOREOVER,
BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A
NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO
ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING COMMON SHARES WILL THEREAFTER BE
ABLE TO SELL SUCH SHARES AT THE CONVERSION PURCHASE PRICE.
A copy of the complete appraisal is on file and open for inspection at the
offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552, at the Central
Regional Office of the OTS, 200 W. Madison Street, Suite 1300, Chicago, Illinois
60606, at the offices of the Division, 77 S. High Street, Columbus, Ohio 43215,
and at the office of the Bank.
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RESTRICTIONS ON REPURCHASE OF COMMON SHARES
Federal regulations generally prohibit the Holding Company from
repurchasing any of its capital stock for three years following the date of
completion of the Conversion, except as part of an open-market stock repurchase
program during the second and third years following the Conversion involving no
more than 5% of the Holding Company's outstanding capital stock during a twelve-
month period. The OTS has recently indicated, however, that it would permit
repurchases beginning after six months following the completion of the
Conversion. In addition, after such a repurchase, the Bank's regulatory capital
must equal or exceed all regulatory capital requirements. Before commencement
of such a program, the Holding Company must provide notice to the OTS, and the
OTS may disapprove the program if the OTS determines that it would adversely
affect the financial condition of the Bank or if it determines that there is no
valid business purpose for such repurchase. Such repurchase restrictions would
not prohibit the ESOP or the RRP from purchasing Common Shares during the first
year following the Conversion.
Ohio regulations prohibit the Holding Company from repurchasing shares
during the first year after the Conversion if the effect thereof would be the
failure of the Bank to meet its capital requirements.
RESTRICTIONS ON TRANSFERABILITY OF COMMON SHARES BY DIRECTORS AND OFFICERS
Common Shares purchased by directors and executive officers of the Holding
Company will be subject to the restriction that such shares may not be sold for
a period of one year following completion of the Conversion, except in the event
of the death of the shareholder. Common Shares issued by the Holding Company to
directors and executive officers will bear a legend giving appropriate notice of
the restriction imposed upon them. In addition, the Holding Company will give
appropriate instructions to the transfer agent (if any) for the Common Shares in
respect of the applicable restriction for transfer of any restricted shares.
Any shares issued as a stock dividend, stock split or otherwise in respect of
restricted shares will be subject to the same restrictions.
Subject to certain exceptions, for a period of three years following the
Conversion, no director or officer of the Holding Company or the Bank, or any of
their Associates, may purchase any common shares of the Holding Company without
the prior written approval of the OTS, except through a broker-dealer registered
with the SEC. This restriction will not apply, however, to negotiated
transactions involving more than 1% of a class of outstanding common shares of
the Holding Company or shares acquired by any stock benefit plan of the Holding
Company or the Bank.
The Common Shares, like the stock of most public companies, are subject to
the registration requirements of the Securities Act. Accordingly, the Common
Shares may be offered and sold only in compliance with such registration
requirements or pursuant to an applicable exemption from registration. Common
Shares received in the Conversion by persons who are not "affiliates" of the
Holding Company may be resold without registration. Common Shares received by
affiliates of the Holding Company will be subject to resale restrictions. An
"affiliate" of the Holding Company, for purposes of Rule 144, is a person who
directly, or indirectly through one or more intermediaries, controls, or is
controlled by or is under common control with, the Holding Company. Rule 144
generally requires that there be publicly available certain information
concerning the Holding Company and that sales subject to Rule 144 be made in
routine brokerage transactions or through a market maker. If the conditions of
Rule 144 are satisfied, each affiliate (or group of persons acting in concert
with one or more affiliates) is entitled to sell in the public market, without
registration, in any three-month period, a number of shares which does not
exceed the greater of (i) 1% of the number of outstanding shares of the Holding
Company or (ii) if the shares are admitted to trading on a national securities
exchange or reported through the automated quotation system of a registered
securities association, the average weekly reported volume of trading during the
four weeks preceding the sale.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK
GENERAL
Federal law and regulations, Ohio law, the Articles of Incorporation and
Code of Regulations of the Holding Company, the Amended Articles of
Incorporation and Amended Constitution of the Bank and certain employee benefit
plans to be adopted by the Holding Company and the Bank contain certain
provisions which may deter or prohibit a change of control of the Holding
Company and the Bank. Such provisions are intended to encourage any acquiror to
negotiate the terms of an acquisition with the Board of Directors of the Holding
Company, thereby reducing the vulnerability of the
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Holding Company to takeover attempts and certain other transactions which have
not been negotiated with and approved by the Board of Directors.
Anti-takeover devices and provisions may, however, have the effect of
discouraging certain takeover attempts which are not approved by the Board of
Directors, even under circumstances in which shareholders may deem such
takeovers to be in their best interests or in which shareholders may receive a
substantial premium for their shares over then current market prices. As a
result, shareholders who might desire to participate in such a transaction may
not have an opportunity to participate by virtue of such devices and provisions.
Such provisions may also benefit management by discouraging changes of control
in which incumbent management would be removed from office. The following is a
summary of certain provisions of such laws, regulations and documents.
FEDERAL LAW AND REGULATION
FEDERAL DEPOSIT INSURANCE ACT. The Federal Deposit Insurance Act (the
"FDIA") provides that no person, acting directly or indirectly or in concert
with one or more persons, shall acquire control of any insured savings
association or holding company unless 60 days' prior written notice has been
given to the OTS and the OTS has not issued a notice disapproving the proposed
acquisition. Control, for purposes of the FDIA, means the power, directly or
indirectly, to direct the management or policies of an insured institution or to
vote 25% or more of any class of securities of such institution. This provision
of the FDIA is implemented by the OTS in accordance with the Regulations for
Acquisition of Control of an Insured Institution, 12 C.F.R. Part 574 (the
"Control Regulations"). Control, for purposes of the Control Regulations,
exists in situations in which the acquiring party has direct or indirect voting
control of at least 25% of the institution's voting shares or controls in any
manner the election of a majority of the directors of such institution or the
Director of the OTS determines that such person exercises a controlling
influence over the management or policies of such institution. In addition,
control is presumed to exist, subject to rebuttal, if the acquiring party (which
includes a group "acting in concert") has voting control of at least 10% of the
institution's voting stock and any of eight control factors specified in the
Control Regulations exists. There are also rebuttable presumptions in the
Control Regulations concerning whether a group "acting in concert" exists,
including presumed action in concert among members of an "immediate family."
With certain limited exceptions, the Control Regulations, including the
rebuttable presumptions, apply to acquisitions of Common Shares in connection
with the Conversion and to acquisitions after the Conversion.
CHANGE IN CONTROL OF CONVERTED BANKS. A regulation of the OTS provides
that, for a period of three years after the date of the completion of the
Conversion, no person shall, directly or indirectly, offer to acquire or acquire
beneficial ownership of more than 10% of any class of equity security of the
Holding Company or the Bank without the prior written approval of the OTS. In
addition to the actual ownership of more than 10% of a class of equity
securities, a person shall be deemed to have acquired beneficial ownership of
more than 10% of the equity securities of the Holding Company or the Bank if the
person holds any combination of stock and revocable and/or irrevocable proxies
of the Holding Company under circumstances that give rise to a conclusive
control determination or rebuttable control determination under the Control
Regulations. Such circumstances include (i) holding any combination of voting
shares and revocable and/or irrevocable proxies representing more than 25% of
any class of voting stock of the Holding Company enabling the acquiror (a) to
elect one-third or more of the directors, (b) to cause the Holding Company or
the Bank's shareholders to approve the acquisition or corporate reorganization
of the Holding Company, or (c) to exert a controlling influence on a material
aspect of the business operations of the Holding Company or the Bank, and (ii)
acquiring any combination of voting shares and irrevocable proxies representing
more than 25% of any class of voting shares.
Such three-year restriction does not apply (i) to any offer with a view
toward public resale made exclusively to the Holding Company or the Bank or any
underwriter or selling group acting on behalf of the Holding Company or the
Bank, (ii) unless made applicable by the OTS by prior written advice, to any
offer or announcement of an offer which, if consummated, would result in the
acquisition by any person, together with all other acquisitions by any such
person of the same class of securities during the preceding 12-month period, of
not more than 1% of the class of securities, or (iii) to any offer to acquire,
or the acquisition of, beneficial ownership of more than 10% of any class of
equity security of the Holding Company or the Bank by a corporation whose
ownership is or will be substantially the same as the ownership of the Holding
Company or the Bank if made more than one year following the date of the
Conversion. The foregoing restriction does not apply to the acquisition of the
capital stock of the Holding Company or the Bank by one or more tax-qualified
employee stock benefit plans, provided that the plan or plans do not have the
beneficial ownership in the aggregate of more than 25% of any class of equity
security of the Holding Company or the Bank.
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HOLDING COMPANY RESTRICTIONS. Federal law generally prohibits a savings
and loan holding company, without prior approval of the Director of the OTS,
from (i) acquiring control of any other savings association or savings and loan
holding company, (ii) acquiring substantially all of the assets of a savings
association or holding company thereof, or (iii) acquiring or retaining more
than 5% of the voting shares of a savings association or holding company thereof
which is not a subsidiary.
Under certain circumstances, a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
the previously unissued voting shares of an undercapitalized savings association
for cash without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the Director of the OTS, no
director or officer of the savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's voting shares
may acquire control of any savings institution, other than a subsidiary
institution or any other savings and loan holding company.
OHIO LAW
MERGER MORATORIUM STATUTE. Ohio has a merger moratorium statute regulating
certain takeover bids affecting certain public corporations which have
significant ties to Ohio. The statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between such an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder") for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted
only if, prior to the time such person first becomes an Interested Shareholder,
the Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination may
not occur unless (1) one of the exceptions referred to above applies, (2) the
holders of at least two-thirds of the voting shares, and of at least a majority
of the voting shares not beneficially owned by the Interested Shareholder,
approve the business combination at a meeting called for such purpose, or (3)
the business combination meets certain statutory criteria designed to ensure
that the issuing public corporation's remaining shareholders receive fair
consideration for their shares.
An Ohio corporation, under certain circumstances, may "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. The
statute still prohibits for 12 months, however, any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. The
Articles of Incorporation of the Holding Company do not opt out of the
protection afforded by Chapter 1704.
CONTROL SHARE ACQUISITION STATUTE. Section 1701.831 of the Ohio Revised
Code (the "Control Share Acquisition Statute") requires that certain
acquisitions of voting securities which would result in the acquiring
shareholder owning 20%, 33-1/3% or 50% of the outstanding voting securities of
the Holding Company (a "Control Share Acquisition") must be approved in advance
by the holders of at least a majority of the outstanding voting shares
represented at a meeting at which a quorum is present and a majority of the
portion of the outstanding voting shares represented at such a meeting,
excluding the voting shares owned by the acquiring shareholder. The Control
Share Acquisition Statute was intended, in part, to protect shareholders of Ohio
corporations from coercive tender offers.
TAKEOVER BID STATUTE. Ohio law also contains a statute regulating takeover
bids for any Ohio corporation. Such statute provides that no offeror may make a
takeover bid unless (i) at least 20 days prior thereto the offeror announces
publicly the terms of the proposed takeover bid and files with the Ohio Division
of Securities (the "Securities Division") and provides the target company with
certain information in respect of the offeror, his ownership of the company's
shares and his plans for the company, and (ii) within ten days following such
filing either (a) no hearing is required by the Securities Division, (b) a
hearing is requested by the target company within such time but the Securities
Division finds no cause for hearing exists, or (c) a hearing is ordered and upon
such hearing the Securities Division adjudicates that the offeror proposes to
make full, fair and effective disclosure to offerees of all information material
to a decision to accept or reject the offer.
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The takeover bid statute also states that no offeror shall make a takeover
bid if he owns 5% or more of the issued and outstanding equity securities of any
class of the target company, any of which were purchased within one year before
the proposed takeover bid, and the offeror, before making any such purchase,
failed to announce his intention to gain control of the target company or
otherwise failed to make full and fair disclosure of such intention to the
persons from whom he acquired such securities. The United States District Court
for the Southern District of Ohio has determined that the Ohio takeover bid
statute is preempted by federal regulation.
ARTICLES OF INCORPORATION OF THE HOLDING COMPANY
ABILITY OF THE BOARD OF DIRECTORS TO ISSUE ADDITIONAL SHARES. The Articles
of Incorporation of the Holding Company permit the Board of Directors of the
Holding Company to issue additional common shares and preferred shares. The
ability of the Board of Directors to issue such additional shares may create
impediments to gaining, or otherwise discourage persons from attempting to gain,
control of the Holding Company.
MATTERS REQUIRING ENLARGED SHAREHOLDER VOTE. Article Sixth of the Articles
of Incorporation of the Holding Company provides that, in the event the Board of
Directors recommends against the approval of any of the following matters, the
holders of at least 75% of the voting shares of the Holding Company are required
to approve any such matters:
(1) A proposed amendment to the Articles of Incorporation of the Holding
Company;
(2) A proposed Amendment to the Code of Regulations of the Holding
Company;
(3) A proposal to change the number of directors by action of the
shareholders;
(4) An agreement of merger or consolidation providing for the proposed
merger or consolidation of the Holding Company with or into one or
more other corporations;
(5) A proposed combination or majority share acquisition involving the
issuance of shares of the Holding Company and requiring shareholder
approval;
(6) A proposal to sell, exchange, transfer or otherwise dispose of all, or
substantially all, of the assets, with or without the goodwill, of the
Holding Company; or
(7) A proposed dissolution of the Holding Company.
ELIMINATION OF CUMULATIVE VOTING. Section 1701.55 of the Ohio Revised Code
provides in substance and effect that shareholders of a for profit corporation
which is not a savings and loan association and which is incorporated under Ohio
law must initially be granted the right to cumulate votes in the election of
directors. The right to cumulate votes in the election of directors will exist
at a meeting of shareholders if notice in writing is given by any shareholder to
the President, a Vice President or the Secretary of an Ohio corporation, not
less than 48 hours before a meeting at which directors are to be elected, that
the shareholder desires that the voting for the election of directors shall be
cumulative and if an announcement of the giving of such notice is made upon the
convening of such meeting by the Chairman or Secretary or by or on behalf of the
shareholder giving such notice. If cumulative voting is invoked, each
shareholder would have a number of votes equal to the number of directors to be
elected, multiplied by the number of shares owned by him, and would be entitled
to distribute his votes among the candidates as he sees fit.
Section 1701.69 of the Ohio Revised Code provides that an Ohio corporation
may eliminate cumulative voting in the election of directors after the
expiration of 90 days after the date of initial incorporation by filing with the
Ohio Secretary of State an amendment to the articles of incorporation
eliminating cumulative voting. The Articles of Incorporation of the Holding
Company will be amended prior to the consummation of the Conversion to eliminate
cumulative voting. The elimination of cumulative voting may make it more
difficult for shareholders to elect as directors persons whose election is not
supported by the Board of Directors.
-76-
<PAGE>
EMPLOYEE BENEFIT PLANS
The Stock Option Plan, the ESOP and the RRP also may be deemed to have
certain anti-takeover effects. See "DESCRIPTION OF AUTHORIZED SHARES" and
"MANAGEMENT - Stock Benefit Plans -- Employee Stock Ownership Plan; -- Stock
Option Plan; and -- Recognition and Retention Plan."
DESCRIPTION OF AUTHORIZED SHARES
GENERAL
The Articles of Incorporation of the Holding Company authorize the issuance
of 2,000,000 common shares. The common shares authorized by the Holding
Company's Articles of Incorporation have no par value. Upon receipt by the
Holding Company of the purchase price therefor and subsequent issuance thereof,
each Common Share will be validly issued, fully paid and nonassessable. The
Common Shares of the Holding Company will represent nonwithdrawable capital and
will not and cannot be insured by the FDIC. Each Common Share will have the
same relative rights and will be identical in all respects to every other Common
Share.
The following is a summary description of the rights of the common shares
of the Holding Company, including the material express terms of such shares as
set forth in the Holding Company's Articles of Incorporation.
LIQUIDATION RIGHTS
In the event of the complete liquidation or dissolution of the Holding
Company, the holders of the Common Shares will be entitled to receive all assets
of the Holding Company available for distribution, in cash or in kind, after
payment or provision for payment of (i) all debts and liabilities of the Holding
Company, (ii) any accrued dividend claims, and (iii) any interests in the
Liquidation Account. See "THE CONVERSION - Liquidation Account."
VOTING RIGHTS
The holders of the Common Shares will possess exclusive voting rights in
the Holding Company, unless preferred shares are issued. Each holder of Common
Shares will be entitled to one vote for each share held of record on all matters
submitted to a vote of holders of common shares. See "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY AND THE BANK - Articles of Incorporation of
the Holding Company -- Elimination of Cumulative Voting."
DIVIDENDS
The holders of the Common Shares will be entitled to the payment of
dividends when, as and if declared by the Board of Directors and paid out of
funds, if any, available under applicable laws and regulations for the payment
of dividends. The payment of dividends is subject to federal and state
statutory and regulatory restrictions. See "DIVIDEND POLICY," "REGULATION -
Office of Thrift Supervision -- Limitations on Capital Distributions" and
"TAXATION - Federal Taxation" for a description of restrictions on the payment
of cash dividends.
PREEMPTIVE RIGHTS
After the consummation of the Conversion, no shareholder of the Holding
Company will have, as a matter of right, the preemptive right to purchase or
subscribe for shares of any class, now or hereafter authorized, or to purchase
or subscribe for securities or other obligations convertible into or
exchangeable for such shares or which by warrants or otherwise entitle the
holders thereof to subscribe for or purchase any such share.
RESTRICTIONS ON ALIENABILITY
See "THE CONVERSION - Restrictions on Transferability of Common Shares by
Directors and Officers" for a description of certain restrictions on the
transferability of Common Shares purchased by officers and directors; and
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK" for
information regarding regulatory restrictions on acquiring Common Shares.
-77-
<PAGE>
REGISTRATION REQUIREMENTS
The Holding Company will register its common shares pursuant to
Section 12(g) of the Exchange Act upon the completion of the Conversion. The
proxy and tender offer rules, insider trading restrictions, annual and periodic
reporting and other requirements of the Exchange Act will apply to the Holding
Company.
LEGAL MATTERS
Certain legal matters pertaining to the Common Shares and the federal and
Ohio tax consequences of the Conversion will be passed upon for the Holding
Company and the Bank by Vorys, Sater, Seymour and Pease, 221 E. Fourth Street,
Cincinnati, Ohio 45202. Certain legal matters are being passed upon for Webb
by Keating, Muething & Klekamp ("KMK"), One East Fourth Street, Cincinnati, Ohio
45202. Certain members of KMK may subscribe for Common Shares in the Offering,
to the extent they are eligible under the Plan.
EXPERTS
Keller has consented to the publication herein of the summary of its letter
to the Bank setting forth its opinion as to the estimated pro forma market value
of the Bank as converted and to the use of its name and statements with respect
to it appearing herein. The financial statements of the Bank as of March 31,
1996 and 1995, and for each of the years in the three-year period ended June 30,
1995, have been included herein in reliance upon the report of Clark, Schaefer,
Hackett & Co., independent certified public accountants, appearing elsewhere
herein, and upon the authority of such firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Bank has filed an Application for Approval of Conversion (the
"Application") with the OTS and the Division. This prospectus omits certain
information contained in the Application. The Application may be inspected at
the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552, at the
Central Regional Office of the OTS, 200 W. Madison Street, Suite 1300, Chicago,
Illinois 60606 and at the offices of the Division, 77 S. High Street, Columbus,
Ohio 43215.
-78-
<PAGE>
FOUNDATION SAVINGS BANK
TABLE OF CONTENTS
Page
----
Independent Auditors' Report F-2
Financial Statements:
Statements of Financial Condition F-3
Statements of Income F-4
Statements of Retained Earnings F-5
Statements of Cash Flows F-6 - F-7
Notes to Financial Statements F-8 - F-21
All financial statement schedules are omitted because the required information
either is not applicable or is shown in the financial statements or in the notes
thereto.
Foundation Bancorp, Inc. was incorporated April 16, 1996 and has engaged in only
minimal activities to date; accordingly, the financial statements of the Company
have been omitted because of their immateriality.
F-1
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Foundation Savings Bank:
We have audited the statements of financial condition of Foundation Savings Bank
as of June 30, 1995 and 1994, and the related statements of income, retained
earnings, and cash flows for each of the three years in the period ended June
30, 1995. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Foundation Savings Bank as of
June 30, 1995 and 1994, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Savings Bank adopted the
provisions of Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" at July 1, 1993 and Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" at July 1, 1994.
CLARK, SCHAEFER, HACKETT & CO.
Cincinnati, Ohio
July 19, 1995
F-2
<PAGE>
FOUNDATION SAVINGS BANK
Statements of Financial Condition
June 30, 1995 and 1994 and March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
ASSETS
JUNE 30,
----------------------
MARCH 31, 1996 1995 1994
-------------- ---- ----
(Unaudited)
<S> <C> <C> <C>
Cash $ 15,202 57,374 59,309
Interest-bearing deposits in other
financial institutions 4,221,221 3,885,606 2,402,282
----------- ----------- -----------
4,236,423 3,942,980 2,461,591
Certificates of deposit in other
financial institutions - - 1,400,000
Investment securities - at amortized cost
(fair value of $393,338, $1,034,812 and
$1,004,188 at March 31, 1996 (unaudited)
and June 30, 1995 and 1994 respectively) 400,000 1,050,000 1,050,000
Mortgage-backed securities - at amortized
cost (fair value of $4,831,501, $5,409,400
and $6,443,808 at March 31, 1996 (unaudited)
and June 30, 1995 and 1994, respectively) 4,957,151 5,532,399 6,592,744
Loans receivable, net 21,358,992 20,510,541 18,794,133
Accrued interest receivable:
Loans 96,212 79,335 57,341
Investments and interest bearing deposits 4,040 16,389 17,597
Mortgage-backed securities 39,469 41,522 44,183
Federal Home Loan Bank stock - at cost 274,100 260,400 241,200
Property and equipment, net 317,417 323,773 335,302
Refundable federal income tax - 31,927 22,400
Prepaid expenses and other assets 53,926 60,050 39,670
----------- ----------- -----------
Total assets $ 31,737,730 31,849,316 31,056,161
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND RETAINED EARNINGS
Deposits $ 27,780,306 27,737,204 27,348,162
Advances from Federal Home Loan Bank 841,870 1,191,577 954,788
Advances by borrowers for taxes,
insurance and other 135,445 39,076 21,614
Accrued expenses 136,441 114,747 108,049
Accrued federal income tax 8,063 - -
Deferred federal income tax 63,500 60,600 42,800
----------- ----------- -----------
Total liabilities 28,965,625 29,143,204 28,475,413
Commitments - - -
Retained earnings, substantially
restricted 2,772,105 2,706,112 2,580,748
----------- ----------- -----------
Total liabilities and
retained earnings $ 31,737,730 31,849,316 31,056,161
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
FOUNDATION SAVINGS BANK
Statements of Income
Three Years Ended June 30, 1995 and the Nine Months
Ended March 31, 1996 and 1995 (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31, June 30,
------------------ -----------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans $ 1,358,303 1,225,328 1,655,223 1,594,174 1,882,392
Mortgage-backed securities 233,510 242,173 320,376 286,084 231,785
Investment securities 51,505 50,415 69,104 27,620 12,951
Interest-bearing deposits 139,921 75,150 117,309 160,799 169,711
----------- ----------- ----------- ----------- -----------
Total interest income 1,783,239 1,593,066 2,162,012 2,068,677 2,296,839
----------- ----------- ----------- ----------- -----------
Interest expense:
Deposits 1,167,132 946,303 1,308,686 1,297,024 1,499,192
Borrowings 39,490 41,717 59,265 41,966 -
----------- ----------- ----------- ----------- -----------
Total interest expense 1,206,622 988,020 1,367,951 1,338,990 1,499,192
----------- ----------- ----------- ----------- -----------
Net interest income 576,617 605,046 794,061 729,687 797,647
Provision for loan losses 34,000 9,000 12,000 32,600 82,600
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 542,617 596,046 782,061 697,087 715,047
----------- ----------- ----------- ----------- -----------
Other income:
Gain on sale of investment securities - - - 132,431 61,291
Gain on sale of loans 7,484 2,702 12,179 - -
Net investment property income 36,736 37,773 50,446 64,926 64,271
Gain on sale of equipment - - - 1,164 -
Other operating income 7,776 6,625 7,051 5,395 10,725
----------- ----------- ----------- ----------- -----------
Total other income 51,996 47,100 69,676 203,916 136,287
----------- ----------- ----------- ----------- -----------
General, administration and
other expense:
Employee compensation and benefits 260,076 273,558 364,607 292,230 306,457
Occupancy and equipment 58,431 57,614 76,604 77,488 84,122
Deposit insurance 46,284 46,752 61,911 65,527 60,197
Franchise tax 25,204 23,798 31,916 31,372 29,134
Computer processing costs 23,439 24,016 32,268 29,387 27,678
Other operating expense 83,059 82,780 111,267 131,386 132,057
----------- ----------- ----------- ----------- -----------
Total general, administration
and other operating expense 496,493 508,518 678,573 627,390 639,645
----------- ----------- ----------- ----------- -----------
Income before income taxes 98,120 134,628 173,164 273,613 211,689
----------- ----------- ----------- ----------- -----------
Federal income taxes (credits):
Current 29,227 31,381 30,000 62,263 93,176
Deferred 2,900 11,700 17,800 16,100 (8,000)
----------- ----------- ----------- ----------- -----------
32,127 43,081 47,800 78,363 85,176
----------- ----------- ----------- ----------- -----------
Net income $ 65,993 91,547 125,364 195,250 126,513
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
FOUNDATION SAVINGS BANK
Statements of Retained Earnings
Three Years Ended June 30, 1995 and the
Nine Months Ended March 31, 1996 (Unaudited)
Balance at June 30, 1992 $ 2,258,985
Net income for the year ended
June 30, 1993 126,513
------------
Balance at June 30, 1993 2,385,498
Net income for the year ended
June 30, 1994 195,250
------------
Balance at June 30, 1994 2,580,748
Net income for the year ended
June 30, 1995 125,364
------------
------------
Balance at June 30, 1995 2,706,112
Net income for the nine months ended
March 31, 1996 (unaudited) 65,993
------------
Balance at March 31, 1996 (unaudited) $ 2,772,105
------------
------------
See accompanying notes to financial statements.
F-5
<PAGE>
FOUNDATION SAVINGS BANK
Statements of Cash Flows
Three Years Ended June 30, 1995 and the Nine Months Ended
March 31, 1996 and 1995 (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Years Ended June 30,
--------------------------- -------------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Interest received $ 1,774,495 1,584,429 2,145,841 2,065,169 2,267,264
Interest paid (1,204,903) (987,254) (1,365,659) (1,339,074) (1,500,248)
Cash paid to suppliers and employees (400,755) (465,902) (679,261) (648,076) (585,822)
Fees and commissions received 27,298 30,195 7,051 6,332 19,211
Income taxes paid 10,763 (23,527) (39,527) (67,463) (187,877)
Rental income received 51,300 51,300 68,400 83,000 84,000
----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities 258,198 189,241 136,845 99,888 96,528
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of mortgage-backed securities 82,714 - - (3,143,631) (3,048,520)
Repayments of mortgage-backed securities 471,651 728,932 1,029,624 1,798,427 887,113
Purchase of certificates of deposit - - - - (400,000)
Maturities of certificates of deposit - 1,300,000 1,400,000 - -
Purchase of investment securities - - - (1,050,000) -
Proceeds from sale of investment securities - - - 143,272 66,712
Maturities of investment securities 650,000 - - - -
Loan disbursements (6,319,728) (4,168,225) (5,637,576) (2,961,358) (6,377,791)
Loan principal repayments 4,337,090 2,103,282 3,354,330 3,700,533 8,867,546
Proceeds from sale of loans 1,123,109 184,202 576,584 - -
Proceeds from sale of Federal Home Loan
Bank stock - - - - 2,900
Purchase of property and equipment (2,986) (3,869) (4,249) (5,526) (8,698)
----------- ----------- ----------- ----------- -----------
Investment in foreclosed real estate - - - - (1,705)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities 341,850 144,322 718,713 (1,518,283) (12,443)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits 43,102 (1,571,482) 389,042 (1,713,715) 1,444,933
Proceeds from Federal Home Loan Bank
advances - 300,000 300,000 1,000,000 -
Repayment of Federal Home Loan Bank
advances (349,707) (47,086) (63,211) (45,212) -
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (306,605) (1,318,568) 625,831 (758,927) 1,444,933
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 293,443 (985,005) 1,481,389 (2,177,322) 1,529,018
Cash and cash equivalents at beginning of
period 3,942,980 2,461,591 2,461,591 4,638,913 3,109,895
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 4,236,423 1,476,586 3,942,980 2,461,591 4,638,913
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
FOUNDATION SAVINGS BANK
Statements of Cash Flows
Three Years Ended June 30, 1995 and the
Nine Months Ended March 31, 1996 and 1995 (Unaudited)
Reconciliation of Net Income to Net Cash
Provided By Operating Activities
--------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
MARCH 31, YEARS ENDED JUNE 30,
-------------------- -------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income $ 65,993 91,547 125,364 195,250 126,513
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of loans (7,484) (2,702) (12,179) - -
Gain on sale of investment securities - - - (132,431) (61,291)
Depreciation and amortization 9,342 11,797 15,778 16,497 22,960
Amortization of premiums and discounts
on mortgage-backed securities 20,883 21,194 30,721 55,881 24,574
Federal Home Loan Bank stock dividends (13,700) (15,000) (22,600) (11,300) (9,900)
Provision for loan losses 34,000 9,000 12,000 32,600 82,600
Amortization of deferred loan fees (11,388) (8,726) (9,567) (17,118) (27,438)
Increase in deferred loan fees (4,050) 7,061 - 937 7,804
Deferred federal income tax - - 17,800 16,100 (8,000)
Effects of change in operating assets
and liabilities:
Accrued interest receivable (2,475) (3,618) (14,725) (30,971) (8,868)
Refundable federal income tax 31,927 19,554 (9,527) (5,200) (17,200)
Prepaid expenses and other assets 6,124 (12,542) (20,380) 1,067 (16,072)
Advances by borrowers for taxes,
insurance and other 96,369 71,651 17,462 (10,783) 4,941
Accrued expenses 21,694 25 6,698 (10,641) 53,405
Accrued federal income tax 10,963 - - - (77,500)
----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities $ 258,198 189,241 136,845 99,888 96,528
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Supplemental disclosure of non-cash investing activities:
- ---------------------------------------------------------
The Savings Bank compensated the widow of the former managing officer with a car
with a net book value of $10,135 in 1994.
The Savings Bank sold foreclosed real estate and financed the transaction with
loans receivable totaling $67,900 in 1993.
See accompanying notes to financial statements.
F-7
<PAGE>
FOUNDATION SAVINGS BANK
Notes to Financial Statements
Three Years Ended June 30, 1995 and the Nine Months
Ended March 31, 1996 and 1995 (Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following describes the organization and the significant accounting
policies followed in the preparation of these financial statements.
ORGANIZATION
The Savings Bank is a state chartered savings and loan association and
a member of the Federal Home Loan Bank System and subject to
regulation by the Office of Thrift Supervision (OTS), an office of the
U. S. Government Department of the Treasury. As a member of this
system, the Savings Bank maintains a required investment in capital
stock of the Federal Home Loan Bank of Cincinnati.
Savings accounts are insured by the Savings Association Insurance Fund
(SAIF), administered by the Federal Deposit Insurance Corporation
(FDIC), within certain limitations. An annual premium is required by
the SAIF for the insurance of such savings accounts.
UNAUDITED FINANCIAL STATEMENTS
The unaudited financial statements at March 31, 1996 and for the nine
months ended March 31, 1996 and 1995, reflect all adjustments,
consisting solely of normal recurring accruals, which are, in the
opinion of management, necessary for a fair presentation of the
financial position, results of operations and cash flows for such
periods. The financial position at March 31, 1996 and results of
operations for the nine months then ended are not necessarily
indicative of the financial position that may be expected at June 30,
1996, or the results of operations that may be expected for the year
ended June 30, 1996.
CASH AND CASH EQUIVALENTS
For the purpose of reporting cash flows, the Savings Bank considers
all highly liquid debt instruments with original maturity when
purchased of three months or less to be cash equivalents.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". This standard
addresses the accounting and reporting for securities based on
management's intent and ability to hold such securities to maturity.
The Savings Bank adopted this standard on July 1, 1994. Statement No.
115 requires the classification of investments in debt and equity
securities into three categories; held to maturity, trading, and
available for sale. Debt securities that the Savings Bank has the
positive intent and ability to hold to maturity are classified as held
to maturity securities and reported at amortized cost. Debt and
equity securities that are bought and held principally for the purpose
of selling in the near-term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in
earnings. The Savings Bank has no trading securities. Debt and
equity securities not classified as either held to maturity securities
or trading securities are classified as available for sale securities
and reported at fair value, with unrealized gains or losses excluded
from earnings and reported as a separate component of stockholders'
equity, net of deferred taxes. At the date of implementation of
Statement No. 115, the Savings Bank had not identified any investment
or mortgage-backed securities as available for sale.
F-8
<PAGE>
Premiums and discounts on investment securities and mortgage-backed
securities are amortized and accreted using the interest method over
the expected lives of the related securities.
The Savings Bank presently holds all investment securities as held to
maturity carried at amortized cost.
LOANS RECEIVABLE
Loans held in portfolio are stated at the principal amount
outstanding, adjusted for deferred loan origination fees and costs,
the allowance for loan losses, and premiums and discounts on loans
purchased. Premiums and discounts on loans purchased are amortized
and accreted to operations using the interest method over the
estimated life of the underlying loans.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield on the
related loan over the contractual life of the loan.
Interest is accrued as earned unless the collectibility of the loan is
in doubt. Uncollectible interest on loans that are contractually past
due is charged off, or an allowance is established based on
management's periodic evaluation. The allowance is established by a
charge to interest income equal to all interest previously accrued,
and income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments has returned
to normal, in which case the loan is returned to accrual status.
Loans held for sale are carried at the lower of cost or market,
determined in the aggregate. In computing cost, deferred loan
origination fees and costs are aggregated with the principal balances
of the related loans. At March 31, 1996 and June 30, 1995 and 1994,
the Savings Bank had not identified any loans held for sale.
The Savings Bank will either sell the related servicing on loans or
retain the servicing on loans sold and agree to remit to the investor
loan principal and interest at agreed-upon rates. For loans where
servicing is retained by the Savings Bank, these rates can differ from
the loan's contractual interest rate resulting in a "yield
differential". In addition to previously deferred loan origination
fees and cash gains, gains on sale of loans can represent the present
value of the future yield differential less a normal servicing fee,
capitalized over the estimated life of the loans sold. Normal
servicing fees are determined by reference to the stipulated minimum
servicing fee set forth by the government agencies to whom the loans
are sold. Such servicing fees are representative of the Savings
Bank's normal servicing costs.
The resulting capitalized excess servicing fee is amortized to
operations over the life of the loans using the interest method. If
prepayments are higher than expected, an immediate charge to
operations is made. if prepayments are lower, then the related
adjustments are made prospectively.
F-9
<PAGE>
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, trends in the
level of delinquent and problem loans, adverse situations that may
affect the borrower's ability to repay, the estimated value of any
underlying collateral and current and anticipated economic conditions
in the primary lending area. When the collection of a loan becomes
doubtful, or otherwise troubled, the Savings Bank records a loan loss
provision equal to the difference between the fair value of the
property securing the loan and the loan's carrying value. Major loans
and major lending areas are reviewed periodically to determine
potential problems at an early date. The allowance for loan losses is
increased by charges to earnings and decreased by charge-offs (net of
recoveries). The amount of actual write-offs could differ from the
estimate. Because of uncertainties inherent in the estimation
process, management's estimate of credit losses inherent in the loan
portfolio and the related allowance may change in the near term.
However, the amount of the change that is reasonably possible cannot
be estimated.
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan". This standard amends Statement
No. 5 to clarify that a creditor should evaluate the collectibility of
both contractual interest and contractual principal on all loans when
assessing the need for a loss accrual. In October, 1994, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosure", which amends Statement
No. 114 to allow a creditor to use existing methods for recognizing
interest income on impaired loans. The statements were effective for
the fiscal year beginning July 1, 1995. The Savings Bank adopted the
statement effective July 1, 1995, without material effect on financial
condition or results of operations.
For impairment recognized in accordance with SFAS No. 114, as amended,
the entire change in present value of expected cash flows is reported
as bad debt expense in the same manner in which impairment initially
was recognized or as a reduction in the amount of bad debt expense
that otherwise would be reported. Interest on impaired loans is
reported on the cash basis. Impaired loans are loans that are
considered to be permanently impaired in relation to principal or
interest based on the original contract. Impaired loans would be
charged off in the same manner as all loans subject to charge off.
The Savings Bank considers its investment in one to four family and
multi-family residential loans, non-residential loans and consumer
loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. The Company's policy is
that collateral dependent loans, which are more than ninety days
delinquent, are considered to constitute more than a minimum delay in
repayment and are evaluated for impairment under SFAS No. 114 at that
time. For the nine months ended March 31, 1996, the Savings Bank had
no loans that were impaired as described in the pronouncement and
therefore no interest income was recognized or received on impaired
loans.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure results when property
collateralizing a loan is foreclosed upon or otherwise acquired by the
Association in satisfaction of the loan. Real estate acquired
F-10
<PAGE>
in settlement of loans is recorded at the lower of the recorded
investment in the loan satisfied or the fair value of the assets
received at the time of acquisition less estimated costs to sell at
the date of foreclosure. The fair value of the assets received is
based upon a current appraisal adjusted for estimated carrying and
selling costs. Valuations are periodically performed by management,
and an allowance for losses is established by a charge to operations
if the carrying value of a property exceeds its estimated net
realizable value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation of property
and equipment is provided by the straight-line method over the
estimated useful lives (range of lives five to fifteen years) of the
related classes of assets.
INCOME TAXES
Effective July 1, 1993, the Savings Bank adopted Financial Accounting
Standards Board Statement No. 109 (FAS 109), "Accounting for Income
Taxes". The adoption of FAS 109 changed the method of accounting for
income taxes from the deferred method to an asset and liability
approach which requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of assets
and liabilities. The impact of adopting this standard had no material
effect on the financial statements.
Under FAS 109, deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable
income. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment. Income tax
expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
ACCOUNTING ESTIMATES
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement No. 107, "Disclosures
About Fair Value of Financial Statements", requires disclosure of fair
value information about financial instruments, whether or not
recognized in the statement of condition, for which it is practicable
to estimate that value. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. The Savings Bank will be required to adopt Statement
No. 107 for the year ending June 30, 1996.
F-11
<PAGE>
In October, 1994, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 119, "Disclosures
about Derivative Financial Instruments and Fair Value of Financial
Instruments". This statement requires disclosures about the amounts,
nature and terms of derivative financial instruments that are not
subject to Statement No. 105, "Disclosures of Information about
Financial Instruments and Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk", because they do not
result in off-balance-sheet risk of accounting loss.
It requires that a distinction be made between financial instruments
held or issued for trading purposes (including dealing and other
trading activities measured at fair value with gains and losses
recognized in earnings) and financial instruments held or issued for
purposes other than trading. Statement No. 119 is effective for
financial statements issued for fiscal years ending after December 15,
1995. Management does not expect an impact from the adoption of this
standard.
In May 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights". This statement requires that a mortgage
banking enterprise recognize as separate assets rights to service
mortgage loans for others however those servicing rights are acquired.
A mortgage banking enterprise that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and sells
or securitizes those loans with servicing rights retained would
allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans based on their relative fair value.
Statement No. 122 is effective for fiscal years beginning after
December 31, 1995. Management has not evaluated the impact of this
pronouncement.
In June 1996 the FASB issued SFAS No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities"
which established accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The
standards are based on a consistent application of a financial-
components approach that focuses on control. Under that approach,
after a transfer of financial assets an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. The
statement provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. This statement supersedes FASB Statement No. 122. This
statement is effective for transactions occurring after December 31,
1996. Management does not expect an impact from adoption of this
standard.
2. INVESTMENT SECURITIES:
The amortized cost, gross unrealized gains, gross unrealized losses and
fair values of investment securities are as follows:
MARCH 31, 1996
-------------------------------------------
(Unaudited)
Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
---- ----- ------ -----
Obligations of U.S.
Government agencies $ 400,000 - 6,662 393,338
--------- ----- ----- -------
--------- ----- ----- -------
F-12
<PAGE>
JUNE 30, 1995
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
---- ----- ------ -----
Obligations of U.S.
Government agencies $ 1,050,000 - 15,189 1,034,812
----------- ------- ------- ---------
----------- ------- ------- ---------
JUNE 30, 1994
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
---- ----- ------ -----
Obligations of U.S.
Government agencies $ 1,050,000 - 45,812 1,004,188
----------- ------- ------- ---------
----------- ------- ------- ---------
The amortized cost and fair value of investment securities at June 30, 1995
and 1994 by contractual maturity are shown below. Actual maturities may
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
JUNE 30, 1995
--------------------
Amortized Fair
COST VALUE
---- -----
Due or callable in one year
or less $ 900,000 890,624
Due after one year through
five years 150,000 144,188
----------- -------
$ 1,050,000 1,034,812
----------- ---------
----------- ---------
JUNE 30, 1994
--------------------
Amortized Fair
COST VALUE
---- -----
Due or callable in one year
or less $ 900,000 855,688
Due after one year through
five years 150,000 148,500
----------- ---------
$ 1,050,000 1,004,188
----------- ---------
----------- ---------
The above investment securities as of March 31, 1996 are all due or
callable in one year or less.
3. MORTGAGE-BACKED SECURITIES:
The amortized cost, gross unrealized gains, gross unrealized losses and
fair value of mortgage-backed securities are as follows:
MARCH 31, 1996
--------------------------------------------------
(Unaudited)
Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
---- ----- ------ -----
Federal Home Loan
Mortgage Corp. $ 2,305,249 434 55,672 2,250,011
Federal National
Mortgage
Association 2,431,224 959 71,648 2,360,535
Government National
Mortgage
Association 220,678 277 - 220,955
----------- ---------- ---------- ----------
$ 4,957,151 1,670 127,320 4,831,501
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
F-13
<PAGE>
JUNE 30, 1995
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
---- ----- ------ -----
Federal Home Loan
Mortgage Corp. $ 2,641,753 - 59,504 2,582,249
Federal National
Mortgage
Association 2,658,239 - 59,770 2,598,469
Government National
Mortgage
Association 232,407 - 3,725 228,682
----------- ---------- ---------- -----------
$ 5,532,399 - 122,999 5,409,400
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
JUNE 30, 1994
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
---- ----- ------ -----
Federal Home Loan
Mortgage Corp. $ 3,272,681 - 65,808 3,206,873
Federal National
Mortgage
Association 3,079,018 - 70,410 3,008,608
Government National
Mortgage
Association 241,045 - 12,718 228,327
----------- ---------- ---------- -----------
$ 6,592,744 - 148,936 6,443,808
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
The maturity of the mortgage-backed securities is based on the repayment of
the underlying mortgages.
4. LOANS RECEIVABLE:
Loans receivable consists of the following:
JUNE 30,
--------------
MARCH 31, 1996 1995 1994
-------------- ----------- -----------
(Unaudited)
Residential one to four
family real estate $ 18,989,394 18,299,896 16,713,603
Multi-family residential
real estate 797,771 636,068 688,065
Commercial real estate 1,302,591 1,124,131 882,603
Property improvement - - 14,175
Consumer 353,098 500,643 565,873
Passbook 57,814 111,282 66,229
------------ ---------- ----------
21,500,668 20,672,020 18,930,548
Less:
Loans in process (5,000) (15,000) -
Allowance for loan losses (103,773) (98,138) (72,107)
Deferred loan fees (32,903) (48,341) (57,908)
Unearned discounts - - (6,400)
------------ ---------- ----------
$ 21,358,992 20,510,541 18,794,133
------------ ---------- ----------
------------ ---------- ----------
At March 31, 1996 (unaudited) and June 30, 1995, adjustable rate loans
approximated $9,456,000 and $10,862,000.
F-14
<PAGE>
Activity in the allowance for loan losses are as follows:
Nine Months Ended
MARCH 31, YEAR ENDED JUNE 30,
------------------ -------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
Beginning balance $ 98,138 72,107 72,107 100,725 14,625
Provision for loan
losses 34,000 9,000 12,000 32,600 82,600
Write-offs (28,365) (1,524) (3,969) (95,560) -
Recoveries - 18,000 18,000 34,342 3,500
--------- ------- ------- ------- -------
Ending balance $ 103,773 97,583 98,138 72,107 100,725
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
Gross proceeds on sales of loans were $1,123,109, 184,202 and $576,584 for
the nine months ended March 31, 1996 and 1995 (unaudited) and the year
ended June 30, 1995, respectively. Gross realized gains on sales of loans
were $7,484, $2,702 and $12,179 for the nine months ended March 31, 1996
and 1995 (unaudited) and the year ended June 30, 1995. Loans serviced for
others as of March 31, 1996 and 1995 (unaudited), June 30, 1995, 1994 and
1993 were $251,902, $-0-, $198,076, $ -0-, and $-0-, respectively.
The Savings Bank grants first mortgages and other loans to customers
located primarily in the Metropolitan Cincinnati area. As such, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the health of the local economy and market.
At March 31, 1996 (unaudited) and June 30, 1995 and 1994, the Savings Bank
had non-accrual loans of $-0-, $-0-, and $92,965, respectively.
Loans to officers, directors and employees totalled approximately $94,896
and $100,142 at March 31, 1996 and 1995 (unaudited), respectively and
$98,866 and $104,031 at June 30, 1995 and 1994, respectively. An analysis
of loan activity to such persons for the fiscal year ended June 30, 1995
and the nine months ended March 31, 1996 (unaudited) is as follows:
Nine Months Year Ended
Ended June 30,
MARCH 31, 1996 1995
-------------- ----
Outstanding balance, beginning $ 98,866 104,031
New loans issued - -
Repayments 3,970 5,165
--------- --------
Outstanding balance, ending $ 94,896 98,866
-------- --------
-------- --------
5. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
MARCH 31,
1996 1995 1994
---- ---- ----
(Unaudited)
Real estate owned - investment
property $ 251,847 251,847 251,847
Furniture and equipment 153,264 154,913 150,665
Leasehold improvements 34,246 34,246 34,246
--------- -------- --------
439,357 441,006 436,758
Less accumulated depreciation 121,940 117,233 101,456
--------- -------- --------
$ 317,417 323,773 335,302
--------- -------- --------
--------- -------- --------
F-15
<PAGE>
The Savings Bank leases its office facility under a ten year non-cancelable
lease which expires in March of 2001 with additional renewal options. Rent
expense was $40,017 and $40,017 for the nine months ended March 31, 1996
and 1995 (unaudited), respectively. Rent expense for the years ended June
30, 1995, 1994 and 1993 was $53,355, $53,355 and $53,305, respectively.
Minimum commitments under the term of the lease are as follows:
Year Ended Year Ended
MARCH 31, JUNE 30,
----------- ----------
(Unaudited)
1997 $ 51,628 1996 50,456
1998 51,628 1997 51,628
1999 51,628 1998 51,628
2000 51,628 1999 51,628
Subsequent years 51,628 Subsequent years 90,350
------ ------
$ 258,140 295,690
------- -------
------- -------
6. INVESTMENT PROPERTY:
The Savings Bank acquired real estate at the southeast corner of Eighth and
Vine Streets in 1980. The Savings Bank has a lease agreement on the
property as a parking lot under a three year lease beginning July 1, 1994.
The lease payments will be $5,700 per month for the first two years and
$6,100 per month for the third year. Rent income for the nine months ended
March 31, 1996 and 1995 (unaudited) was $51,300 and $51,300, respectively.
Rent income for the years ended June 30, 1995 and 1994 was $68,400 and
$83,000 respectively.
7. DEPOSITS:
Deposits consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 1996 JUNE 30
------------------------- ------------------------------------------------------------
(Unaudited) 1995 1994
---------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
RATE AMOUNT RATE AMOUNT RATE AMOUNT
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Passbook 2.52% $ 1,085,461 2.87% $ 1,287,943 2.84% $ 1,834,533
NOW and money
market
accounts 2.55 1,961,727 2.66 2,507,150 2.79 3,306,537
------------ ------------ ------------
2.54 3,047,188 2.77 3,795,093 2.81 5,141,070
------------ ------------ ------------
Certificates
of deposit:
3 months 4.29 368,147 4.42 203,356 3.38 483,701
6 months 5.40 1,520,044 5.79 1,192,710 3.32 1,422,754
10/11
months 2.65 44,047 6.31 4,900,236 - -
12 months 5.83 10,544,843 5.71 4,454,225 4.25 3,997,547
18 months 6.41 5,639,480 6.19 8,514,317 5.17 11,403,901
2 years 6.11 4,599,236 5.62 3,065,798 4.64 2,539,935
3 years 5.84 830,643 5.53 556,922 5.35 505,082
4 years 5.37 207,131 5.24 127,306 6.80 284,029
5 years 5.79 979,547 6.56 927,241 6.55 1,570,143
------------ ------------ -------------
5.96 24,733,118 6.01 23,942,111 4.91 22,207,092
------------ ------------ ------------
5.58% $ 27,780,306 5.57% $ 27,737,204 4.52% $ 27,348,162
------------ ---- ------- ------------
</TABLE>
F-16
<PAGE>
Maturities of outstanding certificates of deposit are summarized as
follows:
JUNE 30,
March 31, ---------------
1996 1995 1994
---- ---- ----
(Unaudited) (In Thousands)
One year or less $ 18,756 15,647 15,634
1 - 2 years 4,591 7,445 5,363
2 - 3 years 807 549 276
Over 3 years 579 301 934
------ ------ ------
$ 24,733 23,942 22,207
------ ------ ------
------ ------ ------
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended
MARCH 31, JUNE 30,
--------------------- --------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Passbook $ 25,379 35,326 45,278 66,769 144,852
NOW and money
market accounts 41,711 60,477 79,124 98,787 96,553
Certificates of
deposit 1,100,042 850,500 1,184,284 1,131,468 1,257,787
----------- ----------- ----------- ----------- -----------
$ 1,167,132 946,303 1,308,686 1,297,024 1,499,192
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The aggregate amount of certificates of deposits in denominations of
$100,000 or more was $2,581,410 and $3,088,352 at March 31, 1996
(unaudited) and June 30, 1995, respectively. Deposit accounts exceeding
$100,000 are not federally insured.
8. ADVANCES FROM FEDERAL HOME LOAN BANK:
The Savings Bank borrowed $1,000,000 in 1994 from the Federal Home Loan
Bank under a mortgage matched advance program. Interest is charged on the
advance at a weighted average rate of 5.50% and is due in 120 to 180
monthly installments of $9,517 including interest. The Savings Bank
borrowed an additional $300,000 in 1995. The note is an interest only
bearing an interest rate of 6.85%. The note matured September 1, 1995.
Future maturities on the advance are as follows:
YEAR ENDED MARCH 31, YEAR ENDED JUNE 30,
-------------------- -------------------
(Unaudited)
1997 $ 69,496 1996 $ 366,730
1998 73,366 1997 70,445
1999 77,450 1998 74,366
2000 81,764 1999 78,506
2001 86,316 2000 82,878
2002 and subsequent 453,478 2001 and subsequent 518,652
--------- -----------
$ 841,870 $ 1,191,577
--------- ----------
--------- ----------
The advances are collateralized by a blanket agreement on residential
mortgage loans held by the Savings Bank. The Savings Bank has also pledged
its Federal Home Loan Bank stock and mortgage notes with unpaid principal
balances of approximately $1,275,000 for future advances.
9. CAPITAL REQUIREMENTS:
The Savings Bank is subject to minimum regulatory capital requirements
promulgated by the Office of Thrift Supervision (OTS). The minimum capital
standards generally require the maintenance of regulatory capital
sufficient to meet each of three tests, hereinafter described as the
tangible capital requirement, the core capital requirement and the risk-
based capital requirement.
F-17
<PAGE>
The tangible capital requirement provides for minimum tangible capital
(defined as stockholders' equity less all intangible assets) equal to 1.5%
of adjusted total assets. The core capital requirement provides for
minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets) equal to 3.0% of adjusted
total assets. The risk-based capital requirement currently provides for
the maintenance of core capital plus general loss allowances equal to 8.0%
of risk-weighted assets. In computing risk-weighted assets, the Savings
Bank multiplies the value of each asset on its statement of financial
condition by a defined risk-weighing factor, e.g., one-to-four family
residential loans carry a risk-weighted factor of 50%.
The Savings Bank's regulatory capital exceed all minimum capital
requirements as shown in the following table:
MARCH 31, 1996
-------------------------------------------
Regulatory Capital
Risk-
Tangible Core based
CAPITAL % CAPITAL % CAPITAL %
-------- --- ------- --- ------- ---
(in Thousands)
(Unaudited)
Capital under generally
accepted accounting
principles $ 2,772 $ 2,772 $ 2,772
General valuation
allowances - - 96
------- ------- -------
Regulatory capital computed 2,772 8.7 2,772 8.7 2,868 19.6
Minimum capital requirements 476 1.5 952 3.0 1,171 8.0
------- --- ------- --- ------- ----
Regulatory capital-excess $ 2,296 7.2 $ 1,820 5.7 $ 1,697 11.6
------- --- ------- --- ------- ----
------- --- ------- --- ------- ----
JUNE 30, 1995
-------------------------------------------
Regulatory Capital
Risk-
Tangible Core based
CAPITAL % CAPITAL % CAPITAL %
-------- --- ------- --- ------- ---
(in Thousands)
Capital under generally
accepted accounting
principles $ 2,706 $ 2,706 $ 2,706
General valuation
allowances - - 70
------- ------- -------
Regulatory capital computed 2,706 8.5 2,706 8.5 2,776 19.3
Minimum capital requirements 478 1.5 955 3.0 1,153 8.0
------- --- ------- --- ------- ---
Regulatory capital-excess $ 2,228 7.0 $ 1,751 5.5 $ 1,623 11.3
------- --- ------- --- ------- ----
------- --- ------- --- ------- ----
10. COMMITMENTS:
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of their
customers including commitments to extend credit. Such commitments
involve, to varying degrees, elements of credit and interest-rate risk in
excess of the amount recognized in the statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of
the Savings Bank's involvement in such financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit is represented by the contractual notional amount of those
instruments. The Savings Bank uses the same credit policies in making
commitments and conditional obligations as those utilized for on-balance-
sheet instruments.
F-18
<PAGE>
March 31, 1996, the Savings Bank had commitments to originate loans
totaling $726,005 (unaudited). The entire amount was for fixed rate
residential loans (range of interest rates 7.50% to 7.75%). No portion of
these loans were disbursed prior to March 31, 1996, and the financial
statements do not reflect any liability for such commitments. Management
anticipates that all originations will be funded from existing liquidity
and normal monthly cash flows. Loan commitments as of June 30, 1995 and
1994 were $411,000 and $628,000, respectively.
11. RETIREMENT PLAN:
The Savings Bank has a 401(K) Salary Savings Plan with the Ohio Savings and
Loan League. During the nine months ended March 31, 1996 and 1995
(unaudited) and the years ended June 30, 1995, 1994, and 1993,
respectively, retirement expense amounted to $5,053, $9,074, $10,585,
$10,167 and $10,952. The plan covers all employees having completed one
year of service and having attained the age of twenty-one. The employee
can contribute up to six percent with the employer matching contribution of
three percent and a discretionary three percent employer matching
contribution.
12. FEDERAL INCOME TAXES:
The Savings Bank has qualified under provisions of the Internal Revenue
Code which permits the Savings Bank to deduct from taxable income an
allowance for bad debts based on a percentage of taxable income before such
deduction. The Tax Reform Act of 1969 gradually reduced this reduction to
40% for years beginning in 1979. The Tax Reform Act of 1986 reduced this
deduction to 8% beginning in 1988.
Appropriated and unappropriated retained income at June 30, 1995 included
earnings of approximately $641,000, representing such bad debt deductions
for which no provision for federal income taxes has been made. In the
future, if the Savings Bank does not meet the federal income tax
requirements necessary to permit it to deduct an allowance for bad debts,
the Savings Bank will be subject to federal income tax at the then current
corporate rate. Management does not contemplate any action which would
cause such cumulative bad debt deduction to be subject to federal income
taxes, although it is possible that changes in legislation could, at a
future date require recapture of all or part of this bad debt deduction.
An analysis of income tax expense, setting forth the reasons for the
variations from the statutory rate is as follows:
Nine Months Ended
MARCH 31, YEAR ENDED JUNE 30
---------------- --------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
Federal income taxes
at the statutory
rate of 34% $ 33,361 45,774 58,876 93,028 71,974
Bad debt deduction - - - (13,300) 22,000
Other, primarily surtax
exemptions (1,234) (2,693) (11,076) (1,365) (8,798)
------- ------ ------ ------ ------
$ 32,127 43,081 47,800 78,363 85,176
------ ------ ------ ------ ------
------ ------ ------ ------ ------
32.7% 32.0% 27.6% 28.6% 40.2%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
F-19
<PAGE>
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as
follows:
JUNE 30
March 31, --------------
1996 1995 1994
---------- ---- -----
(Unaudited)
Deferred tax assets
arising from:
Loan loss reserve $ 23,700 15,000 13,300
Deferred loan fees and costs 11,200 15,500 19,700
Basis of investments 2,000 2,000 2,000
------ ------ ------
Total deferred tax assets 36,900 32,500 35,000
------ ------ ------
Deferred tax liabilities
arising from:
Accrual to cash conversion 33,600 30,300 19,500
Depreciation 20,100 20,800 21,700
FHLB stock 46,700 42,000 36,600
------ ------ ------
Total deferred tax
liabilities (100,400) (93,100) (77,800)
------- ------ ------
Net deferred tax liability $ 63,500 60,600 42,800
-------- ------ ------
-------- ------ ------
The Savings Bank has not recorded a valuation allowance, as the deferred
tax assets are presently considered to be realizable based on the level of
anticipated future taxable income. Net deferred tax liabilities and
federal income tax expense in future years can be significantly affected by
changes in enacted tax rates.
The components of deferred income tax expense (credit) are as follows:
Nine Months Ended
MARCH 31, YEAR ENDED JUNE 30
-------------- ------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
Loan origination fees $ 4,200 600 4,200 5,500 6,300
FHLB stock dividend 4,700 5,100 5,400 3,900 3,000
Depreciation (700) (700) (900) 200 2,000
Accrual to cash
conversion 3,500 6,300 10,800 19,800 (10,300)
Bad debt reserves and
other (8,800) 400 (1,700) (13,300) (9,000)
------ ----- ------ ------ ------
$ 2,900 11,700 17,800 16,100 (8,000)
------ ------ ------ ------ ------
------ ------ ------ ------ ------
13. CONTINGENCY - SAIF RECAPITALIZATION:
The deposits of savings associations such as the Savings Bank are
presently insured by the SAIF, which together with the BIF, are the two
insurance funds administered by the FDIC. On November 14, 1995, the FDIC
revised the premium schedule for BIF-insured banks to provide a range of
.00% to .27% (subject to a $2,000 minimum) of deposits (as compared to the
current range of .23% to .31% of deposits for SAIF-insured institutions)
due to the BIF achieving its statutory reserve ratio. As a result, BIF
members generally pay substantially lower premiums than the SAIF members.
It is anticipated that the SAIF will not be adequately recapitalized until
2002, absent a substantial increase in premium rates or the imposition of
special assessments or other significant developments, such as a merger of
the SAIF and the BIF. As a result of this disparity, SAIF members have
been placed at a significant, competitive disadvantage to BIF members due
to higher costs for deposit insurance. A recapitalization plan under
consideration by the Treasury Department, the FDIC, the OTS and the
Congress reportedly provides for a one-time assessment of .80% to .85% to
be imposed on all deposits assessed at the SAIF rates in order to
recapitalize the SAIF and eliminate the disparity, and an eventual merger
of the SAIF and the BIF.
F-20
<PAGE>
The Savings Bank currently is unable to predict the likelihood of
legislation effecting these changes, although a consensus appears to be
developing in this regard. If such an assessment was effected based on
deposits as of March 31, 1995, as proposed, the Savings Bank's pro rate
share would amount to approximately $136,100 to $144,600 after taxes,
respectively, assuming a 34% tax rate.
14. PLAN OF CONVERSION:
On May 31, 1996, the Savings Bank's Board of Directors adopted a Plan of
Conversion (the "Plan") to convert the Savings Bank from a state chartered
mutual savings bank to a state chartered stock savings bank, which will
then become a wholly owned subsidiary of a holding company formed in
connection with the Conversion. The holding company will issue common
stock to be sold in the conversion and will use a portion of the net
proceeds thereof which it does not retain to purchase the capital stock of
the Savings Bank. The Plan is subject to approval by the regulatory
authorities and the members of the Savings Bank at a special meeting.
At the time of conversion, the Savings Bank will establish a liquidation
account in an amount equal to its net worth as reflected in its latest
balance sheet used in its final conversion Prospectus. The liquidation
account will be maintained for the benefit of eligible deposit account
holders who continue to maintain their deposit accounts in the Savings Bank
after conversion. Only in the event of a complete liquidation will each
deposit account holder be entitled to receive a liquidation distribution
from the liquidation account in the amount of the then current adjusted
subaccount balance for deposit accounts then held before any liquidation
distribution may be made with respect to common stock. Dividends paid by
the Savings Bank subsequent to the conversion cannot be paid from this
liquidation account.
The Savings Bank may not declare or pay a cash dividend on or repurchase
any of its common stock if its net worth would thereby be reduced below
either the aggregate amount then required for the liquidation account or
the minimum regulatory capital requirements imposed by the federal and
state regulations.
No conversion costs had been incurred as of March 31, 1996. If the
conversion is ultimately successful, conversion costs will be accounted for
as a reduction of the stock proceeds. If the conversion is unsuccessful,
conversion costs will be charged to the Savings Bank's operations.
F-21
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE HOLDING COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, ANY SECURITY, OTHER THAN THE
COMMON SHARES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM DELIVERY OF
THIS PROSPECTUS WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS TO ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
TABLE OF CONTENTS PAGE
- ----------------- ----
PROSPECTUS SUMMARY 3
SELECTED FINANCIAL INFORMATION AND OTHER DATA 9
RISK FACTORS 11
USE OF PROCEEDS 14
MARKET FOR THE COMMON SHARES 15
DIVIDEND POLICY 15
REGULATORY CAPITAL COMPLIANCE 16
CAPITALIZATION 17
PRO FORMA DATA 18
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 22
RECENT DEVELOPMENTS 33
THE BUSINESS OF THE BANK 35
MANAGEMENT 48
REGULATION 53
TAXATION 60
THE CONVERSION 62
RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY AND
THE BANK 73
DESCRIPTION OF AUTHORIZED SHARES 77
REGISTRATION REQUIREMENTS 78
LEGAL MATTERS 78
EXPERTS 78
ADDITIONAL INFORMATION 78
FINANCIAL STATEMENTS F-1
Up to 402,500 Common Shares
FOUNDATION BANCORP, INC.
--------------
PROSPECTUS
------------
CHARLES WEBB & COMPANY
A DIVISION OF KEEFE, BRUYETT & WOODS, INC.
August 12, 1996
