<PAGE>
PROSPECTUS
MARKET FINANCIAL CORPORATION
(PROPOSED HOLDING COMPANY FOR THE MARKET BUILDING AND SAVING COMPANY)
MT. HEALTHY, OHIO
UP TO 1,161,500 COMMON SHARES, $10 PURCHASE PRICE PER SHARE
Market Financial Corporation, an Ohio corporation ("MFC"), is hereby
offering for sale up to 1,161,500 common shares, without par value (the "Common
Shares"), in connection with its acquisition of all of the capital stock to be
issued by The Market Building and Saving Company, an Ohio mutual savings and
loan association located in Mt. Healthy, Ohio (the "Association"), upon the
conversion of the Association from a mutual savings and loan association to a
permanent capital stock savings and loan association incorporated under Ohio law
(the "Conversion"). The consummation of the Conversion and the sale of the
Common Shares are subject to the approval of the Association's Plan of
Conversion (the "Plan") and the adoption of the Amended Articles of
Incorporation and the Amended Constitution by the members of the Association at
a Special Meeting of Members of the Association to be held at 10:00 a.m.,
Eastern Time, on March 24, 1997 at the offices of the Association at 7522
Hamilton Avenue, Mt. Healthy, Ohio 45231 (the "Special Meeting").
Based on an independent appraisal of the pro forma market value of the
Association, as converted, as of December 31, 1996, the aggregate purchase price
of the Common Shares offered in connection with the Conversion ranges from a
minimum of $8,585,000 to a maximum of $11,615,000 (the "Valuation Range"),
resulting in a range of 858,500 to 1,161,500 Common Shares at $10 per share.
See "THE CONVERSION - Pricing and Number of Common Shares to be Sold."
Applicable regulations permit MFC 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 1,335,725 Common Shares with an aggregate purchase price
of $13,357,250. The actual number of Common Shares to be sold in connection
with the Conversion will be determined in the sole discretion of the Boards of
Directors of MFC and the Association and will be based upon the final valuation
of the Association, as determined by the independent appraiser upon the
completion of this offering.
(CONTINUED ON NEXT PAGE)
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" BEGINNING ON PAGE 8 OF THIS
PROSPECTUS.
THE COMMON SHARES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), THE OFFICE OF THRIFT
SUPERVISION (THE "OTS"), THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"),
THE DIVISION OF FINANCIAL INSTITUTIONS OF THE DEPARTMENT OF COMMERCE OF THE
STATE OF OHIO (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 A CRIMINAL OFFENSE.
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) 521-8711.
<TABLE>
<CAPTION>
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Subscription Estimated Expenses and Estimated Net
Price Underwriting Commissions (1) Proceeds (2)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share Minimum $10.00 $0.49 $9.51
Per share Mid-point $10.00 $0.43 $9.57
Per share Maximum $10.00 $0.39 $9.61
Per share Maximum, as adjusted (3) $10.00 $0.35 $9.65
Total Minimum $8,585,000 $417,000 $8,168,000
Total Mid-point $10,100,000 $435,000 $9,665,000
Total Maximum $11,615,000 $453,000 $11,162,000
Total Maximum, as adjusted (3) $13,357,250 $473,000 $12,884,250
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Expenses of the Conversion payable by the Association and MFC include
legal, accounting, appraisal, printing, mailing and miscellaneous expenses.
Such expenses also include sales commissions, estimated to be between
$107,000 and $163,000, and reimbursable expenses, not to exceed $25,000,
payable to Charles Webb & Company, a division of Keefe, Bruyette &. Woods,
Inc. ("Webb"). Such sales commissions may be deemed to be underwriting
fees. See "THE CONVERSION - Marketing Plan." Actual expenses may vary
from the estimates. Webb will solicit subscriptions for the Common Shares
on a "best efforts" basis and has no obligation to purchase any of the
Common Shares.
(2) Includes the amount paid by the Market Financial Corporation Employee Stock
Ownership Plan (the "ESOP") in the form of a note payable to MFC in payment
for the Common Shares purchased by the ESOP. 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 (both of which are defined hereinafter). See "THE
CONVERSION - Pricing and Number of Common Shares to be Sold."
The date of this Prospectus is February 12, 1997.
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) each account holder who, at the
close of business on December 31, 1994 (the "Eligibility Record Date"), had
deposit accounts with deposit balances, in the aggregate, of $50 or more (a
"Qualifying Deposit") with the Association (the "Eligible Account Holders"),
(b) the ESOP, (c) each account holder who, at the close of business on June 30,
1996 (the "Supplemental Eligibility Record Date"), had a Qualifying Deposit with
the Association (the "Supplemental Eligible Account Holders"), and (d) members
of the Association having a Qualifying Deposit with the Association on February
6, 1997 ("Other Eligible Members"). ALL SUBSCRIPTION RIGHTS TO PURCHASE COMMON
SHARES IN THE SUBSCRIPTION OFFERING ARE NONTRANSFERABLE AND WILL EXPIRE AT 4:30
P.M., EASTERN TIME, ON MARCH 17, 1997 (THE "SUBSCRIPTION EXPIRATION DATE"),
UNLESS EXTENDED BY THE ASSOCIATION AND MFC FOR UP TO 45 DAYS TO MAY 1, 1997.
Persons found to be transferring subscription rights will be subject to
forfeiture of such rights and possible further penalties imposed by the OTS.
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 concurrently
offered to the general public in a direct community offering in which preference
will be given to natural persons residing in Hamilton County, Ohio (the
"Community Offering"). See "THE CONVERSION - Community Offering." The Board of
Directors of MFC may terminate the Community Offering at any time after
subscriptions or orders for at least 1,335,725 Common Shares have been received
and in no event will the Community Offering extend beyond 45 days after the
Subscription Expiration Date, or May 1, 1997, unless extended by the Association
and MFC with the approval of the OTS and the Division, if necessary. In
accordance with the Plan, the Subscription Offering and the Community Offering
(collectively, the "Offering") may not be extended beyond March 24, 1999. See
"THE CONVERSION - Subscription Offering; - Community Offering; and - Marketing
Plan."
The Plan and federal regulations limit the number of Common Shares which
may be purchased by various categories of persons, including the limitation that
no person may purchase fewer than 25 shares, nor more than 2% of the Common
Shares sold in connection with the Conversion (which would be 26,714 Common
Shares at the maximum of the Valuation Range, as adjusted). Such limitation
does not apply to the ESOP. In addition, no person together with such person's
Associates (hereinafter defined) and persons Acting in Concert (hereinafter
defined) with such person, may purchase more than 4% of the Common Shares sold
in connection with the Conversion (which would be 53,429 Common Shares at the
maximum of the Valuation Range, as adjusted) in the Subscription Offering, or 2%
in the Community Offering. Subject to applicable OTS regulations, the
limitations set forth in the Plan may be changed at any time in the sole
discretion of the Board of Directors of MFC and the Association. See "THE
CONVERSION - Limitations on Purchases of Common Shares."
Common Shares may be subscribed for or ordered in the Offering only by
returning the accompanying order form (the "Order Form"), along with full
payment of the purchase price per share for all Common Shares for which a
subscription is made or an order is submitted, so that it is received by the
Association no later than 4:30 p.m., Eastern Time, on March 17, 1997. See "THE
CONVERSION - Use of Order Forms." Payment may be made in cash, if delivered in
person, or by check or money order and will be held at the Association in a
segregated account insured by the FDIC up to the applicable limits and earning
interest at the Association's then current passbook savings account rate from
the date of receipt until the completion of the Conversion. Payment may also be
made by authorized withdrawal from an existing deposit account at the
Association, the amount of which will continue to earn interest until completion
of the Conversion at the rate normally in effect from time to time for such
accounts. See "THE CONVERSION - Payment for Common Shares."
AN EXECUTED ORDER FORM, ONCE RECEIVED BY MFC, MAY NOT BE MODIFIED, AMENDED
OR RESCINDED WITHOUT THE CONSENT OF MFC, UNLESS (i) THE COMMUNITY OFFERING IS
NOT COMPLETED WITHIN 45 DAYS AFTER THE SUBSCRIPTION EXPIRATION DATE, OR (ii) THE
FINAL VALUATION OF THE ASSOCIATION, AS CONVERTED, IS LESS THAN $8,585,000 OR
MORE THAN $13,357,250. IF EITHER OF THOSE EVENTS OCCUR, PERSONS WHO HAVE
SUBSCRIBED FOR COMMON SHARES IN THE OFFERING WILL RECEIVE WRITTEN NOTICE THAT,
UNTIL A DATE SPECIFIED IN THE NOTICE, THEY HAVE A 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 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% OF
THE COMMON SHARES SOLD IN THE CONVERSION, PERSONS WHO HAVE SUBSCRIBED FOR 2% OF
THE COMMON SHARES WILL BE GIVEN THE OPPORTUNITY TO INCREASE THEIR SUBSCRIPTIONS.
THE CONVERSION OF THE ASSOCIATION 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 ASSOCIATION'S
VOTING MEMBERS, (ii) THE SALE OF THE REQUISITE NUMBER OF COMMON SHARES AND (iii)
CERTAIN OTHER FACTORS. SEE "THE CONVERSION."
-ii-
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
Established in 1883
Headquarters:
7522 Hamilton Avenue
Mt. Healthy, Ohio 45231
(513) 521-9772
[Map of the states of Ohio, Indiana and Kentucky with the capital cities noted
and indicating the City of Cincinnati and the location of the main office and
branch office of the Association. Above the tri-state map is an enlargement of
Hamilton County showing the location of the City of Cincinnati and the
Association's main office and branch office within Hamilton County.]
-iii-
<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.
MARKET FINANCIAL CORPORATION
MFC was incorporated under Ohio law in April 1996 at the direction of the
Association for the purpose of purchasing all of the capital stock of the
Association to be issued in connection with the Conversion. MFC 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, MFC will be a unitary savings and loan holding
company, the principal assets of which initially will consist of the capital
stock of the Association, a promissory note from the ESOP and the investments
made with the net proceeds retained from the sale of Common Shares in connection
with the Conversion. See "USE OF PROCEEDS."
The executive office of MFC is located at 7522 Hamilton Avenue, Mt.
Healthy, Ohio 45231, and its telephone number is (513) 521-9772.
THE MARKET BUILDING AND SAVING COMPANY
The Association is a mutual savings and loan association organized under
Ohio law in 1883 under the name "The Court Street Market Building and Saving
Company." In 1926, the Association adopted its current name. In 1960, the
Hilltop Savings and Loan Company of Mt. Healthy, Ohio, was merged into the
Association. The Cleves-North Bend Building and Loan Company ("Cleves-North
Bend") of North Bend, Ohio, was merged into the Association in 1994.
As an Ohio savings and loan association, the Association is subject to
supervision and regulation by the OTS and the Division. The Association is a
member of the Federal Home Loan Bank (the "FHLB") of Cincinnati, and the deposit
accounts of the Association are insured up to applicable limits by the Savings
Association Insurance Fund (the "SAIF") administered by the FDIC. See
"REGULATION."
The Association conducts business from its main office located at 7522
Hamilton Avenue, Mt. Healthy, Ohio, and its full-service branch office at 125
Miami Avenue, North Bend, Ohio. As a community-oriented institution, the
Association focuses on providing a high level of customer service to the
families and businesses located in the Mt. Healthy and North Bend communities.
The Association's strategy is to continue its historic commitment to one- to
four-family mortgage lending while maintaining strong asset quality and a high
level of capital.
The principal business of the Association is the origination of permanent
mortgage loans secured by first mortgages on one- to four-family residential
real estate located in Hamilton County, Ohio, the Association's primary market
area. The Association also originates a limited number of loans for the
construction of one- to four-family residences and permanent mortgage loans
secured by multifamily real estate (over four units) and nonresidential real
estate in its market area. See "THE BUSINESS OF THE ASSOCIATION - Lending
Activities." In addition to real estate lending, the Association originates a
limited number of loans secured by deposits at the Association. For liquidity
and interest rate risk management purposes, the Association invests in interest-
bearing deposits in other financial institutions, U.S. Government and agency
obligations and mortgage-backed securities. See "THE BUSINESS OF THE
ASSOCIATION - 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. See "THE
BUSINESS OF THE ASSOCIATION - Deposits and Borrowings."
THE CONVERSION
GENERAL. The Boards of Directors of MFC and the Association have
unanimously approved the Plan. The Plan provides for the conversion of the
Association 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 Association's voting members at the Special Meeting, and to
the satisfaction of certain other conditions. See "THE CONVERSION - Conditions
and Termination."
THE SUBSCRIPTION OFFERING AND THE COMMUNITY OFFERING. Pursuant to the
Plan, subscription rights to purchase Common Shares at a price of $10 per share
are hereby offered to (a) each Eligible Account Holder, (b) the ESOP, (c) each
Supplemental Eligible Account Holder and (d) Other Eligible Members. See "THE
CONVERSION - Subscription Offering."
-1-
<PAGE>
Concurrently with the Subscription Offering, MFC is hereby offering Common
Shares in the Community Offering, subject to certain limitations and to the
extent such shares remain available after the satisfaction of all subscriptions
received in the Subscription Offering. Preference will be given in the
Community Offering to natural persons residing in Hamilton County, Ohio. The
Boards of Directors of MFC and the Association have the right to reject, in
whole or in part, any order for Common Shares submitted in the Community
Offering. See "THE CONVERSION - Community Offering."
The Offering will terminate at, and subscription rights will expire if not
exercised by, 4:30 p.m., Eastern Time, on the Subscription Expiration Date. If
necessary, the Community Offering may be extended by MFC and the Association to
45 days after the Subscription Expiration Date or May 1, 1997. Any extension of
the Community Offering beyond May 1, 1997, would require the consent of the OTS
and the Division. If the Community Offering extends beyond May 1, 1997, persons
who have subscribed for or ordered Common Shares in the Offering will receive a
notice that they have the right to affirm, increase, decrease or rescind their
subscriptions or orders for Common Shares. Persons who do not affirmatively
elect to continue their subscriptions 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." The sale
of Common Shares pursuant to subscriptions and orders received in the Offering
will be subject to the approval of the Plan by the voting members of the
Association at the Special Meeting, to the determination by the Board of
Directors of MFC and the Association of the total number of Common Shares to be
sold and to the satisfaction or waiver of certain other conditions. See "THE
CONVERSION - Subscription Offering; - Community Offering; and - Pricing and
Number of Common Shares to be Sold."
PURCHASE LIMITATIONS. The Plan authorizes the Boards of Directors of MFC
and the Association to establish limits on the amount of Common Shares which may
be purchased by various categories of persons. The Plan also permits the Boards
of Directors of MFC and the Association, subject to any required regulatory
approval and the requirements of applicable laws and regulations, to increase or
decrease such purchase limitations, in their sole discretion. Pursuant to such
authority, the Boards of Directors have established the preliminary limitation
that, generally, an Eligible Account Holder or Supplemental Eligible Account
Holder may purchase in the Subscription Offering a number of Common Shares equal
to the greater of (i) 2% of the total number of Common Shares to be sold in
connection with the Conversion (which would be 26,714 shares at the maximum of
the Valuation Range, as adjusted), or (ii) 15 times the product (rounded down to
the next whole number) obtained by multiplying the total number of Common Shares
to be sold in connection with the Conversion by a fraction, the numerator of
which is the amount of such Eligible Account Holder's or Supplemental Eligible
Account Holder's Qualifying Deposit and the denominator of which is the total
amount of Qualifying Deposits of all Eligible Account Holders or Supplemental
Eligible Account Holders, as the case may be. Other Eligible Members in the
Subscription Offering may purchase a number of Common Shares equal to up to 2%
of the total number of Common Shares sold in connection with the Conversion.
No person in the Subscription Offering, however, together with his or her
Associates and other persons Acting in Concert with him or her, may purchase
more than 4% of the Common Shares sold in connection with the Conversion (which
would be 53,429 shares at the maximum of the Valuation Range, as adjusted).
Such limitations do not apply to the ESOP, which intends to purchase up to 8% of
the Common Shares sold in the Offering. The ESOP may purchase Common Shares if
shares remain available after satisfying the subscriptions of Eligible Account
Holders up to $11,615,000, the maximum of the Valuation Range. 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 Common Shares from MFC. If the ESOP purchases authorized but
unissued Common Shares from MFC, such purchases could have a dilutive effect on
the interests of MFC's shareholders. See "RISK FACTORS - Dilutive Effect of
Purchases by the ESOP and the RRP."
Each person in the Community Offering, together with such person's
Associates and other persons Acting in Concert with him or her, may purchase 2%
of the Common Shares to be sold in connection with the Conversion (which would
be 26,714 shares at the maximum of the Valuation Range, as adjusted). 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 of MFC and the Association. See "THE CONVERSION - Limitations on
Purchases of Common Shares" and "RESTRICTIONS ON ACQUISITION OF MFC AND THE
ASSOCIATION AND RELATED ANTI-TAKEOVER PROVISIONS."
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS. OTS 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
-2-
<PAGE>
exercising subscription rights will be required to certify that his or her
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 OFFERING. The Association and MFC have
retained Webb as a consultant and advisor in connection with the Offering. Webb
will also assist in soliciting subscriptions in the Subscription Offering and
the Community Offering. Such solicitations will be made on a "best efforts"
basis. Webb is not obligated to purchase any of the Common Shares. See "THE
CONVERSION - Marketing Plan."
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
Association, as converted. Keller was selected by the Board of Directors
because Keller has extensive experience in the valuation of thrift institutions,
particularly in the mutual-to-stock conversion context. Keller is certified by
the OTS as a mutual-to-stock conversion appraiser. The Association and Keller
have no relationship which would affect Keller's independence.
Keller's valuation of the estimated pro forma market value of the
Association, as converted, is $10,100,000 as of January 27, 1997 (the "Pro Forma
Value"). Based on the Pro Forma Value of the Association, the Valuation Range
established in accordance with the Plan is $8,585,000 to $11,615,000. MFC will
issue the Common Shares at a fixed price of $10 per share and, by dividing the
price per share into the aggregate pro forma value at the close of the Offering,
will determine the number of Common Shares to be issued.
In the event that Keller determines at the close of the Offering that the
aggregate pro forma value of the Association is higher or lower than the Pro
Forma Value, but is nevertheless equal to or greater than $8,585,000 and equal
to or less than $13,357,250, MFC will make an appropriate adjustment by raising
or lowering the total number of Common Shares to be sold in the Conversion
consistent with the final valuation. The total number of Common Shares to be
sold in the Conversion 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 $8,585,000 or more than
$13,357,250, subscribers will be given notice of such final valuation and the
right to affirm, increase, decrease or rescind their subscriptions.
USE OF PROCEEDS. MFC will retain 50% of the net proceeds from the sale of
the Common Shares, or approximately $4.8 million at the mid-point of the
Valuation Range, including the value of a promissory note from the ESOP which
MFC intends to accept in exchange for the issuance of Common Shares to the ESOP.
Such proceeds will be used by MFC to fund the Market Financial Corporation
Recognition and Retention Plan (the "RRP"), which is expected to purchase on the
open market a number of shares of MFC equal to up to 4% of the Common Shares
sold in connection with the Conversion and for general corporate purposes,
including payment of dividends, purchases of Common Shares and acquisitions of
other financial institutions.
The remainder of the net proceeds received from the sale of the Common
Shares, approximately $4.8 million at the mid-point of the Valuation Range, will
be invested by MFC in the capital stock to be issued by the Association to MFC
as a result of the Conversion and will increase the regulatory capital of the
Association. The Association will utilize such proceeds to originate
adjustable- and fixed-rate loans and as a source of liquidity through
investments in short- to intermediate-term U.S. Government securities. See "USE
OF PROCEEDS."
TAX CONSEQUENCES
The consummation of the Conversion is expressly conditioned upon the
receipt by MFC and the Association of a private letter ruling from the Internal
Revenue Service (the "IRS") or an opinion of counsel to the effect that, for
federal income tax purposes, 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"). MFC and the Association intend to proceed with
the Conversion based upon an opinion received from Vorys, Sater, Seymour and
Pease that states, in part, that (1) no gain or loss will be recognized by the
Association in connection with the Conversion or the receipt from MFC of
proceeds from the sale of the Common Shares, (2) assuming that the subscription
rights received by deposit account holders in connection with the Conversion
have no ascertainable fair market value, no gain or loss will be recognized to
the deposit account holders of the Association upon issuance to them of
subscription rights or interests in the Liquidation Account (hereinafter
defined) and (3) 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, MFC and the Association have received an
opinion from Keller supporting such assumption. See "THE CONVERSION - Principal
Effects of the Conversion -- Tax Consequences."
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<PAGE>
MARKET FOR COMMON SHARES
There is presently no market for the Common Shares. No assurance can be
given that an active or liquid market for the Common Shares will develop after
the completion of the Conversion or, if such a 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 -
Absence of Market of Common Shares."
MFC has received conditional approval from The Nasdaq SmallCap Market
("Nasdaq SmallCap") to have the Common Shares quoted on Nasdaq SmallCap under
the symbol "MRKF" upon the completion of the Conversion, subject to certain
conditions which the Association and MFC believe will be satisfied, although no
assurance can be provided that the conditions will be met. One of the
conditions to the Nasdaq SmallCap listing is the commitment of at least two
brokerage firms to make a market in the Common Shares. Keefe, Bruyette & Woods,
Inc. ("KBW"), intends to make a market in the Common Shares but has no
obligation to do so. Webb does not intend to make a market in the Common
Shares.
The aggregate offering price for the Common Shares is based upon an
independent appraisal of the Association. The appraisal does not represent
Keller's opinion as to the price at which the Common Shares may trade and is not
a recommendation as to the advisability of purchasing Common Shares. No
assurance can be given that the Common Shares may later be resold at the price
at which they are purchased in connection with the Conversion. See "THE
CONVERSION - Pricing and Number of Common Shares to be Sold."
DIVIDEND POLICY
The declaration and payment of dividends or other capital distributions by
MFC will be subject to the discretion of the Board of Directors of MFC, to the
earnings and financial condition of MFC and the Association and to general
economic conditions. If the Board of Directors of MFC determines in the
exercise of its discretion that the net income, capital and financial condition
of MFC and the general economy justify the declaration and payment of dividends
by MFC, dividends may be paid on the Common Shares. No assurance can be given,
however, that dividends will be paid or, if paid, will continue in the future.
See "DIVIDEND POLICY" and "REGULATION - Office of Thrift Supervision --
Limitations on Capital Distributions."
BENEFITS OF THE CONVERSION TO DIRECTORS, OFFICERS AND EMPLOYEES OF MFC AND THE
ASSOCIATION
GENERAL. Among the factors considered by the Board of Directors of the
Association in making the decision to pursue the Conversion is the ability of
MFC and the Association to utilize various types of stock benefit plans to
attract and retain qualified directors and employees. See "THE CONVERSION -
Reasons for the Conversion." Such benefit plans include the ESOP, the RRP and
the Market Financial Corporation 1997 Stock Option and Incentive Plan (the
"Stock Option Plan"). It is expected that the ESOP will purchase 8% of the
Common Shares sold in connection with the Conversion. The officers of the
Association who are employees will be eligible to receive allocations of shares
of MFC thereunder based upon the officers' compensation as a percentage of the
compensation of all employees, calculated at the end of each plan year end.
Assuming the sale of a number of Common Shares between 858,500 and 1,161,500 and
the purchase by the RRP of a number of shares equal to 4% of the Common Shares
issued in the Conversion at a purchase price of $10 per share, the shares
available for distribution under the RRP to directors and employees would have
an aggregate market value of between $343,400 and $464,600. Based on the sale
of a number of Common Shares between 858,500 and 1,161,500 and 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 to employees and directors is
between $858,500 and $1,161,500. The ultimate value of any stock option granted
at fair market value will depend on future appreciation in the fair market value
of the shares to which the option relates. No decisions have been made as to
anticipated awards under either the RRP or the Stock Option Plan.
EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the Conversion, MFC will
establish the ESOP, which intends to use a loan from MFC to purchase 8% of the
Common Shares issued in the Conversion. The ESOP intends to repay the loan with
discretionary contributions made by the Association to the ESOP. As the loan is
repaid, the Common Shares held by the ESOP will be allocated to the accounts of
employees of the Association and MFC, including executive officers, at the
discretion of the Board of Directors of MFC. See "PRO FORMA DATA" for a
discussion of the impact of the ESOP on pro forma earnings per share. All full-
time employees of MFC and the Association 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."
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<PAGE>
STOCK OPTION PLAN. After the completion of the Conversion, MFC intends to
establish the Stock Option Plan. The Board of Directors of MFC anticipates that
a number of shares equal to 10% of the Common Shares sold in the Offering will
be reserved for issuance to directors, officers and employees of MFC and the
Association upon the exercise of options granted under the Stock Option Plan.
The Stock Option Plan will be administered by a committee comprised of three
directors of MFC (the "Stock Option Committee"). Persons eligible for awards
under the Stock Option Plan will consist of directors, officers and key
employees of MFC or the Association who hold positions with significant
responsibilities or whose performance or potential contribution, in the judgment
of the Stock Option Committee, will contribute to the future success of MFC or
the Association. The Stock Option Committee will consider the position, duties
and responsibilities of the directors, officers and key employees of MFC and the
Association, the value of their services to MFC and the Association and any
other factors the Stock Option Committee may deem relevant.
Under OTS regulations, no stock options may be awarded until after the
approval of the Stock Option Plan by the shareholders of MFC at an annual or a
special meeting of shareholders held not less than six months following the
completion of the Conversion. If the Stock Option Plan is approved by the MFC
shareholders at such meeting and implemented during the first year after the
completion of the Conversion, the following restrictions will apply: (i) the
number of shares which may be subject to options awarded under the Stock Option
Plan to directors who are not full-time employees of MFC may not exceed 5% per
person and 30% in the aggregate of the available awards; (ii) the number of
shares which may be subject to options awarded under the Stock Option Plan to
any individual who is a full-time employee of MFC or its subsidiaries may not
exceed 25% of the plan shares; (iii) stock options must be awarded with an
exercise price at least equal to the fair market value of common shares of MFC
at the time of the grant; and (iv) stock 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. The
ultimate value of any option granted at fair market value will depend on future
appreciation in the fair market value of the shares to which the option relates.
No decision has been made as to anticipated awards under the Stock Option Plan.
See "MANAGEMENT - Stock Benefit Plans -- Stock Option Plan."
RECOGNITION AND RETENTION PLAN AND TRUST. MFC intends to establish the RRP
after the completion of the Conversion and anticipates that a number of shares
equal to 4% of the number of Common Shares sold in connection with the
Conversion will be purchased by, or issued to, the RRP. Shares held in the RRP
will be available for awards to directors, officers and employees of MFC and the
Association. The RRP will be administered by a committee comprised of three
directors of MFC (the "RRP Committee"). In selecting the directors, officers
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 such persons, the value of their services to MFC and the
Association and any other factors the RRP Committee may deem relevant. No
determination has been made with respect to RRP awards.
Under OTS regulations, no RRP shares may be awarded until after the
approval of the RRP by the shareholders of MFC at an annual meeting or a special
meeting of shareholders to be held no less than six months after the completion
of the Conversion. If the RRP is approved by the MFC shareholders at such
meeting and implemented during the first year after the completion of the
Conversion, the following restrictions will apply: (i) the number of shares
that may be subject to awards under the RRP to directors who are not full-time
employees of MFC or its subsidiaries may not exceed 5% per person and 30% in the
aggregate of the available awards; (ii) the number of shares which may be
subject to RRP awards to any individual who is a full-time employee of MFC or
its subsidiaries may not exceed 25% of the plan shares; and (iii) RRP awards may
not be earned more quickly than one-fifth per year commencing on the date which
is one year from the date of grant of the award; provided, however, that in the
event of the death or the disability of the participant and RRP awards shall be
deemed earned and nonforfeitable on such date. Dividends paid by MFC on shares
awarded under the RRP but not yet earned will be held in the RRP Trust. When
the awarded shares are earned, the dividends accumulated with respect to such
shares will be distributed to the participant along with the shares. While held
in the RRP Trust, shares of MFC will be voted by the RRP Trustee. See
"MANAGEMENT - Stock Benefit Plans -- Recognition and Retention Plan and Trust."
EMPLOYMENT AGREEMENT. In connection with the Conversion, the Association
will enter into an employment agreement with John T. Larimer, the President and
Managing Officer of the Association. The employment contract will provide for a
term of three years, with an annual salary not less than Mr. Larimer's current
salary, which is $94,500. The employment agreement will also provide for
severance payments in the event the agreement is terminated prior to the
expiration of its term. 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 - Low
Return on Equity May Affect Market Price and Liquidity of the Common Shares; -
Reduction in
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<PAGE>
Return on Equity due to Proceeds of Offering; - Interest Rate Risk; -
Legislation and Regulation Which May Adversely Affect the Association's
Earnings; - Experience and Restructuring of Management; - Dilutive Effect of
Purchases by the ESOP and the RRP; - Absence of Market for Common Shares;
Uncertainty of Future Trading Market; - Controlling Influence of Management and
Anti-Takeover Provisions Which May Discourage Sales of Common Shares for Premium
Prices; - Possible Tax Liability Related to Subscription Rights; and - Risk of
Delayed Offering."
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following table sets forth certain information concerning the financial
condition, earnings and other data regarding the Association at the dates and
for the periods indicated. The financial information should be read in
conjunction with the financial statements and notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------
SELECTED FINANCIAL CONDITION (1): 1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $45,547 $45,734 $45,340 $46,942 $47,556
Cash and cash equivalents 4,082 4,013 6,380 18,289 15,126
Certificates of deposit in other financial
institutions 7,040 7,139 6,139 1,789 4,164
Investment securities - at cost 9,062 7,984 5,919 3,525 3,243
Investment securities designated as available
for sale - at market 712 504 - - -
Mortgage-backed securities - at cost 1,549 2,211 2,441 3,661 5,793
Loans receivable - net 21,996 23,018 23,658 18,945 18,616
Real estate acquired through foreclosure - - - 79 -
Deposits 37,282 38,056 38,674 40,703 41,719
Unrealized gains on securities designated as
available for sale (2) 451 314 - - -
Retained earnings, net, substantially restricted 7,514 7,153 6,372 5,960 5,550
<CAPTION>
Year ended September 30,
-------------------------------------------------------
SELECTED OPERATING DATA (1): 1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(In thousands)
<S>
Interest income $ 3,261 $ 3,182 $ 2,908 $ 3,095 $ 3,500
Interest expense 1,758 1,622 1,478 1,706 2,318
------- ------- ------- ------- -------
Net interest income 1,503 1,560 1,430 1,389 1,182
Provision for losses on loans 13 - - 10 11
------- ------- ------- ------- -------
Net interest income after provision for losses on
loans 1,490 1,560 1,430 1,379 1,171
Other income 7 8 12 10 8
General, administrative and other expenses 1,153 861 836 697 710
------- ------- ------- ------- -------
Earnings before income taxes 344 707 606 692 469
Federal income taxes 120 240 194 223 138
------- ------- ------- ------- -------
Net earnings $ 224 $ 467 $ 412 $ 469 $ 331
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
- ---------------------------
(1) The pre-1995 financial information presented above has been restated to
reflect the merger of Cleves-North Bend into the Association and provides
such information on a combined entity basis.
(2) The Association adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," on October 1, 1994. As of and subsequent to that date, the
Association carries at market value securities designated as available for
sale.
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<PAGE>
<TABLE>
<CAPTION>
At or for the year ended September 30,
----------------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA: 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets(1)(2)(3) 0.49% 1.03% 0.89% 0.99% 0.70%
Return on average equity(2)(3)(4) 3.05 6.91 6.68 8.15 6.15
Interest rate spread(5) 2.66 2.93 2.98 2.58 1.98
Net interest margin(6) 3.36 3.55 3.29 3.03 2.57
Operating expenses to average assets(3) 2.53 1.89 1.81 1.48 1.51
Equity to assets(7) 16.50 15.64 14.05 12.70 11.67
Asset quality ratios:
Nonperforming assets to total assets 0.31 - - 0.58 0.57
Nonperforming loans to total loans 0.63 - - 1.02 1.46
Allowance for losses on loans to total loans 0.24 0.17 0.16 0.21 0.18
Allowance for losses on loans to
nonperforming loans 37.41 N/M(8) N/M(8) 20.21 12.18
Net charge-offs to average loans - - - (0.02) (0.05)
Average interest-earning assets to average
interest-bearing liabilities 117.78 116.62 109.04 112.38 111.54
Other data:
Number of full service offices 2 2 1 1 1
</TABLE>
- -------------------------
(1) Net earnings divided by average assets.
(2) Based on arithmetic average of beginning and ending balances.
(3) Excluding the effect of a one-time assessment to recapitalize the SAIF, the
return on average assets, the return on average equity and the operating
expenses to average assets ratios would have been .85%, 5.21% and 1.99%,
respectively. See "RISK FACTORS - Legislation and Regulation Which May
Adversely Affect the Association's Earnings."
(4) Net earnings divided by average equity capital.
(5) Average yield on interest-earning assets less average cost of interest-
bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
(7) At the end of the respective periods.
(8) Not meaningful, as the Association had no nonperforming loans at September
30, 1995 or 1994.
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<PAGE>
RISK FACTORS
INVESTMENT IN THE COMMON SHARES INVOLVES CERTAIN RISKS. BEFORE INVESTING,
PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE FOLLOWING MATTERS.
LOW RETURN ON EQUITY MAY AFFECT MARKET PRICE AND LIQUIDITY OF THE COMMON SHARES
During the fiscal years ended September 30, 1996, 1995 and 1994, the return
on average equity of the Association equaled 3.05%, 6.91% and 6.68%,
respectively. The low returns on equity for such periods may be attributed to a
variety of factors. During fiscal years 1995 and 1996, for example, loan
principal repayments exceeded new loan originations, and funds not used to
originate loans were invested in lower yielding investments.
The significant amount of equity capital that will be raised in the
Conversion will further reduce the return on equity of MFC on a consolidated
basis after the Conversion until the Conversion proceeds are effectively
invested. At September 30, 1996, the pro forma return on equity at the minimum,
mid-point, maximum and maximum, as adjusted, of the Valuation Range, would be
2.76%, 2.74%, 2.73% and 2.71%, respectively. See "PRO FORMA DATA" for the pro
forma net earnings and the pro forma shareholders' equity at the different
levels of the Valuation Range. Although a low return on equity is not unusual
for recently converted, well-capitalized thrifts, MFC's return on equity after
the Conversion may adversely affect the market price of the Common Shares. In
addition, the Association's low return on equity during the fiscal years ended
September 30, 1996, 1995 and 1994, was one of the factors considered by Keller
in its appraisal of the estimated pro forma market value of the Association.
Based on such appraisal, the number of Common Shares being offered by MFC is
smaller than the average number of publicly-traded outstanding shares of holding
companies of savings associations located in Ohio, which may adversely affect
the liquidity of the Common Shares.
REDUCTION IN RETURN ON EQUITY DUE TO PROCEEDS OF OFFERING
Upon the conclusion of the Offering, MFC and the Association will receive
up to approximately $12,900,000 in cash proceeds assuming the sale of a number
of Common Shares in an amount equal to 15% above the maximum of the Valuation
Range. While both MFC and the Association intend to invest the proceeds in
various ways, the overall objective of MFC and the Association is to increase
the return on equity of the Association in the future. See "Low Return on
Equity May Affect Market Price of Common Shares."
At September 30, 1996, 47.7% of the Association's assets consisted of
liquid assets and certain qualifying mortgage-backed securities. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." The concentration of such a high percentage of the Association's
assets in liquid assets and certain qualifying mortgage-backed securities has
contributed to the Association's low return on equity because liquid assets and
qualifying mortgage-backed securities typically have a lower yield than mortgage
loans and other non-liquid investments.
The high percentage of the Association's liquidity is also indicative of
the difficulty that the Association has had in the past fiscal year in investing
available liquid funds in higher yielding mortgage loans. Such historic
difficulty may be increased upon the receipt of the proceeds from the Offering.
To the extent that MFC and the Association do not invest the proceeds of the
Offering in higher yielding mortgage loans, the return on equity of the
Association will remain at lower levels, as a result of which an investment in
the Common Shares will be adversely affected.
INTEREST RATE RISK
The Association'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 Association's interest income and interest expense
change as interest rates fluctuate and assets and liabilities reprice. Interest
rates fluctuate and assets and liabilities reprice because of a variety of
factors, including general economic conditions, the policies of various
regulatory authorities and other factors beyond the Association's control. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Asset and Liability Management" and "THE BUSINESS OF THE
ASSOCIATION - Lending Activities; and - Deposits and Borrowings."
When interest rates are rising, the interest income earned on assets may
not increase as rapidly as the interest expense paid on the Association's
liabilities. As a result, the earnings of the Association may be adversely
affected when the cost of the
-8-
<PAGE>
Association's liabilities increases more rapidly than the income earned on the
Association's assets. The degree to which such earnings will be adversely
affected depends upon the rapidity and extent of the increase in interest rates.
The Association's earnings were adversely affected during fiscal year 1996
by the small difference between the interest paid by the Association on deposits
and the income received on the Association's assets. In a rising interest rate
environment, that small difference can be expected to continue due to the large
number of fixed-rate loans in the Association's portfolio and the maturity of
$17.6 million of certificates of deposit, or 77.0% of the Association's total
certificates of deposit, within one year after September 30, 1996. The interest
earned on the Association's loan portfolio will increase slowly as existing
loans at lower rates are repaid and new loans at higher rates are originated,
while the rates paid on deposits will increase at a quicker pace. Rising
interest rates may also affect the Association's earnings due to diminished loan
demand. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Asset and Liability Management."
LEGISLATION AND REGULATION WHICH MAY ADVERSELY AFFECT THE ASSOCIATION'S EARNINGS
The Association is subject to extensive regulation by the OTS, the Division
and the FDIC and is periodically examined by such regulatory agencies to test
compliance with various regulatory requirements. MFC will also be subject to
regulation and examination by the OTS. Such supervision and regulation of the
Association and MFC are primarily for the protection of depositors and not for
the maximization of shareholder value and may affect the ability of MFC to
engage in various business activities. The assessments, filing fees and other
costs associated with reports, examinations and other regulatory matters are
significant and may have an adverse effect on MFC's net earnings. See
"REGULATION."
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance for members of the Bank Insurance Fund (the "BIF") and 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 such system, assessments may vary depending on the risk
the institution poses to its deposit insurance fund. Such risk level is
determined by reference to the institution's capital level and the FDIC's level
of supervisory concern about the institution.
Legislation to recapitalize the SAIF and to eliminate the significant
premium disparity between the SAIF and the BIF became effective September 30,
1996. The recapitalization plan provides for the payment of a special
assessment equal to $.657 per $100 of SAIF deposits held at March 31, 1995, in
order to increase SAIF reserves to the level required by law. On the basis of
its $37.6 million in deposits at March 31, 1995, the Association paid an
additional pre-tax assessment of $246,000 in November 1996. Such payment was
recorded as an expense and accounted for by the Association as of September 30,
1996. Earnings and capital were, therefore, negatively affected for the quarter
ended September 30, 1996, by an after-tax amount of approximately $162,000.
The recapitalization plan also provides for the merger of the SAIF and the
BIF effective January 1, 1999. In conjunction with such merger, it is expected
that the thrift charter or the separate federal regulation of thrifts will be
eliminated. As a result, the Association would be regulated under federal law
as a bank and would become subject to the more restrictive activity limitations
imposed on national banks. See "REGULATION - FDIC Regulations -- Assessments."
EXPERIENCE AND RESTRUCTURING OF MANAGEMENT
John T. Larimer has been a member of the Board of Directors of the
Association since 1975. In November 1995, the Board of Directors asked Mr.
Larimer to assume the position of Managing Officer of the Association on a full-
time basis. The request was due primarily to the need to strengthen the
existing management team in order to contend with the growing complexities of
the highly competitive financial institution environment. Other than serving as
a director of the Association for twenty years and as legal counsel to Cleves-
North Bend before the merger of Cleves-North Bend and the Association, Mr.
Larimer had no experience at the time in serving as a managing officer of a
thrift institution.
Since November 1995, the Association has also hired both a new chief
financial officer and a new chief lending officer. See "MANAGEMENT - Directors
and Executive Officers." Although the Board of Directors believes that the
strengthening of the Association's management team will provide an effective
means of dealing with the complex and competitive future, prospective investors
should consider the experience and restructuring of the Association's management
in making any decision to invest in the Common Shares.
-9-
<PAGE>
DILUTIVE EFFECT OF PURCHASES BY THE ESOP AND THE RRP
If the ESOP is unable to purchase Common Shares in the Conversion due to an
oversubscription by Eligible Account Holders, the ESOP may purchase authorized
but unissued shares from MFC or purchase in the open market a number of shares
equal to up to 10% of the Common Shares issued in connection with the
Conversion. It is anticipated that the ESOP will purchase a number of shares
equal to 8% of the Common Shares issued in the Conversion. If the ESOP shares
are purchased from authorized but unissued shares, shareholders will experience
a dilution of their ownership interests of up to 7.41%. In addition, the RRP
may purchase authorized but unissued shares from MFC or purchase in the open
market a number of shares equal to 4% of the Common Shares issued in connection
with the Conversion. The purchase of authorized but unissued shares by the RRP
would have a dilutive effect on the ownership interests of MFC's shareholders of
up to 3.85%. See "CAPITALIZATION," "PRO FORMA DATA" and "MANAGEMENT - Stock
Benefit Plans."
ABSENCE OF MARKET FOR COMMON SHARES; UNCERTAINTY OF FUTURE TRADING MARKET
There is presently no market for the Common Shares. The number of Common
Shares being offered by MFC, which ranges from 858,500 to 1,161,500, is smaller
than the average number of publicly-held outstanding shares of holding companies
of savings associations located in Ohio, which may adversely affect the
liquidity of the Common Shares. No assurance can be given that an active or
liquid market for the Common Shares will develop after the completion of the
Conversion or, if such a 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.
MFC has received conditional approval from Nasdaq SmallCap to have the
Common Shares quoted on Nasdaq SmallCap under the symbol "MRKF" upon the
completion of the Conversion, subject to certain conditions which MFC and the
Association believe will be satisfied, although no assurance can be provided
that the conditions will be met. One of the conditions of the Nasdaq SmallCap
listing is the commitment of at least two brokerage firms to make a market in
the Common Shares. KBW intends to make a market in the Common Shares but has no
obligation to do so. Webb does not intend to make a market in the Common
Shares.
The aggregate offering price for the Common Shares is based upon an
independent appraisal of the Association. The appraisal is not a recommendation
as to the advisability of purchasing the 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.
CONTROLLING INFLUENCE OF MANAGEMENT AND ANTI-TAKEOVER PROVISIONS WHICH MAY
DISCOURAGE SALES OF COMMON SHARES FOR PREMIUM PRICES
The Articles of Incorporation and Code of Regulations of MFC and the
Amended Articles of Incorporation of the Association contain certain provisions
that could deter or prohibit non-negotiated changes in the control of MFC and
the Association. Such provisions include a restriction on the acquisition of
more than 10% of the outstanding shares of MFC by any person during the five-
year period following the effective date of the Conversion, the ability to issue
additional common shares and a supermajority voting requirement for certain
transactions. See "DESCRIPTION OF AUTHORIZED SHARES" and "RESTRICTIONS ON
ACQUISITION OF MFC AND THE ASSOCIATION AND RELATED ANTI-TAKEOVER PROVISIONS."
The Articles of Incorporation of MFC provide that for five years after the
effective date of the Conversion, no person, except the ESOP, may offer to
acquire or acquire the beneficial ownership of more than 10% of any class of
outstanding equity securities of MFC. If such a prohibited acquisition occurs,
the securities owned by such person in excess of the 10% limit may not be voted
on any matter submitted to the shareholders of MFC. Such provision may not be
waived by management. The ability of management or any other person to solicit
revocable proxies from shareholders and vote on behalf of such shareholders will
not be restricted by such 10% limit.
The Articles of Incorporation of MFC also provide that if the Board of
Directors recommends that shareholders approve certain matters, including
mergers, acquisitions of a majority of the shares of MFC or the transfer of
substantially all of the assets of MFC, the affirmative vote of the holders of
only a majority of the voting shares of MFC is required to approve such matter.
If, however, the Board of Directors recommends against the approval of any such
matter, the affirmative vote of the holders of at least 75% of the voting shares
of MFC is required to approve such matters. The
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<PAGE>
existence of such a 75% provision in the Articles of Incorporation of MFC may
make more difficult actions which certain shareholders deem to be in their best
interests.
Officers and directors of MFC and the Association are expected to purchase
approximately 10% of the Common Shares sold in the Offering, assuming the sale
of 1,010,000 Common Shares, the midpoint of the Valuation Range. In addition,
the ESOP intends to purchase approximately 8% of the Common Shares sold in the
Offering. The ESOP trustee must vote shares allocated under the ESOP as
directed by the participants to whom the shares are allocated and will vote
unallocated shares in its sole discretion. The RRP may acquire common shares of
MFC in the open market or acquire authorized, but unissued, common shares from
MFC following approval of the RRP by the shareholders of MFC in an amount equal
to up to 4% of the Common Shares sold in the Offering. The RRP trustees, who
are expected to be three directors of the Association, will vote shares awarded
but not distributed under the RRP in their discretion. Under the Stock Option
Plan, directors will be, and officers and employees may be, granted options to
purchase common shares of MFC. The aggregate amount of common shares as to
which options might be granted may equal 10% of the Common Shares sold in
connection with the Conversion. See "MANAGEMENT - Stock Benefit Plans --
Employee Stock Ownership Plan; -- Stock Option Plan; and -- Recognition and
Retention Plan and Trust."
In view of the various provisions of the Articles of Incorporation and the
stock benefit plans of MFC, the aggregate ownership by the ESOP, the RRP and the
directors and officers of MFC and the Association may have the effect of
facilitating the perpetuation of current management and discouraging proxy
contests and takeover attempts. Thus, officers and directors, who are
anticipated to be allocated or awarded shares under such plans, will have a
significant influence over the vote on such proxy contests and may be able to
defeat proposed takeover attempts. The Boards of Directors of MFC and the
Association 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.
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 Association or MFC without the prior written approval of or lack of
objection by the OTS. Such restrictions could restrict the use of revocable
proxies. Federal and Ohio law also restrict the acquisition of control of MFC
and the Association. 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 MFC AND THE ASSOCIATION AND RELATED ANTI-TAKEOVER PROVISIONS."
POSSIBLE TAX LIABILITY RELATED TO SUBSCRIPTION RIGHTS
As part of the Conversion, subscription rights have been granted to
(i) Eligible Account Holders, (ii) the ESOP, (iii) Supplemental Eligible Account
Holders and (iv) Other Eligible Members. The Association has received an
opinion from Keller to the effect that the subscription rights to be received by
Eligible Account Holders and other eligible subscribers do not have any value
because they are acquired by the recipients without cost, are non-transferable
and of short duration and afford the recipients a right only to purchase Common
Shares at a price equal to their estimated fair market value, the same price as
the purchase price for unsubscribed Common Shares.
Notwithstanding the opinion from Keller, if the subscription rights are
subsequently found to have a fair market value, income may be recognized by the
recipients of the subscription rights (in certain cases, whether or not the
rights are exercised) and MFC and/or the Association may be taxed on the
distribution of such subscription rights. In this regard, the subscription
rights may be taxed partially or entirely at ordinary income tax rates.
RISK OF DELAYED OFFERING
MFC and the Association expect to complete the Conversion by March 31,
1997. It is possible, however, that adverse market, economic or other factors
could delay the completion of the Conversion. If the Community Offering is
extended beyond May 1, 1997, each subscriber will be given a notice of such
delay and the right to affirm, increase, decrease or rescind his subscription.
In such event, any person who does not affirmatively elect to continue his
subscription or elects to rescind his subscription 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. If the Community Offering is extended, the cost of the
Conversion could increase and the valuation of the Association could change.
Extensions of the Community Offering will not extend beyond March 24, 1999.
-11-
<PAGE>
USE OF PROCEEDS
The following table presents the estimated gross and net proceeds from the
sale of the Common Shares, based on the Valuation Range:
<TABLE>
<CAPTION>
Minimum Mid-point Maximum Maximum, as adjusted
------- --------- ------- --------------------
<S> <C> <C> <C> <C>
Gross proceeds $8,585,000 $10,100,000 $11,615,000 $13,357,250
Less estimated expenses 417,000 435,000 453,000 473,000
---------- ----------- ----------- -----------
Total net proceeds $8,168,000 $ 9,665,000 $11,162,000 $12,884,250
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
The net proceeds from the sale of the Common Shares 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." The
expenses detailed above are estimated. Estimated expenses include estimated
sales commissions payable to Webb. Sales commissions have been computed on the
basis of the following assumptions: (i) approximately 10% of the Common Shares
sold in the Offering will be purchased by directors, officers and employees of
the Association and the members of their immediate families; (ii) 8% of the
Common Shares sold in the Offering will be purchased by the ESOP; and (iii) the
remaining 82% of the Common Shares sold in the Offering will be sold in the
Subscription Offering with sales commissions of 1.5% of the aggregate dollar
amount of such Common Shares. Actual expenses may be more or less than
estimated. See "THE CONVERSION - Marketing Plan."
MFC will retain 50% of the net proceeds from the sale of the Common Shares,
or approximately $4.8 million at the mid-point of the Valuation Range, including
the value of a promissory note from the ESOP which MFC intends to accept in
exchange for the issuance of MFC Common Shares to the ESOP. The cash proceeds
received from the sale of Common Shares will be used by MFC to fund the RRP,
which intends to purchase up to 4% of all Common Shares sold in the Conversion,
and for general corporate purposes, which may include the payment of dividends,
repurchases of Common Shares and acquisitions of other financial institutions.
MFC presently has no specific plans to use the proceeds for any such purposes,
except the funding of the RRP. See "THE CONVERSION - Restrictions on Repurchase
of Common Shares."
The remainder of the net proceeds received from the sale of the Common
Shares, approximately $4.8 million at the mid-point of the Valuation Range, will
be invested by MFC in the capital stock to be issued by the Association to MFC
as a result of the Conversion and will increase the regulatory capital of the
Association. Initially, for liquidity purposes and to fund purchases of common
shares for the RRP, the Association will invest approximately $800,000 in U.S.
Treasury and government agency securities with maturities of three years or less
and short-term interest-bearing deposits. The Association expects to increase
its loan origination staff and utilize the balance of the net proceeds to
originate adjustable-rate and fixed-rate loans. No assurance can be provided,
however, with respect to when such hiring or originations will occur or the
effect such efforts will have on the Association's financial condition or
earnings.
MARKET FOR COMMON SHARES
There is currently no market for the Common Shares. No assurance can be
given that an active or liquid market for the Common Shares will develop after
the completion of the Conversion or, if such a 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.
A public trading market for the stock of any issuer, including MFC, depends
upon the presence of both willing buyers and willing sellers at any given time.
MFC has applied to have the Common Shares included on Nasdaq SmallCap under the
symbol "MRKF" upon completion of the Conversion, subject to certain conditions
which the Association and MFC believe will be satisfied, although no assurance
can be provided that the conditions will be met. One of the conditions to the
Nasdaq SmallCap listing is the commitment of at least two brokerage firms to
make a market in the Common Shares. KBW intends to make a market in the Common
Shares but has no obligation to do so. Webb does not intend to make a market in
the Common Shares.
The aggregate offering price for the Common Shares is based upon an
independent appraisal of the Association. The appraisal of the pro forma market
value of the Association, as converted, does not represent Keller's opinion as
to the price at
-12-
<PAGE>
which the Common Shares may trade, and such appraisal is not a recommendation as
to the advisability of purchasing Common Shares. No assurance can be given that
the Common Shares may later be resold at the price at which they are purchased
in connection with the Conversion. See "RISK FACTORS - Absence of Market for
Common Shares; Uncertainty of Future Trading Market."
DIVIDEND POLICY
The declaration and payment of dividends by MFC will be subject to the
discretion of the Board of Directors of MFC, to the earnings and financial
condition of MFC and to general economic conditions. If the Board of Directors
of MFC determines in the exercise of its discretion that the net income, capital
and consolidated financial condition of MFC and the general economy justify the
declaration and payment of dividends by MFC, the Board of Directors of MFC 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, that such dividends will continue to be paid in the future.
Other than earnings on the investment of the proceeds retained by MFC and
interest earned on the loan to the ESOP, the only source of income of MFC will
be dividends periodically declared and paid by the Board of Directors of the
Association on the common shares of the Association held by MFC. The
declaration and payment of dividends by the Association to MFC will be subject
to the discretion of the Board of Directors of the Association, to the earnings
and financial condition of the Association, 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
associations, the Association 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 Association may not pay a dividend unless such dividend also
complies with an OTS regulation limiting capital distributions by savings and
loan 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."
-13-
<PAGE>
REGULATORY CAPITAL COMPLIANCE
The following table sets forth the historical and pro forma regulatory
capital of the Association at September 30, 1996, based on the receipt of 50% of
the net proceeds for the number of Common Shares indicated. Estimated expenses
used in determining the net proceeds are $417,000, $435,000, $453,000 and
$473,000 at the minimum, mid-point, maximum and maximum, as adjusted,
respectively, of the Valuation Range:
<TABLE>
<CAPTION>
Pro forma capital at September 30, 1996, assuming the sale of:
--------------------------------------------------------------------------------------------------------
858,500 1,010,000 1,161,500 1,335,725
Common Shares Common Shares Common Shares Common Shares
Historical at (offering price (offering price (offering price (offering price
September 30, 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) $7,514 16.5% $10,568 21.3% $11,135 22.1% $11,701 22.9% $12,353 23.8%
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
Current tangible
capital:
Capital level(2) $7,063 15.7% $10,117 20.7% $10,684 21.5% $11,250 22.3% $11,902 23.2%
Requirement 673 1.5 734 1.5 745 1.5 757 1.5 770 1.5
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess $6,390 14.2% $ 9,383 19.2% $ 9,939 20.0% $10,493 20.8% $11,132 21.7%
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
Current core
capital:
Capital level(2) 7,063 15.7% $10,117 20.7% $10,684 21.5% $11,250 22.3% $11,902 23.2%
Requirement 1,346 3.0 1,468 3.0 1,491 3.0 1,513 3.0 1,539 3.0
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess $5,717 12.7% $ 8,649 17.7% $ 9,193 18.5% $ 9,737 19.3% $10,363 20.2%
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
Current risk-based
capital:(3)
Capital level(4)(2) $7,113 49.1% $10,167 66.4% $10,734 69.5% $11,300 72.4% $11,952 75.8%
Requirement 1,159 8.0 1,224 8.0 1,236 8.0 1,248 8.0 1,262 8.0
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess $5,954 41.1% $ 8,943 58.4% $ 9,498 61.5% $10,052 64.4% $10,690 67.8%
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
</TABLE>
- ------------------------------------
(1) The calculations in the table above do not take into account the interest
rate risk component added by the OTS to its risk-based capital
requirements. See "REGULATION - Office of Thrift Supervision -- Regulatory
Capital Requirements."
(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. Tangible and core capital do
not include $451,000 of unrealized gains determined under SFAS No. 115.
Reflects a reduction for unearned ESOP and RRP shares equal to 8% and 4%,
respectively, of the Offering.
(3) Assumes that the net proceeds received by the Association will be invested
in assets having a risk-weighting of 20%.
(4) Risk-weighted capital includes $50,000 of qualifying general loan loss
allowances as determined under OTS regulations.
-14-
<PAGE>
CAPITALIZATION
Set forth below is the historical capitalization of the Association at
September 30, 1996, and the pro forma consolidated capitalization of MFC 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 MFC
at September 30, 1996, assuming the sale of:
-------------------------------------------------------------------
858,500 1,010,000 1,161,500 1,335,725
Historical Common Common Common Common
capitalization Shares Shares Shares Shares
of the Association at (Offering (Offering (Offering (Offering
September 30, price of price of price of price of
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) $37,282 $37,282 $37,282 $37,282 $37,282
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Borrowings $ - $ - $ - $ - $ -
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Capital and retained earnings:
Preferred Shares, no par value per share:
authorized - 1,000,000 shares, assumed
outstanding - none $ - $ - $ - $ - $ -
Common Shares, no par value per share:
authorized - 4,000,000 shares; assumed
outstanding - as shown(2) - - - - -
Additional paid-in capital - 8,168 9,665 11,162 12,884
Less Common Shares acquired by the
ESOP(3) - (687) (808) (929) (1,069)
Less Common Shares acquired by the
RRP(4) - (343) (404) (465) (534)
Retained earnings, net, substantially
restricted(5) 7,514 7,514 7,514 7,514 7,514
------- ------- ------- ------- -------
Total capital and retained earnings $ 7,514 $14,652 $15,967 $17,282 $18,795
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</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 Association. 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." Reflects receipt of the proceeds from the
sale of the Common Shares, net of estimated expenses. Estimated expenses
include estimated sales commissions payable to Webb. Such sales
commissions have been computed based on the following assumptions: (i)
approximately 10% of the Common Shares sold in the Offering will be
purchased by directors, officers and employees of the Association and the
members of their immediate families; (ii) 8% of the Common Shares sold in
the Offering will be purchased by the ESOP; and (iii) the remaining 82% of
the Common Shares sold in the Offering will be purchased in the
Subscription Offering with sales commissions of 1.5% of the aggregate
dollar amount of such Common Shares.
(3) Assumes that 8% of the Common Shares sold in connection with the Conversion
will be acquired by the ESOP with funds borrowed by the ESOP from MFC for a
term of 10 years at a rate of 8%. The ESOP loan will be secured solely by
the Common Shares purchased by the ESOP. The Association has agreed,
however, to use its best efforts to fund the ESOP based on future earnings,
which best efforts funding will reduce the Association'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 MFC. If the ESOP purchases authorized but unissued
shares from MFC, such purchases would have a dilutive effect of
approximately 7.41% on the voting interests of MFC's shareholders. See
"MANAGEMENT - Stock Benefit Plans -- Employee Stock Ownership Plan" and
"RISK FACTORS - Possible Dilutive Effect of RRP and Stock Option Plan on
Net Income and Shareholders' Equity."
(4) Assumes that 4% 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% of the
shares, would reduce pro forma shareholders' equity. The RRP may purchase
shares in the open market or may purchase authorized but unissued shares
from MFC. If authorized but unissued shares are purchased, the voting
interests of existing shareholders would be diluted approximately
3.85%. See "MANAGEMENT - Stock Benefit Plans -- Recognition and Retention
Plan and Trust."
(5) Retained earnings include restricted and unrestricted retained earnings and
unrealized gain on securities designated as available for sale. See "THE
CONVERSION - Principal Effects of the Conversion -- Liquidation Account"
for information concerning the liquidation account to be established in
connection with the Conversion and "TAXATION - Federal Taxation" for
information concerning restricted retained earnings for federal tax
purposes.
-15-
<PAGE>
PRO FORMA DATA
Set forth below are the pro forma consolidated net earnings of MFC for the
year ended September 30, 1996, and the pro forma consolidated shareholders'
equity of MFC as of and for the respective dates and periods ending on such
date, along with the related pro forma earnings per share amounts, giving effect
to the sale of the Common Shares. The computations are based on the assumed
issuance of 858,500 Common Shares (minimum of the Valuation Range), 1,010,000
Common Shares (mid-point of the Valuation Range), 1,161,500 Common Shares
(maximum of the Valuation Range) and 1,335,725 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 3.78% for the year ended September 30, 1996; 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 5.72% in
effect at September 30, 1996. This rate was used as an alternative to the
arithmetic average of the Association's interest-earning assets and interest-
bearing deposits. In calculating pro forma net earnings, a statutory federal
income tax rate of 34% has been assumed for the period. In the opinion of
management, the assumed after-tax yield does not differ materially from the
estimated after-tax yield which will be obtained on the initial investment of
the cash proceeds in short-term, interest-bearing deposits and is viewed as
being more relevant in the current low interest rate environment than the use of
an arithmetic average of the fiscal year 1996 weighted average yield on
interest-earning assets and weighted average rates paid on deposits during such
period. Actual yields may differ, however, from the assumed returns. The pro
forma consolidated net earnings amounts derived from the assumptions set forth
herein should not be considered indicative of the actual results of operations
of MFC 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. In addition, the offering price as a multiple
of pro forma earnings per share and as a percent of pro forma shareholders'
equity per share increases 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. NO
ASSURANCE CAN BE PROVIDED THAT THE YIELDS WILL BE ACHIEVED ON THE INVESTMENT OF
THE CONVERSION PROCEEDS. THE PRO FORMA DATA DOES NOT PURPORT TO REPRESENT WHAT
MFC'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 MFC'S FINANCIAL POSITION OR
RESULTS OF OPERATIONS AT ANY FUTURE DATE OR FOR ANY FUTURE PERIOD.
-16-
<PAGE>
<TABLE>
<CAPTION>
At and for the year ended September 30, 1996, assuming the sale of:
------------------------------------------------------------------------------
858,500 1,010,000 1,161,500 1,335,725
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 $ 8,585 $10,100 $11,615 $13,357
Estimated expenses 417 435 453 473
------------- ------- ------- -------
Estimated net proceeds 8,168 9,665 11,162 12,884
Less Common Shares acquired by the RRP(1) (343) (404) (465) (534)
Less Common Shares acquired by the ESOP(2) (687) (808) (929) (1,069)
------------- ------- ------- -------
Net cash proceeds $ 7,138 $ 8,453 $ 9,768 $11,281
------------- ------- ------- -------
------------- ------- ------- -------
Net earnings:
Historical $ 224 $ 224 $ 224 $ 224
Pro forma income on net proceeds 270 320 369 426
Pro forma adjustment for the RRP(1) (45) (53) (61) (70)
Pro forma adjustment for the ESOP(2) (45) (53) (61) (71)
------------- ------- ------- -------
Pro forma net earnings $ 404 $ 438 $ 471 $ 509
------------- ------- ------- -------
------------- ------- ------- -------
Earnings per share:
Historical $ .26 $ .22 $ .19 $ .17
Pro forma income on net proceeds .31 .32 .32 .32
Pro forma adjustment for the RRP(1) (.05) (.05) (.05) (.05)
Pro forma adjustment for the ESOP(2) (.05) (.05) (.05) (.05)
------------ ----------- ------- -------
Pro forma earnings per share(3)(4) $ .47 $ .44 $ .41 $ .39
------------ ------- ------- -------
------------ ------- ------- -------
Offering price as a multiple of pro forma
earnings per share 21.28x 22.73x 24.39x 25.64x
------------ ------- ------- -------
------------ ------- ------- -------
Shareholders' equity:(5)
Historical $ 7,514 $ 7,514 $ 7,514 $ 7,514
Estimated net proceeds from the sale of
Common Shares 8,168 9,665 11,162 12,884
Less unearned RRP shares(1) (343) (404) (465) (534)
Less unearned ESOP shares(2) (687) (808) (929) (1,069)
------------- ------- ------- -------
Pro forma shareholders' equity $14,652 $15,967 $17,282 $18,795
------------- ------- ------- -------
------------- ------- ------- -------
Per share shareholders' equity:
Historical $ 8.75 $ 7.44 $ 6.47 $ 5.63
Estimated net proceeds 9.51 9.57 9.61 9.65
Less unearned RRP shares(1) (.40) (.40) (.40) (.40)
Less unearned ESOP shares(2) (.80) (.80) (.80) (.80)
------------ ------- ------- -------
Pro forma shareholders' equity per share(3) $ 17.06 $ 15.81 $ 14.88 $ 14.08
------------- ------- ------- -------
------------- ------- ------- -------
Ratio of offering price to pro forma
shareholders' equity per share 58.62% 63.25% 67.20% 71.02%
------------- ------- ------- -------
------------- ------- ------- -------
</TABLE>
- ------------------------------------
(Footnotes on next page)
-17-
<PAGE>
(1) Assumes that 4% 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 MFC. 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% 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, MFC may issue additional authorized shares. The issuance of
authorized but unissued shares in an amount equal to 4% of the Common
Shares issued in the Conversion would result in a 3.85% dilution in
existing shareholders' voting interests. See "MANAGEMENT - Stock Benefit
Plans -- Recognition and Retention Plan and Trust."
(2) Assumes that 8% of the Common Shares sold in connection with the Conversion
will be purchased by the ESOP and that the funds used to acquire such
shares will be borrowed by the ESOP from MFC with repayment thereof secured
solely by the Common Shares purchased by the ESOP. The Association 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 ten-year period with
assumed tax benefits of 34%. See "MANAGEMENT - Stock Benefit Plans --
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 voting interest of existing shareholders by 7.41%.
(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) Per share amounts are based upon the weighted average number of shares
outstanding of 858,500, 1,010,000, 1,161,500 and 1,335,725 at the minimum,
midpoint, maximum and 15% above the maximum of the Valuation Range,
respectively. Does not give effect to SOP 93-6. Assumes that the ESOP
holds 68,680 shares, 80,800 shares, 92,920 shares and 106,858 shares for
purposes of computing earnings per share. Pursuant to SOP 93-6, only ESOP
shares which will be allocated over the period are included in the earnings
per share calculation. Application of SOP 93-6 to the year ended September
30, 1996, would result in an earnings per share presentation of $.51, $.47,
$.44 and $.41, reflecting weighted average shares outstanding of 796,688
shares, 937,280 shares, 1,077,872 shares and 1,239,553 shares at the
minimum, mid-point, maximum and adjusted maximum of the Valuation Range.
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."
-18-
<PAGE>
SUMMARY STATEMENTS OF EARNINGS
The following summary sets forth information concerning the Association for
the periods indicated. Such information should be read in conjunction with the
financial statements and notes thereto appearing elsewhere herein.
Year ended September 30, (1)
--------------------------------
1996 1995 1994
------ ------ ------
(In thousands)
Interest income:
Loans $1,867 $1,960 $1,799
Mortgage-backed securities 169 196 250
Investment securities 590 309 201
Interest-bearing deposits and other 635 717 658
------ ------ ------
Total interest income 3,261 3,182 2,908
Interest expense:
Deposits 1,758 1,622 1,478
------ ------ ------
Net interest income before provision
for losses on loans 1,503 1,560 1,430
Provision for losses on loans 13 - -
------ ------ ------
Net interest income after provision for
losses on loans 1,490 1,560 1,430
Other income 7 8 12
General, administrative and other
expense 1,153 861 836
------ ------ ------
Earnings before income taxes 344 707 606
Federal income taxes 120 240 194
------ ------ ------
Net earnings $ 224 $ 467 $ 412
------ ------ ------
------ ------ ------
- -----------------------------
(1) The summary statements of earnings data for the fiscal years ended
September 30, 1996, 1995 and 1994, were derived from the audited financial
statements included herein.
-19-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Association 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 primarily in
Hamilton County, Ohio. Loans secured by multifamily real estate (over four
units) and nonresidential real estate loans and passbook loans are also
originated by the Association. In recent years, the Association has made
significant investments in certificates of deposit in other financial
institutions and U.S. Government agency obligations as an alternative to
originating loans.
The Association's profitability is primarily dependent upon its net
interest income, which is the difference between interest income on the
Association's loan, investment and mortgage-backed securities ("MBSs")
portfolios and interest paid on deposits and borrowed funds. Net interest
income is directly affected by the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rates earned or paid on such
amounts. The Association's profitability is also affected by its provision for
losses on loans and the level of other income or losses and general,
administrative and other expense. Other income consists primarily of service
charges. General, administrative and other expense includes salaries and
employee benefits, occupancy of premises, federal deposit insurance premiums,
state franchise taxes and other operating expenses.
The operating results of the Association are also affected by general
economic conditions, the monetary and fiscal policies of federal agencies and
the regulatory policies of agencies that regulate financial institutions. The
Association's cost of funds is influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
influenced by the demand for real estate loans and other types of loans, which
is in turn affected by the interest rates at which such loans are made, general
economic conditions and the availability of funds for lending activities.
CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 1995, TO SEPTEMBER 30, 1996
The Association's total assets at September 30, 1996, were approximately
$45.5 million, a $187,000, or .4%, decrease from the $45.7 million total at
September 30, 1995. The decrease resulted primarily from a decrease in deposits
as management decided to fund net deposit outflows with excess liquidity.
Unlike some competitors, management chose not to increase the interest rates
offered by the Association on short-term certificates of deposit because the
Association's regulatory liquidity exceeded 50%. Management believes that this
decision will not have a negative long-term effect on the Association.
Liquid assets (cash and cash equivalents, certificates of deposit and
investment securities) totaled $20.9 million at September 30, 1996, an increase
of $1.3 million over the total at September 30, 1995. This increase resulted
primarily from repayments on loans and mortgage-backed securities which were
redeployed into liquid investments during the fiscal year. Management's
decision to fund net deposit outflows with excess liquidity, however, partially
offset such increase in liquid assets.
Loans receivable totaled $22.0 million at September 30, 1996, a decrease of
$1.0 million, or 4.4%, from September 30, 1995. This decrease resulted
primarily from principal repayments of $3.6 million, which exceeded loan
disbursements of $2.6 million. The Association's allowance for loan losses
totaled $52,000 at September 30, 1996, an increase of $13,000 over the balance
at September 30, 1995. The allowance represented .24% and .17% of total loans
at September 30, 1996 and 1995, respectively. Nonperforming loans totaled
$139,000, or .63% of total loans, at September 30, 1996. The Association had no
nonperforming loans at September 30, 1995.
Deposits totaled $37.3 million at September 30, 1996, a decrease of
$774,000, or 2.0%, from the total at September 30, 1995. Demand accounts
decreased by approximately $461,000 and certificates of deposit decreased by
$313,000 during fiscal year ended September 30, 1995. At September 30, 1996,
certificates of deposits that will mature within one year accounted for 38.6% of
the Association's assets.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
GENERAL. The Association's net earnings for the year ended September 30,
1996, were $224,000, a decline of $243,000, or 52.0%, from the $467,000 in net
earnings recorded for the year ended September 30, 1995. The decline in
earnings resulted primarily from a $292,000 increase in general, administrative
and other expenses, due primarily to a one-
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<PAGE>
time deposit insurance assessment, a $57,000 decrease in net interest income and
a $13,000 increase in the provision for losses on loans, which were partially
offset by a $120,000 decrease in the provision for income taxes.
NET INTEREST INCOME. Total interest income was $3.3 million for the year
ended September 30, 1996, a $79,000, or 2.5%, increase over the comparable 1995
period. The increase in total interest income was attributable to an increase
of $199,000, or 19.4%, in interest income on investment securities and interest-
bearing deposits, due primarily to an increase of $1.8 million in the weighted-
average balances outstanding to $20.2 million at September 30, 1996, coupled
with a 51 basis point increase in the weighted-average yield. Interest income
on loans totaled $1.9 million in 1996, a decrease of $93,000, or 4.7%, from
1995. The decrease resulted primarily from the decline of $566,000 in weighted-
average balances outstanding, coupled with a 20 basis point decrease in the
weighted-average yield, from 8.44% in 1995 to 8.24% in 1996. Interest income on
mortgage-backed securities decreased by $27,000, or 13.8%, during fiscal 1996,
as compared to 1995, as a result of a decline of $394,000 in the weighted-
average balance outstanding, which was partially offset by an increase of 37
basis points in the weighted-average yield, from 8.65% in 1995 to 9.02% in 1996.
Interest expense on deposits totaled $1.8 million for the year ended
September 30, 1996, an increase of $136,000, or 8.4%, over the comparable 1995
period. This increase was due primarily to a $299,000 increase in the weighted-
average balances outstanding, coupled with a 32 basis point increase in the
weighted-average cost of deposits, from 4.31% in the 1995 period to 4.63% in the
1996 period.
As a result of the foregoing changes in interest income and interest
expense, net interest income declined by $57,000, or 3.7%, for the year ended
September 30, 1996, compared to fiscal 1995. The interest rate spread declined
by 27 basis points, from 2.93% in 1995 to 2.66% in 1996, while the net interest
margin declined by 19 basis points, from 3.55% in 1995 to 3.36% in 1996.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans increased
by $13,000 for the year ended September 30, 1996, compared to fiscal 1995.
During fiscal 1996, management increased the allowance for losses on loans due
to an increase in internally classified assets of $36,000 and an increase of
$139,000 in loans delinquent more than 90 days. The $13,000 increase in the
provision for losses on loans equaled approximately 10% of the increase in the
amount of loans delinquent more than 90 days, which were in the process of
collection.
OTHER OPERATING INCOME. Other operating income, primarily service fees on
money orders and travelers' checks, totaled $7,000 for the year ended September
30, 1996, a decrease of $1,000, or 12.5%, from the 1995 amount.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense totaled $1.2 million for the year ended September 30, 1996, an
increase of $292,000, or 33.9%, over the 1995 fiscal year amount. The increase
resulted primarily from a $235,000, or 255.4%, increase in federal deposit
insurance premiums and an $86,000, or 22.9%, increase in employee compensation
and benefits, which was partially offset by a $20,000, or 11.8%, decrease in
other operating expense, an $8,000, or 6.6%, decrease in occupancy and equipment
expense and a $1,000, or 1.0%, decrease in franchise taxes. The increase in
federal deposit insurance premiums was primarily attributable to the one-time
SAIF recapitalization assessment of approximately $246,000, or 65.7 basis points
of the deposit base at March 31, 1995. This increase was partially offset by
the effect of a decrease in the deposit portfolio during the fiscal year ended
September 30, 1996. In addition to normal merit increases, the increase in
employee compensation and benefits resulted primarily from the hiring of a chief
executive officer, a chief financial officer and a vice president of lending.
FEDERAL INCOME TAXES. The provision for federal income taxes was $120,000
for the year ended September 30, 1996, a decrease of $120,000, or 50.0%, from
the provision recorded in fiscal 1995. The decrease resulted primarily from a
$363,000, or 51.4%, decline in earnings before taxes. The effective tax rates
were 34.9% and 33.9% for the years ended September 30, 1996 and 1995,
respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
GENERAL. Net earnings for the year ended September 30, 1995, amounted to
$467,000, an increase of $55,000, or 13.3%, from the $412,000 in net earnings
recorded in 1994. The increase in net earnings resulted primarily from a
$130,000 increase in net interest income, which was partially offset by a
decrease of $4,000 in other income, an increase of $25,000 in general,
administrative and other expense, and an increase of $46,000 in the provision
for income taxes.
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<PAGE>
NET INTEREST INCOME. Total interest income was $3.2 million for the year
ended September 30, 1995, an increase of $274,000, or 9.4%, over 1994. Interest
income on loans totaled $2.0 million, an increase of $161,000, or 8.9%, over the
1994 total. This increase resulted primarily from growth of $2.8 million in the
weighted-average balance outstanding, which was partially offset by a decrease
in the weighted-average yield of 38 basis points, to 8.44% in 1995. Interest
income on mortgage-backed securities declined by $54,000, or 21.6%, from the
1994 amount, due to a $581,000 decline in the weighted-average balance
outstanding, coupled with a 13 basis point decrease in yield, to 8.65% in 1995.
Interest income on investment securities and interest-bearing deposits increased
by $167,000, or 19.4%, over 1994, due to an increase in yield of 132 basis
points.
Interest expense on deposits increased for the year ended September 30,
1995, by $144,000, or 9.7%, to a total of $1.6 million, compared to $1.5 million
in 1994. The increase resulted primarily from a 60 basis point increase in the
weighted-average cost of deposits, from 3.71% in 1994 to 4.31% in 1995. The
increase in cost of deposits was partially offset by a $2.2 million decline in
the weighted-average balance outstanding year to year. The increases in rates
paid on the Association's deposit portfolio generally reflect the increase in
interest rates in the overall economy during 1995.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased during 1995 by $130,000, or 9.1%, to a
total of $1.6 million. The interest rate spread decreased by 5 basis points
during 1995, from 2.98% in 1994 to 2.93% in 1995, while the net interest margin
increased by 26 basis points, from 3.29% in 1994 to 3.55% in 1995.
PROVISION FOR LOSSES ON LOANS. There was no provision for losses on loans
for the years ended September 30, 1995 and 1994, as management considered the
level to be adequate to absorb losses.
OTHER OPERATING INCOME. Other operating income amounted to $8,000 during
the year ended September 30, 1995, a decrease of $4,000, or 33.3%, from 1994,
due primarily to a decline in service fees and other charges on loans and
deposits.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense totaled approximately $861,000 for the year ended September 30,
1995, an increase of $25,000, or 3.0%, over the amount recorded for 1994. The
increase resulted primarily from a $24,000, or 6.8%, increase in employee
compensation and benefits, a $51,000, or 71.8%, increase in occupancy and
equipment and an $8,000, or 8.6%, increase in franchise taxes, which were
partially offset by a $23,000 decrease in the loss on sale of real estate
acquired through foreclosure and a $33,000 decrease in other operating expense.
The increase in employee compensation and benefits resulted primarily from an
increase in staffing levels and normal merit salary increases, coupled with a
reduction in deferred loan origination costs, as loan origination volume
declined by $8.3 million from fiscal year 1994 to fiscal year 1995. The
increase in occupancy and equipment expense resulted generally from increases in
the cost of equipment maintenance contracts and repairs and maintenance
expenses, while the increase in franchise taxes was due to pro-rata increases in
retained earnings. The decrease in other operating expenses was due to the
absence in fiscal 1995 of merger-related expenses associated with the merger of
Cleves-North Bend with and into the Association, which was effective on
December 31, 1994.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled
$240,000 for the year ended September 30, 1995, an increase of $46,000, or
23.7%, from the 1994 amount. The increase resulted primarily from a $101,000,
or 16.7%, increase in earnings before taxes. The effective tax rates were 33.9%
and 32.0% for the years ended September 30, 1995 and 1994, respectively.
-22-
<PAGE>
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. Management does not believe
that the use of month-end balances instead of daily balances has caused any
material difference in the information presented.
<TABLE>
<CAPTION>
Year ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average Average Interest Average
outstanding earned/ yield/ outstanding earned/ yield/ outstanding earned/ yield/
balance paid rate balance paid rate balance paid rate
----------- --------- ------- ----------- -------- ------- ----------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $22,648 $1,867 8.24% $23,214 $1,960 8.44% $20,399 $1,799 8.82%
Mortgage-backed securities 1,873 169 9.02 2,267 196 8.65 2,848 250 8.78
Investment securities 9,123 590 6.47 7,288 309 4.24 4,501 201 4.47
Other interest-earning assets 11,070 635 5.74 11,154 717 6.43 15,742 658 4.18
------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-earning assets 44,714 3,261 7.29 43,923 3,182 7.24 43,490 2,908 6.69
Non-interest-earning assets 1,485 1,240 2,908
------ ------ -------
Total assets $46,199 $45,163 $46,398
------ ------ -------
------ ------ -------
Interest-bearing liabilities:
Passbook and club accounts $11,159 324 2.90 $11,386 343 3.01 $12,284 433 3.52
Money market demand accounts 3,621 104 2.87 4,728 119 2.52 6,422 148 2.30
Certificate of deposits 23,183 1,330 5.74 21,550 1,160 5.38 21,179 897 4.24
------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-bearing liabilities 37,963 1,758 4.63 37,664 1,622 4.31 39,885 1,478 3.71
------ ----- ------ ----- ------ -----
Non-interest-bearing liabilities 834 586 358
------ ------- ------
Total liabilities 38,797 38,250 40,243
Retained earnings 7,402 6,913 6,155
------ ------- ------
Total liabilities and retained earnings $46,199 $45,163 $46,398
------ ------- ------
------ ------- ------
Net interest income and spread $1,503 2.66% $1,560 2.93% $1,430 2.98%
------ ---- ------ ---- ------ ----
------ ---- ------ ---- ------ ----
Net interest margin (net interest income as a
percent of average interest-earning assets) 3.36% 3.55% 3.29%
------ ------ ------
------ ------ ------
Average interest-earning assets to interest-
bearing liabilities 117.78% 116.62% 109.04%
------ ------ ------
------ ------ ------
</TABLE>
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<PAGE>
The following table sets forth, at the dates indicated, the weighted
average yields earned on the Association's interest-earning assets, the weighted
average interest rates paid on interest-bearing liabilities and the interest
rate spread between the weighted average yields and rates at the dates
presented.
At September 30
--------------------------
1996 1995 1994
------ ------ ------
Weighted average yield on loans 8.08% 8.11% 8.27%
Weighted average yield on mortgage-backed
securities 9.08 9.02 9.04
Weighted average yield on investment
securities 6.11 5.98 5.22
Weighted average yield on interest-bearing
deposits and other 5.99 6.03 4.60
Weighted average rate paid on deposits 4.64 4.87 3.87
Interest rate spread 2.54 2.39 3.02
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 Association'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>
Year ended September 30,
---------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
---------------------------- ------------------------- ----------------------------
Increase Increase Increase
(decrease) due to (decrease) due to (decrease) due to
----------------- ----------------- -----------------
Volume Rate Total Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans receivable $(48) $(45) $(93) $241 $(80) $161 $193 $(247) $(54)
Mortgage-backed
securities (36) 9 (27) (50) (4) (54) (181) 28 (153)
Investment securities 92 189 281 118 (10) 108 52 (32) 20
Interest-bearing deposits (5) (77) (82) (228) 287 59 (127) 127 0
----- ----- ----- ------ ----- ----- ------ ------ -----
Total interest income 3 76 79 81 193 274 (63) (124) (187)
Interest expense attributable
to:
Deposits 13 123 136 (86) 230 144 (36) (192) (228)
Total interest expense 13 123 136 (86) 230 144 (36) (192) (228)
----- ----- ----- ------ ----- ----- ------ ------ -----
Increase (decrease) in net interest
income $(10) $(47) $(57) $167 $ (37) $130 $ (27) $ 68 $ 41
----- ----- ----- ------ ----- ----- ------ ------ -----
----- ----- ----- ------ ----- ----- ------ ------ -----
</TABLE>
ASSET AND LIABILITY MANAGEMENT
The Association, 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. Interest rate risk is defined as the
sensitivity of an institution's earnings and net asset values to changes in
interest rates. As part of its effort to monitor and manage the interest rate
risk of the Association, the Board of Directors has adopted an interest rate
risk policy which charges the Board to review quarterly reports related to
interest rate risk, to set exposure limits for the Association and to provide
management with a list of transactions that the Association may not engage in
without prior Board authorization. As of June, 1996, the Board of Directors
uses the net portfolio value (the "NPV") methodology adopted by the OTS as part
of its capital regulations. Although the Association is not currently subject
to the NPV regulations because such regulation does not apply to
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<PAGE>
institutions with less than $300 million in assets and risk-based capital in
excess of 12%, the application of the NPV methodology may illustrate the
Association'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 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 (100 basis point equals 1%) change in market
interest rates. Both a 200 basis point increase in market interest rates and a
200 basis point decrease in market interest rates are considered. If the NPV
would decrease more than 2% of the present value of the institution's assets
with either an increase or a decrease in market rates, the institution would
have to deduct 50% of the amount of the decrease in excess of such 2% in the
calculation of the institution's risk-based capital, if the regulations were in
effect. Even before the regulation is in effect, the OTS could increase the
Association's risk-based capital requirement on an individualized basis to
address excess interest rate risk. See "Regulation - Office of Thrift
Supervision -- Regulatory Capital Requirements."
At September 30, 1996, 2% of the present value of the Association's assets
was approximately $931,000. Because the interest rate risk of a 200 basis point
increase in market interest rates (which was greater than the interest rate risk
of a 200 basis point decrease) was $1.3 million at September 30, 1996, the
Association would have been required to deduct $175,000 (50% of the approximate
$350,000 difference) from its capital in determining whether the Association met
its risk-based capital requirement, if the regulation had been in effect for the
Association. Regardless of such reduction, however, the Association's risk-
based capital at September 30, 1996, would still have exceeded the regulatory
requirement by approximately $5.8 million.
Presented below, as of September 30, 1996, is an analysis of the
Association'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
Association as the maximum change in NPV that the Board of Directors deems
advisable in the event of certain changes in interest rates. Such limits have
been established with consideration of the dollar impact of various rate
changes.
September 30, 1996
-------------------------------
Change in Interest Rate Board limit $ Change % Change
(Basis Points) % change in NPV in NPV
----------------------- ----------- --------- --------
(Dollars in thousands)
+400 (60.0)% $(2,544) (29)%
+300 (45.0) (1,929) (22)
+200 (30.0) (1,281) (15)
+100 (15.0) (620) (7)
- - - -
-100 (15.0) 481 5
-200 (30.0) 707 8
-300 (45.0) 979 11
-400 (60.0) 1,326 15
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, the
amount of interest the Association would receive on its loans would increase
relatively slowly as loans are slowly prepaid and new loans at higher rates are
made. Moreover, the interest the Association would pay on its deposits would
increase rapidly because the Association's deposits generally have shorter
periods to repricing. Assumptions used in calculating the amounts in this table
are OTS assumptions.
In a rising interest rate environment, the Association's net interest
income could be expected to be negatively affected. Moreover, rising interest
rates could negatively affect the Association's earnings due to diminished loan
demand. The net proceeds from the Conversion will assist the Association in
managing its interest rate risk to the extent the proceeds are invested in
short-term investments and adjustable-rate loans.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability of the Association to generate sufficient
cash to fund current loan demand, meet deposit withdrawals and pay operating
expenses. Liquidity is influenced by financial market conditions, fluctuations
in interest rates, general economic conditions and regulatory requirements. The
Association's liquid assets, primarily represented by cash and cash equivalents
and interest-bearing deposits in other financial institutions, are a result of
its operating, investing and financing activities. These activities are
summarized in the following table for the years ended September 30, 1996, 1995
and 1994:
Year ended September 30,
-----------------------------------
1996 1995 1994
------ ------ ------
(In thousands)
Net cash from operating activities $ 153 $ 497 $ 259
Net cash provided by (used in)
investing activities 697 (2,240) (10,149)
Net cash used in financing
activities (781) (624) (2,019)
--------- -------- ---------
Net change in cash and cash
equivalents 69 (2,367) (11,909)
Cash and cash equivalents at the
beginning of the period 4,013 6,380 18,289
--------- -------- ---------
Cash and cash equivalents at the
end of the period $4,082 $ 4,013 $ 6,380
--------- -------- ---------
--------- -------- ---------
The Association's principal sources of funds are deposits, loan and
mortgage-backed securities repayments, maturities of securities and other funds
provided by operations. The Association also has the ability to borrow from the
FHLB of Cincinnati. See "REGULATION - Federal Home Loan Bank." While scheduled
loan repayments and maturing investments are relatively predictable, deposit
flows and early loan and mortgage-backed security prepayments are influenced to
a greater degree by interest rates, general economic conditions and competition.
The Association 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 assets and (iv) the objectives of the
Association's asset and liability management program.
At September 30, 1996, the Association's certificates of deposit totaled
approximately $22.8 million, or 61.2% of total deposits. Of such amount,
approximately $17.6 million in certificates of deposit mature within one year.
Based on past experience and the Association's prevailing pricing strategies,
management believes that a substantial percentage of such certificates will be
renewed with the Association at maturity. If the Association is unable to renew
the maturing certificates for any reason, however, borrowings of up to $7.3
million are available from the FHLB of Cincinnati.
OTS regulations presently require the Association to maintain an average
daily balance of liquid assets, which may include, but are not limited to,
investments in U.S. Treasury and federal agency obligations and other
investments having maturities of five years or less, in an amount equal to 5% of
the sum of the Association'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 Association may rely if necessary to fund deposit withdrawals or other
short-term funding needs. At September 30, 1996, the Association's regulatory
liquidity ratio was 52.2%. At such date, the Association had commitments to
originate loans and loans in process totaling $149,000 and no commitments to
purchase or sell loans. The Association considers its liquidity and capital
resources sufficient to meet its outstanding short-term and long-term needs. See
Note H to Financial Statements.
The Association 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 Association exceeded all of its
regulatory capital requirements at September 30, 1996.
The tangible capital requirement requires a savings and loan association 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.
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<PAGE>
"Core capital" is comprised of common shareholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts,
pledged deposits of mutual associations and intangible assets, primarily certain
purchased mortgage servicing rights and qualifying supervisory goodwill, which
was includable in core capital prior to January 1, 1995, in accordance with a
phase-out schedule. OTS regulations require a savings and loan association to
maintain core capital of at least 3% of the association's total assets. The OTS
has proposed to increase such requirement to 4% and 5%, except for those
associations with the highest examination rating and acceptable levels of risk.
See "REGULATION - Office of Thrift Supervision -- Regulatory Capital
Requirements."
OTS regulations require that a savings and loan association maintain "risk-
based capital" in an amount not less than 8% of its risk-weighted assets. Risk-
based capital is defined as core capital plus certain additional items of
capital, which in the case of the Association includes a general loan loss
allowance of $50,000 at September 30, 1996.
The following table summarizes the Association's regulatory capital
requirements and actual capital at September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Excess of actual capital
over current
Actual capital Current requirement requirement Applicable asset total
------------------------ ------------------------- ------------------------ ----------------------
September 30, 1996 Amount Percent Amount Percent Amount Percent
- ------------------ ------ ------- ------ ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $7,063 15.7% $ 673 1.5% $6,390 14.2% $44,864
Core capital 7,063 15.7 1,346 3.0 5,717 12.7 44,864
Risk-based capital 7,113 49.1 1,159 8.0 5,954 41.1 14,485
</TABLE>
For information concerning the Association's regulatory capital on a pro
forma basis after the Conversion, see "REGULATORY CAPITAL COMPLIANCE."
At September 30, 1996, the Association had no material commitments for
capital expenditures.
ONE-TIME SAIF ASSESSMENT
The Association, a SAIF-insured institution, is subject to regulation by
the OTS and the FDIC. The FDIC is authorized to establish different annual
assessment rates for deposit insurance for members of the BIF and the SAIF.
Legislation to recapitalize the SAIF and eliminate the significant premium
disparity between the SAIF and the BIF became effective September 30, 1996. The
recapitalization plan provided for the recapitalization of the SAIF by means of
a special assessment of $.657 per $100 of SAIF deposits held at March 31, 1995,
in order to increase SAIF reserves to the level required by law. Based on its
$37.6 million in deposits at March 31, 1995, the Association paid an additional
assessment of $246,000 on November 27, 1996. The payment of the assessment was
recorded as an expense as of September 30, 1996, reducing capital and earnings
for the three months ended September 30, 1996, by an after-tax amount of
approximately $162,000. Effective January 1, 1997, the Association's federal
deposit insurance premium rate was reduced from $.23 per $100 of deposits to
$.065 per $100 of deposits.
The recapitalization plan also provides for the merger of the SAIF and BIF
effective January 1, 1999, assuming all savings associations have become banks.
As a result, it is expected that the thrift charter or the separate regulation
of thrifts will be eliminated. The Association would, therefore, be regulated
under federal law as a bank and become subject to the more restrictive activity
limitations imposed on national banks. See "RISK FACTORS - Legislation and
Regulation Which May Adversely Affect the Association's Earnings," and
"REGULATION - FDIC Regulations -- Assessments."
IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1993, the Financial Accounting Standards Board ("FASB") adopted
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114,
which is effective for fiscal years beginning after December 14, 1994, requires
that impaired loans be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or fair value of the
collateral. The Association's loans which might be affected are collateral
dependent, and the Association's current procedures for evaluating
-27-
<PAGE>
impaired loans result in carrying such loans at the lower of cost or fair value.
Management adopted SFAS No. 114 on October 1, 1995, without a significant
detrimental effect on Association's overall financial position or results of
operations.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which requires that the Association recognize as separate
assets rights to service mortgage loans for others, regardless of how those
servicing rights are acquired. An institution that acquires mortgage servicing
rights through either the purchase or origination of mortgage loans and sells
those loans with servicing rights retained would allocate some of the cost of
the loans to the mortgage servicing rights. SFAS No. 122 requires that
securitizations of mortgage loans be accounted for as sales of mortgage loans
and acquisitions of mortgage-backed securities. Additionally, SFAS No. 122
requires that capitalized mortgage servicing rights and capitalized excess
servicing receivables be assessed for impairment. Impairment is measured based
on fair value. SFAS No. 122 was effective for fiscal years beginning after
December 15, 1995 (October 1, 1996, as to the Association), to transactions in
which an entity acquires mortgage servicing rights and to impairment evaluations
of all capitalized mortgage servicing rights and capitalized excess servicing
receivables whenever acquired. Retroactive application is prohibited, and
earlier adoption is encouraged. Management does not anticipate any material
impact of adopting SFAS No. 122, or revisions thereto, due to the fact that the
Association does not currently sell loans.
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 the compensation cost of all
employee stock compensation plans based on the estimated fair value of the award
at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net earnings 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; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management has
determined that MFC will continue to account for stock-based compensation
pursuant to Accounting Principles Board Opinion No. 25, and therefore, the
disclosure provisions of SFAS No. 123 will have no effect on its consolidated
financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets, Servicing Rights and Extinguishment of Liabilities," that
provides accounting guidance on transfers of financial assets, servicing of
financial assets and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, the
financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include,
among others, transfers involving repurchase agreements, securitizations of
financial assets, loan participations, factoring arrangements and transfers of
receivables with recourse.
An institution that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or
liability that is purchased or assumed is initially recognized at its fair
value. Servicing assets and liabilities are amortized in proportion to and over
the period of estimated net servicing income or net servicing loss and are
subject to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligations
for the liability or is legally released from being the primary obligor. SFAS
No. 125 supersedes SFAS No. 122 and is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December 31,
1997, and is to be applied prospectively. Earlier or retroactive application is
not permitted. Management does not believe that the adoption of SFAS No. 125
will have a material adverse effect on the Association's financial position or
results of operations.
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<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes thereto included herein have been
prepared in accordance with generally accepted accounting principles ("GAAP").
GAAP requires the Association to measure financial 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.
SUMMARY OF RECENT DEVELOPMENTS
The following table sets forth certain information concerning the financial
condition of the Association at December 31, 1996, and September 30, 1996, and
selected earnings and other data for the Association for the three months ended
December 31, 1996 and 1995. The selected financial and other data of the
Association set forth below does not purport to be complete and should be read
in conjunction with, and is qualified in its entirety by, the more detailed
information, including the financial statements and related notes, appearing
elsewhere herein. In the opinion of management, the financial information at
December 31, 1996, and for the three months ended December 31, 1996 and 1995,
reflects all adjustments (consisting only of normal recurring accruals) which
are necessary to present fairly the results for such periods. Results for the
three-month periods ended December 31, 1996 and 1995, may not be indicative of
operations of the Association on an annualized basis.
<TABLE>
<CAPTION>
SELECTED FINANCIAL CONDITION: December 31, September 30,
1996 1996
------------ -------------
<S> <C> <C>
Total amount of: (In thousands)
Assets $45,729 $45,547
Cash and cash equivalents 3,711 4,082
Certificates of deposit in other financial institutions 6,540 7,040
Investment securities - at cost 8,379 9,062
Investment securities designated as available for sale - at market 805 712
Mortgage-backed securities - at cost 1,495 1,549
Loans receivable - net 23,639 21,996
Real estate acquired through foreclosure - -
Deposits 37,425 37,282
Unrealized gains on securities designated as available for sale (1)
512 451
Retained earnings, net, substantially restricted 7,649 7,514
Three months ended
December 31,
--------------------------
SELECTED OPERATING DATA: 1996 1995
----- -----
(In thousands)
Interest income $798 $835
Interest expense 426 452
----- -----
Net interest income 372 383
Provision for losses on loans - 11
----- -----
Net interest income after provision for losses on loans 372 372
Other income 2 2
General, administrative and other expenses 262 248
----- -----
Earnings before income taxes 112 126
Federal income taxes 38 46
----- -----
Net earnings $ 74 $ 80
----- -----
----- -----
</TABLE>
_____________________________
(1) The Association adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," on October 1, 1994. As of and subsequent
to that date, the Association carries at market value securities designated
as available for sale.
-29-
<PAGE>
<TABLE>
<CAPTION>
At or for the three months
ended December 31,
---------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA: 1996 1995
---- -----
<S> <C> <C>
Performance ratios:
Return on average assets (1)(2) .65% .70%
Return on average equity (2)(3) 3.90 4.42
Interest rate spread (4) 2.64 2.70
Net interest margin (5) 3.35 3.43
Operating expenses to average assets 2.30 2.16
Equity to assets (6) 16.73 15.91
Asset quality ratios:
Nonperforming assets to total assets 0.99 0.03
Nonperforming loans to total loans 1.91 0.06
Allowance for losses on loans to total loans 0.22 0.22
Allowance for losses on loans to nonperforming loans 11.53 333.33
Net charge-offs to average loans - -
Average interest-earning assets to average interest-
bearing liabilities 118.60 117.96
Other data:
Number of full service offices 2 2
</TABLE>
______________________________
(1) Net earnings divided by average assets.
(2) Annualized. Based on arithmetic average of beginning and ending balances.
(3) Net earnings divided by average equity capital.
(4) Average yield on interest-earning assets less average cost of interest-
bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) At the end of the respective periods.
The following table summarizes the Association's regulatory capital
requirements and actual capital at December 31, 1996:
<TABLE>
<CAPTION>
Excess of actual
Actual capital Current requirement current requirement
------------------------ ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $7,137 15.9% $ 674 1.5% $6,463 14.4%
Core capital 7,137 15.9 1,349 3.0 5,788 12.9
Risk-based capital 7,187 45.9 1,252 8.0 5,935 37.9
</TABLE>
-30-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
The Association's assets at December 31, 1996, totaled approximately $45.7
million, a $182,000, or .40%, increase over the $45.5 million total at September
30, 1996. The increase resulted primarily from an increase in loans receivable
funded with excess liquidity.
Liquid assets (cash and cash equivalents, certificates of deposit and
investment securities) totaled $19.4 million at December 31, 1996, a decrease of
$1.5 million from the total at September 30, 1996. This decrease resulted
primarily from the use of liquid assets to fund loan originations during the
quarter ended December 31, 1996. Repayments from mortgage-backed securities and
an increase in deposits also provided funds for loan originations.
Loans receivable totaled $23.6 million at December 31, 1996, an increase of
$1.6 million, or 7.5%, from September 30, 1996. This increase resulted
primarily from loan originations of $2.2 million, which exceeded principal
repayments of $529,000. The Association's allowance for loan losses totaled
$52,000 at December 31, 1996, and September 30, 1996. The allowance represented
.22% and .24% of total loans at December 31, 1996, and September 30, 1996.
Nonperforming loans totaled $451,000 and $139,000, or 1.91% and .63% of total
loans, at December 31, 1996, and September 30, 1996, respectively. The increase
of $312,000 in nonperforming loans was primarily attributable to a
nonresidential real estate loan with an outstanding balance of $325,000.
Management believes, however, that the collateral on such property is sufficient
and anticipates no losses on the property.
Deposits totaled $37.4 million at December 31, 1996, an increase of
$143,000, or .4%, from the total at September 30, 1996. Demand accounts
decreased by approximately $471,000 while certificates of deposit increased by
$614,000 during the quarter ended December 31, 1996. At December 31, 1996,
certificates of deposit that will mature within one year accounted for 41.3% of
the Association's assets.
Net earnings totaled $74,000 for the three months ended December 31, 1996,
a $6,000, or 7.5%, decrease from the $80,000 of net earnings recorded for the
three months ended December 31, 1995. The decrease in earnings resulted
primarily from a $14,000 increase in general, administrative and other expenses
and an $11,000 decrease in net interest income, which were partially offset by
an $11,000 decrease in the provision for loan losses and an $8,000 decrease in
the provision for federal income taxes.
Interest income decreased by $37,000, or 4.4%, for the three months ended
December 31, 1996, compared to the three months ended December 31, 1995. The
decrease resulted primarily from a decrease in the weighted average balances of
loans outstanding during the period. Interest expense on deposits decreased by
$26,000, or 5.8%, due primarily to a decrease in the deposit portfolio, coupled
with a decrease in the cost of deposits. Net interest income decreased by
$11,000, or 2.9%, for the three months ended December 31, 1996, compared to the
same quarter in 1995.
General, administrative and other expenses increased by $14,000, or 5.6%,
for the quarter ended December 31, 1996, compared to the same quarter in 1995.
The increase resulted primarily from a $16,000, or 12.7%, increase in employee
compensation and benefits due to increased staffing levels and normal merit
increases.
The provision for federal income taxes was $38,000 for the three months
ended December 31, 1996, as compared to $46,000 for the same 1995 quarter. The
$8,000, or 17.4%, decrease resulted from a $14,000 decline in earnings before
taxes. The effective tax rates were 33.9% and 36.5% for the three months ended
December 31, 1996 and 1995, respectively.
THE BUSINESS OF THE ASSOCIATION
GENERAL
The Association is a mutual savings and loan association which was
organized under Ohio law in 1883. Subject to supervision and regulation by the
OTS, the Division and the FDIC, the Association is a member of the FHLB of
Cincinnati, and the deposits of the Association are insured up to applicable
limits by the FDIC in the SAIF. See "REGULATION."
The Association is principally engaged in the business of originating
mortgage loans secured by first mortgages on one- to four-family residential
real estate located in its primary market area of Hamilton County, Ohio, and
portions of the contiguous
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<PAGE>
counties. The Association also originates a limited number of loans for the
construction of one- to four-family residential real estate, permanent mortgage
loans secured by multifamily real estate (over four units) and nonresidential
real estate in its primary market area, and secured consumer loans. See
"Lending Activities." For liquidity and interest rate risk management purposes,
the Association invests in interest-bearing deposits in other financial
institutions, U.S. Government and agency obligations and mortgage-backed
securities. 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 loan principal repayments. See
"Deposits and Borrowings."
Interest on loans and investments is the Association's primary source of
income. The Association's principal expense is interest paid on deposit
accounts. Operating results are dependent to a significant degree on the net
interest income of the Association, which is the difference between interest
income earned on loans, mortgage-backed securities and other investments and
interest paid on deposits. Like most thrift institutions, the Association's
interest income and interest expense are significantly affected by general
economic conditions and by the policies of various regulatory authorities. See
"RISK FACTORS - Interest Rate Risk and Historic Earnings" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset
and Liability Management."
MARKET AREA
The Association conducts business from its main office in Mt. Healthy,
Ohio, and from its full-service branch office located in North Bend, Ohio. The
Association's primary market area for lending and deposit activity is Hamilton
County, Ohio, which includes the City of Cincinnati within its boundaries.
Located in southwest Ohio and served by both Interstate 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 has a population of approximately 866,000, which 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, while the population of Mt. Healthy decreased 1.5%, to
approximately 44,000 in 1995. Both Hamilton County and Mt. Healthy 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 levels in Hamilton County and Mt.
Healthy were $18,004 and $16,805, respectively, compared to $15,708 for Ohio and
$16,405 for the nation. The median household income level of Hamilton County
and Mt. Healthy was $29,498 and $34,085 in 1995, respectively, compared to
$29,276 and $28,255 in Ohio and the United States, respectively. Of the housing
in Hamilton County, 58.3% is owner-occupied, compared to 74.9% in Mt. Healthy,
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 $64,696 in Mt. Healthy, $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
by 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 source of the statistics
disclosed in this and the preceding paragraph is the 1996 SOURCEBOOK OF
DEMOGRAPHICS, produced by CACI, Inc.
Although, there is only one other institution competing for deposits in Mt.
Healthy, the Association has only 1.1% of the thrift deposits and 0.7% of all
financial deposits in Hamilton County.
LENDING ACTIVITIES
GENERAL. The Association's principal lending activity is the origination
of conventional real estate loans secured by one- to four-family residences
located in the Association's primary market area. A limited number of loans
secured by multifamily properties containing five units or more and by
nonresidential real estate and loans for the construction of residences have
been originated by the Association. In addition to real estate lending, the
Association originates a limited number of loans secured by deposit accounts.
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<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information in respect of the composition of the Association's loan portfolio at
the dates indicated:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ------------------------- --------------------------
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
------ --------- ------ --------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $20,404 92.8 $ 21,093 91.6% $21,299 90.0%
Multifamily 407 1.9 465 2.0 500 2.1
Nonresidential 1,168 5.3 1,431 6.3 1,627 6.9
Construction - - 146 0.6 260 1.1
------- ------ --------- ------ ------- ------
Total real estate loans 21,979 100.0 23,135 100.5 23,686 100.1
Consumer loans:
Loans on deposits 96 0.4 118 0.5 117 0.5
------- ------ --------- ------ ------- ------
Total loans 22,075 100.4 23,253 101.0 23,803 100.6
Less:
Undisbursed portion of loans in
process - - 146 0.6 41 0.1
Unearned and deferred income 27 0.2 50 0.2 65 0.3
Allowance for losses on loans 52 0.2 39 0.2 39 0.2
------- ------ --------- ------ ------- ------
Net loans $21,996 100.0% $23,018 100.0% $23,658 100.0%
------- ------ --------- ------ ------- ------
------- ------ --------- ------ ------- ------
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain information
as of September 30, 1996, regarding the dollar amount of loans maturing in the
Association's portfolio based on their contractual terms to maturity before
consideration of net items. 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
September 30, years years years than 20
----------------------------- after after after years after
1997 1998 1999 9/30/96 9/30/96 9/30/96 9/30/96 Total
----- ----- ----- -------- -------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $492 $40 $61 $478 $1,462 $9,777 $8,094 $20,404
Multifamily - 1 1 - 66 339 - 407
Nonresidential - 1 3 - 190 974 - 1,168
Consumer loans 61 18 17 - - - - 96
-------- -------- -------- -------- -------- -------- -------- --------
Total $553 $60 $82 $478 $1,718 $11,090 $8,094 $22,075
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
All of the Association's loans have fixed rates of interest.
LOANS SECURED BY ONE- TO FOUR-FAMILY RESIDENCES. The principal lending
activity of the Association is the origination of conventional loans secured by
first mortgages on one- to four-family residences, primarily single-family
residences located within the Association's primary market area. At September
30, 1996, the Association's one- to four-family residential loans totaled
approximately $20.4 million, or 92.8% of total loans.
OTS regulations and Ohio law limit the amount which the Association may
lend in relationship to the appraised value of the real estate and improvements
which will secure the loan (the "LTV") at the time of loan origination. In
accordance with such regulations, the Association makes fixed-rate loans on one-
to four-family residences up to 95% of the value of the real estate and
improvements thereon, although most of the Association's one- to four-family
loans have an LTV of 80% or less. The Association requires private mortgage
insurance for the amount of such loans in excess of 89% of the value of the real
estate securing such loans.
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<PAGE>
Fixed-rate loans are offered by the Association, currently for terms of up
to 30 years, though most loans are originated with terms of 20 years or less.
At September 30, 1996, the Association did not originate adjustable-rate
mortgage loans ("ARMs"). Currently, however, the Association is offering ARMs
for terms of up to 30 years with various alternative features in an effort to
decrease the Association's interest rate risk. The interest rate adjustment
periods on the ARMs are either one year or a fixed rate for seven years followed
by one-year adjustment periods. The interest rate adjustments on ARMs presently
originated by the Association are tied to the U.S. Treasury maturities index.
Rate adjustments are computed by adding a stated margin, typically 2.75%, to the
index. The maximum allowable adjustment at each adjustment date is usually 1%
with a maximum adjustment of 5% over the term of the loan.
The initial rate on ARMs originated by the Association may be 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, although such increase is considered in the
Association's underwriting of any such loans with a one-year adjustment period.
The Association also makes closed-end home equity loans, which do not
provide the borrower with a line of credit at the Association, in an amount
which, when added to the prior indebtedness secured by the real estate, does not
exceed 80% of the estimated value of the real estate. Home equity loans are
secured by real estate and are made only to borrowers as to whom the Association
holds the first mortgage. Of the $20.4 million of one- to four-family
residential loans, approximately $280,000 were closed-end home equity loans.
LOANS SECURED BY MULTIFAMILY RESIDENCES. In addition to loans on one- to
four-family properties, the Association originates a limited number of loans
secured by multifamily properties, which contain more than four units. At
September 30, 1996, loans secured by multifamily residences totaled
approximately $407,000, or 1.9% of total loans. At September 30, 1996, the
largest single loan secured by a multifamily residence was $191,000 and was
performing in accordance with its terms. Multifamily loans are offered with
fixed rates for terms of up to 30 years and have LTVs of up to 80%.
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 Association 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 Association requires borrowers to
agree to submit financial statements annually to enable the Association to
monitor the loan and requires the assignment of rents.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. The Association also
originates loans for the purchase of nonresidential real estate located within
close proximity to the Association's offices, though it has not originated such
a loan in the last three years. Among the properties securing the
nonresidential real estate loans originated by the Association are office
buildings, retail properties and a veterinary clinic, all located within the
immediate vicinity of the Association's offices. At September 30, 1996,
approximately $1.2 million, or 5.3%, of the Association's total loans were
secured by mortgages on nonresidential real estate. The Association's
nonresidential real estate loans have fixed rates, terms of up to 20 years and
LTVs of up to 75%. See "Delinquent Loans, Nonperforming Assets and Classified
Assets."
Although loans secured by nonresidential real estate 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 Association has endeavored to reduce such risk by
evaluating the credit history 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 the appraisals supporting the
property's valuation. The Association also requires personal guarantees.
CONSTRUCTION LOANS. The Association has made in the past a limited number
of loans for the construction of residential real estate. Such loans are
structured as permanent loans with fixed rates of interest and terms of up to 30
years. During the first six months while the residence is being constructed,
the borrower is required to pay interest only. Such loans have an LTV of 80% or
less, with the value of the land counting as part of the down payment if already
owned. Construction loans originated by the Association are made to owner-
occupants for the construction of single-family homes by a general contractor.
At September 30, 1996, the Association had no construction loans.
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<PAGE>
COMMERCIAL LOANS. The Association does not issue any letters of credit or
originate or purchase any loans for commercial, business or agricultural
purposes, other than loans secured by real estate.
CONSUMER LOANS. The Association makes loans at fixed rates of interest to
depositors on the security of their deposit accounts. At September 30, 1996,
the Association had approximately $96,000, or 0.4% of total loans, invested in
such consumer loans.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from a
number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by the Association's lending
staff and walk-in customers.
Loan applications for permanent real estate loans are taken by loan
personnel. The Association 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 that will be
given as security for the loan is prepared by an 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 Association's underwriting
guidelines. The Managing Officer of the Association has authority to approve
loans of less than $100,000. Loans for amounts ranging from $100,001 to
$200,000 must be approved by a directors' committee, and loans of greater than
$200,000 must be approved by the full Board of Directors of the Association.
Until October 1995, if a mortgage loan application was approved, the
Association typically obtained an attorney's opinion of title. Presently, the
Association obtains title insurance on loans secured by real estate unless the
borrower is seeking to refinance a loan the Association originated. Borrowers
are required to carry satisfactory fire and casualty insurance and flood
insurance, if applicable, and to name the Association as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. The
Association also evaluates the feasibility of the proposed construction project
and the experience and record of the builder. Once approved, the construction
loan is disbursed in portions based upon periodic inspections of construction
progress.
LOAN ORIGINATIONS AND PARTICIPATION. Currently, the Association is
offering both fixed-rate and adjustable-rate loans, with no intention of selling
such loans in the secondary market. Prior to September 1996, the Association
originated only fixed-rate loans. The Association does not service loans for
other financial institutions.
The following table presents the Association's loan origination activity
for the periods indicated:
Year ended September 30,
----------------------------------
1996 1995 1994
----- ----- -----
(In thousands)
Loans originated:
One- to four-family residential $2,515 $2,115 $10,216
Nonresidential 38 - 368
Construction - 146 41
Consumer 30 97 37
------ ------ -------
Total loans originated
2,583 2,358 10,662
Principal repayments (3,621) (3,018) (6,008)
Increase in other items, net (1) 16 20 59
------ ------ -------
Net increase (decrease) $(1,022) $ (640) $ 4,713
------ ------ -------
------ ------ -------
_____________________________
(1) Other items consist of loans in process, deferred loan origination fees and
allowance for loan losses.
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 total
-35-
<PAGE>
capital for risk-based purposes plus any loan reserves not already included in
total capital (collectively, "Unimpaired Capital"). A savings association may
lend 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." In addition, the regulations require that loans to
certain related or affiliated borrowers be aggregated for purposes of such
limits. Two exceptions to these limits permit loans to one borrower of up to
$500,000 "for any purpose" and, subject to certain conditions, including OTS
prior approval, loans to one borrower for the development of domestic
residential housing units in amounts up to the lesser of $30 million or 30% of
the saving associations total capital.
Based on such limits, the Association was able to lend approximately $1.1
million to one borrower at September 30, 1996. The largest amount the
Association had outstanding to one borrower at September 30, 1996, was $540,300,
consisting of three loans, the largest of which had an outstanding balance of
$308,200, which was secured by one- to four-family real estate and which was
performing in accordance with it terms. The other two loans were secured by
nonresidential real estate and were performing in accordance with their terms.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Payments on
loans made by the Association are due on the first day of the month with the
interest portion of the payment applicable to interest accrued during the prior
month. When a loan payment has not been made by the thirtieth of the month, a
late notice is sent. In addition, if the loan is on the borrower's primary
residence, the Association will send a notice of available counseling for
delinquent borrowers. If payment is not received by the sixtieth day, a second
notice is sent. Telephone calls are made to the borrower in connection with
both the 30- and 60-day notices. If the Association is unable to make contact
with the borrower by mail or telephone, a representative from the Association
will make a personal visit to the property in an attempt to speak with the
borrower.
When a loan secured by real estate becomes more than 90 days delinquent, it
is considered nonperforming by the Association, the above steps are repeated and
a letter is sent to the borrower by the Association to inform the borrower that
foreclosure proceedings will begin if the loan is not brought current promptly.
The borrower is also counseled to make every effort to sell the property before
it is lost in a sheriff's sale. If the customer fails to take any action, a
request is made to the Board of Directors to authorize foreclosure proceedings.
If a foreclosure occurs, the real estate is sold at public sale and may be
purchased by the Association, to be sold as soon as possible by the Association
without the use of a real estate agent.
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ----------------------------- ---------------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------- ------ -------- ------ ------ --------- ------ ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 14 $337 1.6% 17 $902 3.9% 23 $424 2.3%
60 - 89 days 3 380 1.7 2 20 0.1 2 45 0.2
90 days and over 6 139 .6 - - - - - -
----- ----- ----- ----- ------ ------ ----- ------ -----
Total delinquent loans 23 $856 3.9% 19 $922 4.0% 25 $469 2.5%
----- ----- ----- ----- ------ ------ ----- ------ -----
----- ----- ----- ----- ------ ------ ----- ------ -----
</TABLE>
-36-
<PAGE>
The following table sets forth information with respect to the accrual and
nonaccrual status of the Association's loans and other nonperforming assets at
the dates indicated:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------
1996 1995 1994
---- ---- -----
(Dollars in thousands)
<S> <C> <C> <C>
Accruing loans delinquent more than 90 days (1) $139 $ - $ -
Loans accounted for on a
nonaccrual basis:
Real estate
One- to four-family - - -
Multifamily - - -
Nonresidential - - -
Consumer - - -
---- ---- -----
Total nonaccrual loans - - -
---- ---- -----
Total nonperforming loans 139 - -
Real estate acquired through foreclosure - - -
---- ---- -----
Total nonperforming assets $139 $ - $ -
---- ---- -----
---- ---- -----
Allowance for loan losses $ 52 $39 $39
---- ---- -----
---- ---- -----
Nonperforming assets as a percent of total assets 0.3% N/A N/A
Nonperforming loans as a percent of total loans 0.6% N/A N/A
Allowance for loan losses as a percent of nonperforming loans 37.4% N/A N/A
</TABLE>
_____________________________
(1) Consists entirely of one- to four-family residential loans for all dates
presented.
The Association had no nonaccruing loans during the year ended September
30, 1996.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. 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 Association 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
Association is not warranted. The regulations also contain a "special mention"
category, consisting of assets which do not currently expose an institution to a
different degree of risk to warrant classification but which possess credit
deficiencies or potential weaknesses deserving management's close attention.
-37-
<PAGE>
The aggregate amounts of the Association's classified assets at the dates
indicated were as follows:
At September 30,
-------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Classified assets:
Substandard $51 $15 $52
Doubtful - - -
Loss 2 2 3
--- --- ---
Total classified assets $53 $17 $55
--- --- ---
--- --- ---
The Association 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 Association establishes specific allowances for losses
in the amount of 100% of the portion of the asset classified loss. See
"Allowance for Loan Losses." Generally, the Association charges off the portion
of any real estate loan deemed to be uncollectible.
The Association analyzes each classified asset on a monthly 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. The Association maintains an allowance for loan
losses based upon a number of relevant factors, including, but not limited to,
growth and changes in the composition of the loan portfolio, trends in the level
of delinquent and problem loans, current and anticipated economic conditions in
the primary lending area, past loss experience and possible losses arising from
specific problem assets.
The single largest component of the Association's loan portfolio consists
of one- to four-family residential real estate loans. Substantially all of
these loans are secured by property in the Association's lending area of
Hamilton County, Ohio, which has a fairly stable economy. The Association's
practice of making loans primarily in its local market area has contributed to a
low historical charge-off rate. In addition to one- to four-family residential
real estate loans, the Association makes home equity, multifamily residential
real estate, nonresidential real estate and construction loans. These real
estate loans are also secured by property in the Association's lending area.
The Association has not experienced any significant charge-offs from these other
real estate loan categories in recent years. Only 0.4% of the Association's
total loans are comprised of consumer loans, which carry a higher degree of risk
than the real estate loans.
The following table sets forth an analysis of the Association's allowance
for loan losses for the periods indicated:
Year ended September 30,
----------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
Balance at beginning of period $39 $39 $39
Loans charged-off:
Residential real estate loans - - -
Nonresidential real estate loans - - -
Consumer loans - - -
--- --- ---
Total charge-offs - - -
Recoveries - - -
Provision for loan losses 13 - -
--- --- ---
Balance at end of period $52 $39 $39
--- --- ---
--- --- ---
Ratio of net charge-offs to average loans - - -
--- --- ---
--- --- ---
Ratio of allowance for loan losses
to total loans .24% .17% .16%
--- --- ---
--- --- ---
-38-
<PAGE>
The allowance for loan losses is based on estimates and is, therefore,
monitored monthly and adjusted as necessary to provide an adequate allowance.
INVESTMENT ACTIVITIES
Federal regulation and Ohio law permit the Association to invest in various
types of investment securities, 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 Association has adopted an investment policy which authorizes management to
make investments in U.S. Government and agency securities, deposits in the FHLB,
certificates of deposit in federally-insured financial institutions, and federal
funds at commercial banks. The Board of Directors has primary responsibility
for implementation of the investment policy. The Association'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 - Changes in Financial Condition; - Liquidity and
Capital Resources." The following table sets forth the composition of the
Company's investment portfolio, excluding mortgage-backed securities, at the
dates indicated:
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------
1996 1995 1994
-------------------- ---------------------- ---------------------
Book Percent Book Percent Book Percent
value of total value of total value of total
----- -------- ----- -------- ----- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits
in other financial institutions (1) $10,610 51.1% $10,483 54.3% $11,843 65.5%
U.S. Government agency obligations (2) 9,062 43.7 7,984 41.3 5,890 32.6
FHLMC stock (3) 712 3.4 504 2.6 29 .2
FHLB stock 364 1.8 339 1.8 318 1.7
------- ----- ------- ----- ------- -----
Total $20,748 100.0% $19,310 100.0% $18,080 100.0%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
</TABLE>
- -------------------------------
(1) Includes interest-bearing deposits, Federal Funds sold and certificates of
deposit.
(2) Consists primarily of investments in U.S. Treasury Notes and Bills, which
are classified as held to maturity at September 30, 1996.
(3) Classified as available for sale at September 30, 1996 and 1995.
-39-
<PAGE>
The Association maintains a portfolio of mortgage-backed securities in the
form of fixed-rate participation interests issued by the Government National
Mortgage Association ("GNMA"). Mortgage-backed securities generally entitle the
Association to receive a portion of the cash flows from an identified pool of
mortgages and are guaranteed by the issuing agency as to principal and interest.
Although mortgage-backed securities generally yield less than individual loans
originated by the Association, management believes they are a prudent
alternative for investing excess cash flow when available funds exceed local
loan demand and as part of the Association's interest rate risk management. The
following table sets forth certain information regarding the Association's
investments in mortgage-backed securities at the dates indicated, all of which
are classified as held to maturity:
<TABLE>
<CAPTION>
At September 30, 1996 At September 30, 1995
------------------------------------------------ -------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized unrealized unrealized fair Amortized unrealized unrealized fair
cost gains loss value cost gains loss value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA participation
certificates $1,549 $63 $ - $1,612 $2,211 $102 $ - $2,313
------ --- ---- ------ ------ ---- ---- ------
------ --- ---- ------ ------ ---- ---- ------
</TABLE>
At September 30, 1994
-------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains loss value
---------- ---------- ---------- ----------
(In thousands)
GNMA participation
certificates $2,441 $22 $54 $2,409
------ --- --- ------
------ --- --- ------
-40-
<PAGE>
The maturities of the Association's investment securities at September 30,
1996, are indicated in the following table:
<TABLE>
<CAPTION>
At September 30, 1996
-------------------------------------------------------------------------
1-5 Total
Less than 1 year years investment securities
------------------ ----------------- -----------------------------
Book Book Book Market Average
value Yield value Yield value value yield
----- ----- ----- ----- ----- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit in
other financial institutions $4,695 6.28% $2,345 5.83% $7,040 $7,040 6.13%
U.S. Government agency
obligations (1) 4,865 6.14 4,197 5.89 9,062 9,071 6.02
____________________________________
</TABLE>
(1) Consists primarily of investments in U.S. Treasury Notes and Bills, which
are classified as held to maturity at September 30, 1996.
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of the
Association's funds for use in lending and other investment activities. In
addition to deposits, the Association derives funds from interest payments and
principal repayments on loans and income on earning assets. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." Loan
payments are a relatively stable source of funds, while deposit inflows and
outflows fluctuate in response to general interest rates and money market
conditions.
DEPOSITS. Deposits are attracted principally from within the Association's
market area through the offering of a selection of deposit instruments,
including regular passbook savings accounts, term certificate accounts and
Individual Retirement Accounts ("IRAs"). Interest rates paid, maturity terms,
service fees and withdrawal penalties for the various types of accounts are
monitored weekly by the Managing Officer and reviewed monthly by the Board of
Directors of the Association. The Association does not use brokers to attract
deposits. The amount of deposits from outside the Association's market area is
not significant.
At September 30, 1996, the Association's certificates of deposit totaled
approximately $22.8 million, or 61.2% of total deposits. Of such amount,
approximately $17.6 million in certificates of deposit mature within one year.
Based on past experience and the Association's prevailing pricing strategies,
management believes that a substantial percentage of such certificates will be
renewed with the Association at maturity. If, however, the Association is
unable to renew the maturing certificates for any reason, borrowings of up to
$7.3 million are available from the FHLB of Cincinnati. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Liquidity and Capital Resources."
-41-
<PAGE>
The following table sets forth the dollar amount of deposits in the various
types of accounts offered by the Association at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------
1996 1995 1994
------------------- --------------------- --------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts (1) $11,027 29.6% $11,008 28.9% $12,058 31.2%
Club accounts (2) 51 .1 54 .1 54 .1
Money market accounts (3) 3,380 9.1 3,857 10.2 5,988 15.5
------- ----- ------- ----- ------- -----
Total transaction accounts 14,458 38.8 14,919 39.2 18,100 46.8
Certificates of deposit (4) 22,824 61.2 23,137 60.8 20,574 53.2
------- ----- ------- ----- ------- -----
Total deposits $37,282 100.0% $38,056 100.0% $38,674 100.0%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
</TABLE>
___________________________________
(1) The weighted average interest rates on passbook accounts were 2.83% at
September 30, 1996, and 3.09% at September 30, 1995 and 1994.
(2) The weighted average interest rates on club accounts were 5.08%, 5.07% and
5.00% at September 30, 1996, 1995 and 1994, respectively.
(3) The weighted average interest rates on money market accounts were 3.09%,
3.09% and 3.11% at September 30, 1996, 1995, and 1994, respectively.
(4) The weighted average rates on all certificates of deposit were 5.74%, 5.04%
and 4.38% at September 30, 1996, 1995 and 1994, respectively.
The following table shows rate and maturity information for the
Association's certificates of deposit at September 30, 1996:
Amount Due
-----------------------------------------------------------
Over Over
Up to 1 year to 2 years to
Rate one year 2 years 3 years Total
- ---- --------- --------- ---------- -------
(In thousands)
4.99 - less $ 2,044 $ - $ - $ 2,044
5.00 - 5.99% 13,813 3,479 635 17,927
6.00 - 6.99% 1,366 934 60 2,360
7.00 - 7.99%
353 140 - 493
------- ------- ---- -------
Total certificates
of deposit $17,576 $4,553 $695 $22,824
------- ------- ---- -------
------- ------- ---- -------
-42-
<PAGE>
The following table presents the amount of the Association's certificates
of deposit of $100,000 or more by the time remaining until maturity at September
30, 1996:
Maturity Amount
-------- ------
(In thousands)
December 31, 1996 $ 118
March 31, 1997 713
June 30, 1997 371
September 30, 1997 100
After September 30, 1997 527
------
Total $1,829
------
------
The following table sets forth the Association's deposit account balance
activity for the periods indicated:
Year ended September 30,
----------------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in thousands)
Beginning balance $38,056 $38,674 $40,703
Deposits 13,155 19,344 16,866
Withdrawals (15,249) (21,039) (19,905)
Interest credited 1,320 1,077 1,010
-------- -------- --------
Ending balance
$ 37,282 $ 38,056 $ 38,674
-------- -------- --------
-------- -------- --------
Net increase (decrease) $ (774) $ (618) $ (2,029)
-------- -------- --------
-------- -------- --------
Percent increase (decrease) (2.0)% (1.6)% (5.0)%
--- --- ---
--- --- ---
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 Association 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, the association will be eligible for 100% of the advances it would
otherwise be eligible to receive. If an association does not meet the QTL Test,
the association will be eligible for such advances only to the extent it holds
specified QTL Test assets. At September 30, 1996, the Association was in
compliance with the QTL Test. At September 30, 1996, the Association was not
utilizing FHLB advances.
COMPETITION
The Association competes for deposits with other savings and loan
associations, savings banks, commercial banks and credit unions and with issuers
of commercial paper and other securities, including shares in money market
mutual funds. The primary factors in competition for deposits are customer
service and convenience of office location. In making loans, the Association
competes with other savings associations, savings banks, commercial banks,
mortgage brokers, consumer finance companies, credit unions, leasing companies
and other lenders. The Association 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 is intense and 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 Association does not offer all
of the products and services offered by some of its competitors, particularly
commercial banks.
-43-
<PAGE>
PROPERTIES
The following table sets forth certain information at September 30, 1996,
regarding the properties on which the main office and the branch office of the
Association are located:
Owned or Date Square Net book
Location leased acquired footage value Deposits
- -------- -------- -------- ------- -------- --------
(In thousands)
7522 Hamilton Avenue
Mt. Healthy, Ohio 45231 Owned 1964 2,325 $71,000 $32,200
125-127 Miami Avenue
North Bend, Ohio 45052 Owned 1994 1,753 $10,000 $ 5,082
EMPLOYEES
At September 30, 1996, the Association had eight full-time employees and
three part-time employees. The Association believes that relations with its
employees are excellent. The Association offers health, life and disability
benefits to all employees and although it has had a defined benefit pension plan
for its full-time employees in the past, such plan is in the process of being
terminated. None of the employees of the Association are represented by a
collective bargaining unit.
LEGAL PROCEEDINGS
The Association is not presently involved in any material legal
proceedings. From time to time, the Association is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by the Association.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
MFC. The Board of Directors of MFC consists of seven members divided into
two classes. All of the directors of MFC were initially elected to the Board of
Directors in 1996. Each director is elected for a two-year term and until his
or her successor is elected or until his or her earlier resignation, removal
from office or death. The Board of Directors of MFC met twice during the fiscal
year ended September 30, 1996, and all directors of MFC attended each meeting.
The following table presents certain information in respect of the members
of the Board of Directors and the executive officers of MFC:
Name Age (1) Position Term Expires
- ---- --- -------- ------------
Robert Gandenberger 68 Director 1998
John T. Larimer 63 Director and President 1998
Rae Skirvin Larimer 60 Director and Secretary 1999
Edgar H. May 72 Director and Vice President 1998
R. C. Meyerenke 74 Director and Treasurer 1999
Wilbur H. Tisch 80 Director 1999
Kathleen A. White 39 Director 1999
Julie M. Bertsch 35 Chief Financial Officer -
_____________________
(1) At December 31, 1996.
-44-
<PAGE>
ROBERT GANDENBERGER. Mr. Gandenberger retired as Supervisor of the
Hamilton County Ohio Recorder's Office in 1994. From 1991 to 1994, Mr.
Gandenberger served as a director of Cleves-North Bend.
JOHN T. LARIMER. Mr. Larimer, an attorney, has served as President of the
Association since 1993 and as Managing Officer of the Association since November
1995. He has been a director of the Association since 1975. Mr. Larimer is Rae
Skirvin Larimer's spouse and is a brother-in-law of Una Schaeperklaus, a
director of the Association.
RAE SKIRVIN LARIMER. Ms. Skirvin Larimer has been legal counsel for the
Association since 1975. From 1979 to 1994, Ms. Skirvin Larimer served as a
director of Cleves-North Bend. Ms. Skirvin Larimer is John Larimer's spouse and
Una Schaeperklaus's sister.
EDGAR H. MAY. Mr. May has served as a director of the Association since
1992 and as Vice President of the Association and MFC since January 14, 1997.
From 1960 until his retirement in 1994, Mr. May was a broker and partner in Ed
May Realty Co., located in Deer Park, Ohio.
R. C. MEYERENKE. Mr. Meyerenke has served the Association as a director
since 1974 and as the Secretary and the Treasurer since 1972. From 1974 until
his retirement in 1991, Mr. Meyerenke was the Managing Officer of the
Association.
WILBUR H. TISCH. Mr. Tisch retired as owner and President of General Metal
Works in 1983. Mr. Tisch served as director of Cleves-North Bend from 1975 to
1994 and as President from 1986 to 1994.
KATHLEEN A. WHITE. Ms. White has been employed as a real estate title
examiner since 1980.
JULIE M. BERTSCH. Ms. Bertsch, a Certified Public Accountant, was hired as
Chief Financial Officer of MFC and the Association in June 1996. Prior to
joining MFC, Ms. Bertsch was employed from August 1987 until June 1996 with
Grant Thornton LLP, independent certified public accountants.
THE ASSOCIATION. The Amended Constitution of the Association provides for
a Board of Directors consisting of not less than five nor more than seven
directors. The Board of Directors of the Association currently consists of five
directors. Each director serves for a three-year term. The Board of Directors
met 31 times during the fiscal year ended September 30, 1996, 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.
The following table presents certain information with respect to the
present directors and executive officers of the Association:
Year of
Position(s) with commencement Term
Name the Association of directorship expires
- ---- --------------- --------------- -------
John T. Larimer Director, President and
Managing Officer 1975 2000
L. Craig Martin Director 1996 2000
R. C. Meyerenke Director and Treasurer 1974 1999
Edgar H. May Director and Vice President 1992 1998
Una Schaeperklaus Director and Secretary 1992 1998
Julie M. Bertsch Chief Financial Officer - -
Thomas A. Gerdes Vice President/Lending - -
L. CRAIG MARTIN. In October 1996 Mr. Martin was appointed by the Board of
Directors to fill the vacancy created by the death of David H. Korn. Mr. Martin
has served for twenty years as President of Environmetrics, Inc., an
architectural firm and commercial and residential construction company he
founded. From 1992 to 1994, Mr. Martin served as a director of Cleves-North
Bend.
-45-
<PAGE>
UNA SCHAEPERKLAUS. Ms. Schaeperklaus has served as a director of the
Association since 1992. From 1986 to 1992, Ms. Schaeperklaus served as a
director of Cleves-North Bend. Ms. Schaeperklaus is Mr. Larimer's sister-in-law
and Ms. Larimer's sister.
THOMAS A. GERDES. Mr. Gerdes joined the Association as Vice
President/Lending in November 1996. From January to November 1996, Mr. Gerdes
was a loan officer and branch manager at Queen City Mortgage Company. Prior to
joining Queen City Mortgage Company, Mr. Gerdes was employed by Oak Hills
Savings & Loan Company, F.A., as a Vice President/Loans from September 1969 to
January 1996.
After the Conversion, each director of the Association will continue to
serve the Association, and each director of MFC will continue to serve MFC.
COMMITTEES OF DIRECTORS
The Board of Directors of the Association has an Audit Committee and a Loan
Appraisal Committee.
During fiscal 1996, the members of the Audit Committee were Messrs. Korn,
Meyerenke and Larimer. The Audit Committee is responsible for auditing teller
boxes, reviewing and reporting to the full Board of Directors on the independent
audits of the Association and reviewing loan files for regulatory compliance and
adherence to the Association's lending policies. The Audit Committee met five
times during fiscal year 1996.
The Loan Appraisal Committee was comprised of Messrs. May, Larimer and Korn
for the year ended September 30, 1996. The function of the Loan Appraisal
Committee is to review delinquent loans, non-performing assets and REO
properties and to report and recommend action to the full Board of Directors
with regard thereto. The Loan Appraisal Committee met 10 times during fiscal
year 1996.
The Board of Directors of MFC does not currently have any committees.
COMPENSATION
Each director of the Association currently receives a fee of $19,500 per
year for service as a director of the Association. Effective April 1996,
directors no longer received committee fees. Former directors of Cleves-North
Bend who were not directors of the Association received $7,800 in advisory fees.
During fiscal year ended September 30, 1996, a total of $96,875 was paid in
directors', committee and advisory fees.
During the fiscal year ended September 30, 1996, no executive officer of
the Association received annual compensation in an amount equal to or greater
than $100,000. The following table presents certain information regarding the
annual compensation received by Mr. Larimer during such period:
SUMMARY COMPENSATION TABLE
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Annual Compensation
-------------------
Name and Principal Position Year Salary ($)
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John T. Larimer, President 1996 $70,703
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____________________________
(1) Consists of salary in the amount of $56,078, and directors' fees of
$14,625. Does not include amounts attributable to other miscellaneous
benefits received by executive officers. The cost to the Association of
providing such benefits to Mr. Larimer was less than 10% of his cash
compensation.
Mr. Larimer became the Managing Officer of the Association in November,
1995. Effective June 11, 1996, Mr. Larimer's annual salary was set at $94,500,
and the Association ceased to pay Mr. Larimer directors' fees.
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MFC does not currently pay directors' fees but intends to pay a fee of
$10,000 per year to those directors who do not serve on the Association's Board
of Directors.
STOCK BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. MFC has established the ESOP for the
benefit of employees of MFC and its subsidiaries, including the Association, who
are age 21 or older and who have completed at least one year of service with MFC
and its subsidiaries. The Board of Directors of MFC believes that the ESOP will
be in the best interests of MFC and its shareholders.
The ESOP trust intends to borrow funds from MFC with which to acquire up to
8% of the Common Shares sold in connection with the Conversion. Such loan will
be secured by the Common Shares purchased with the proceeds from the loan and
will be repaid by the ESOP over a period of up to eight years. The primary
source of repayment will be contributions made to the ESOP by the Association.
Common Shares purchased with such loan proceeds will be held in a suspense
account for allocation among ESOP participants as the loan is repaid. 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 common shares. If the ESOP purchases
authorized but unissued common shares, such purchases could have a dilutive
effect on the interests of MFC's shareholders.
Contributions to the ESOP and shares released from the suspense account
will be allocated pro rata to 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 and be
employed on the last day of the plan year in order to receive an allocation.
Benefits become vested after five years of service. Vesting will be accelerated
upon retirement at or after age 65, death, disability, termination of the ESOP
or change in control of MFC or the Association. Forfeitures will be reallocated
among remaining participating employees. Benefits may be paid either in MFC
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.
MFC or a committee appointed by the Board of Directors of MFC will
administer the ESOP. The Common Shares and other ESOP funds will be held by a
trustee selected and appointed by MFC (the "ESOP Trustee"). The ESOP Trustee
must vote all common shares of MFC held in the ESOP that are allocated to the
accounts of ESOP participants in accordance with the instructions of such
participants. Common shares held by the ESOP that are not allocated to
participants' accounts and allocated shares for which voting instructions are
not received will be voted by the ESOP Trustee in its sole discretion.
Contributions will be made to the ESOP by the Association based upon the
understanding that the ESOP will be a tax-qualified plan under the Code.
Although no assurances can be given, MFC expects a favorable result when the
ESOP is submitted to the IRS for a determination in respect of such tax
qualification.
STOCK OPTION PLAN. After the completion of the Conversion, the Board of
Directors of MFC intends to adopt the Stock Option Plan, subject to approval by
the shareholders of MFC. The purposes of the Stock Option Plan include
retaining and providing incentives to the directors, officers and employees of
MFC and its subsidiaries by facilitating their purchase of a stock interest in
MFC.
Options granted to the officers and employees under the Stock Option Plan
may be "incentive stock options" within the meaning of Section 422 of the Code
("ISOs"). Options granted under the Stock Option Plan to directors who are not
full-time employees of MFC or the Association will not qualify under the Code
and thus will not be ISOs ("non-qualified stock options"). The option exercise
price will be determined by the Stock Option Committee at the time of grant;
provided, however, that the exercise price for an option 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, except that in the case of an ISO granted to an employee who owns
more than 10% of MFC's outstanding common shares at the time such 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
may not be exercisable after the expiration of five years from the date of
grant.
An option recipient cannot transfer or assign an option other than by will,
in accordance with the laws of descent and distribution or pursuant to a
domestic relations order issued by a court of competent jurisdiction.
"Termination for cause," as defined in the Stock Option Plan, will result in the
termination of any outstanding options.
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MFC will receive no monetary consideration for the granting of options
under the Stock Option Plan. Upon the exercise of options, MFC will receive a
payment of cash, common shares of MFC or a combination of cash and common shares
from option recipients in exchange for shares issued.
A number of shares equal to 10% of the Common Shares sold in the Offering
is expected to be reserved for issuance by MFC upon the exercise of options to
be granted to certain directors, officers and employees of MFC and its
subsidiaries from time to time 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. The Stock Option
Committee may grant options under the Stock Option Plan to the directors,
officers and employees of MFC and the Association at such times as they deem
most beneficial to MFC on the basis of the individual participant's
responsibility, tenure and future potential.
In accordance with OTS regulations, the Stock Option Plan may be
implemented no earlier than six months after the completion of the Conversion.
In addition, the following restrictions will apply if the Stock Option Plan is
implemented by MFC during the first year following the completion of the
Conversion: (i) the Stock Option Plan must be approved by the shareholders of
MFC at an annual or a special meeting of shareholders, in either case to be held
no sooner than six months after the completion of the Conversion; (ii) awards to
directors who are not full-time employees of MFC or the Association may not
exceed 5% per person and 30% in the aggregate of the total number of plan
shares; (iii) awards to directors or other persons who are full-time employees
of MFC or the Association 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 of grant, subject to
acceleration of vesting only in the event of the death or disability of a
participant.
RECOGNITION AND RETENTION PLAN AND TRUST. After the completion of the
Conversion, the Association intends to adopt the RRP. The purpose of the RRP is
to provide directors, officers and certain key employees of the Association with
an ownership interest in the Association in a manner designed to compensate such
directors, officers and key employees for services to the Association. The
Association expects to contribute sufficient funds to enable the RRP to purchase
up to 4% of the Common Shares sold in the Offering. Such shares may be
purchased in the market following the Conversion or may be purchased from the
authorized but unissued shares of MFC.
The RRP Committee will administer the RRP and determine the number of
shares to be granted to eligible participants. Each participant granted shares
under the RRP will be entitled to the benefit of any dividends or other
distributions paid on such shares prior to the shares being earned, although
dividends or other distributions on shares held in the RRP Trust will not be
distributed to the participant until the shares are distributed to the
participant. 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, the RRP may be implemented no earlier than six months after the
completion of the Conversion. In addition, the following restrictions will
apply if the RRP is implemented during the first year following the completion
of the Conversion: (i) the RRP must be approved by the shareholders of MFC at
an annual or a special meeting of shareholders, in either case to be held no
sooner than six months after the completion of the Conversion; (ii) awards to
directors who are not full-time employees of MFC or the Association may not
exceed 5% per person and 30% in the aggregate of the total number of plan
shares; (iii) awards to directors or other persons who are full-time employees
of MFC or the Association may not exceed 25% 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. RRP shares will be voted by
the RRP Trust until distributed to a participant.
EMPLOYMENT AGREEMENT
The Association intends to enter into an employment agreement with Mr.
Larimer (the "Employment Agreement"). The Association currently has no
employment agreements with any of its officers. The Employment Agreement will
become effective upon the completion of the Conversion and will provide for a
term of three years, a salary of not less than $94,500 and performance review by
the Board of Directors not less often than annually. The Employment Agreement
will also provide for the inclusion of Mr. Larimer in any formally established
employee benefit, bonus, pension and profit-sharing plans for which senior
management personnel are eligible.
The Employment Agreement will be terminable by the Association at any time.
In the event of termination by the Association for "just cause," as defined in
the Employment Agreement, Mr. Larimer will have no right to receive any
compensation or other benefits for any period after such termination. In the
event of termination by the Association other than
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for just cause, at the end of the term of the Employment Agreement or in
connection with a "change of control," as defined in the Employment Agreement,
Mr. Larimer will be entitled to a continuation of salary payments for a period
of time equal to the term of the Employment Agreement and a continuation of
benefits substantially equal to those being provided at the date of termination
of employment until the earliest to occur of the end of the term of the
Employment Agreement or the date on which Mr. Larimer becomes employed full-time
by another employer.
The Employment Agreement also will contain provisions with respect to the
occurrence within one year of a "change of control" of (1) the termination of
employment of Mr. Larimer 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.
Larimer is employed or a material reduction in his responsibilities, authority,
compensation or other benefits provided under the Employment Agreement without
Mr. Larimer's written consent. In the event of any such occurrence, Mr. Larimer
will be entitled to payment of an amount equal to (a) the amount of compensation
to which he would be entitled for the remainder of the term of the Employment
Agreement, plus (b) the difference between (i) three times Mr. Larimer's average
annual compensation for the three taxable years immediately preceding the
termination of employment, less (ii) the amount paid to Mr. Larimer as
compensation for the remainder of the employment term. In addition, Mr. Larimer
will 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. Larimer may receive, however, is limited to an amount which
will not result in the imposition of a penalty tax pursuant to Section
280G(b)(3) of the Code. "Control," as defined in the Employment Agreement,
generally refers to the acquisition by any person or entity of the ownership or
power to vote 10% or more of the voting stock of the Association or MFC, the
control of the election of a majority of the directors of the Association or MFC
or the exercise of a controlling influence over the management or policies of
the Association or MFC.
The aggregate payments that would have been made to Mr. Larimer, assuming
his termination at September 30, 1996, following a change of control, would have
been approximately $283,500.
CERTAIN TRANSACTIONS WITH THE ASSOCIATION
In accordance with the OTS regulations, the Association makes loans to
executive officers and directors of the Association 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. 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.
Rae Skirvin Larimer, the spouse of John T. Larimer and sister of Una
Schaeperklaus, serves as general counsel to the Association. The Association
expects to continue to engage Ms. Skirvin Larimer in such capacity in the
future. During the fiscal year ended September 30, 1996, the Association paid
$20,875 in legal fees to the firm of Skirvin & Larimer for Ms. Skirvin Larimer's
services. Ms. Skirvin Larimer will not serve as legal counsel to MFC.
REGULATION
GENERAL
As a savings and loan association incorporated under the laws of Ohio, the
Association is subject to regulation, examination and oversight by the OTS and
the Superintendent of the Division (the "Ohio Superintendent"). Because the
Association's deposits are insured by the FDIC, the Association also is subject
to general oversight by the FDIC. The Association 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 Association is in compliance with
various regulatory requirements and is operating in a safe and sound manner.
The Association is a member of the FHLB of Cincinnati.
MFC will be a savings and loan holding company within the meaning of the
Home Owners Loan Act, as amended (the "HOLA"). Consequently, MFC will be
subject to regulation, examination and oversight by the OTS and will be required
to submit periodic reports thereto. Because MFC and the Association are
corporations organized under Ohio law, they are also subject to the provisions
of the Ohio Revised Code applicable to corporations generally.
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Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS and the Association
may be regulated under federal law as a bank or be required to change its
charter. Such change in regulation or charter would likely change the range of
activities in which the Association may engage and would probably subject the
Association to more regulation by the FDIC. In addition, MFC might become
subject to different holding company regulations, including separate capital
requirements. At this time, MFC cannot predict when or whether Congress may
actually pass legislation regarding MFC's and the Association's regulatory
requirements or charter. Although such legislation may change the activities in
which either MFC and the Association may engage, it is not anticipated that the
current activities of MFC or the Association will be materially affected by
those activity limits.
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 Association
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.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations evaluate how well and to what extent an institution lends and
invests in its designated service area, with particular emphasis on low- to
moderate-income communities and borrowers in that area. The Association has
received a "satisfactory" examination rating under those regulations.
REGULATORY CAPITAL REQUIREMENTS. The Association is required by OTS
regulations to meet certain minimum capital requirements. For information
regarding the Association's regulatory capital at September 30, 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 Association consists solely of
tangible capital) of 3.0% of adjusted total assets and risk-based capital (which
for the Association 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).
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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
Association does not anticipate that it will be adversely affected if the core
capital requirement regulation is amended as proposed.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio as determined under the methodology of the OTS. If
the measured interest rate risk is above the level deemed normal under the
regulation, the Association will be required to deduct one-half of such excess
exposure from its total capital when determining its risk-based capital. In
general, an association with less than $300 million in assets and a risk-based
capital ratio in excess of 12% will not be subject to the interest rate risk
component, and the association qualifies for such exemption. Pending
implementation of the interest rate risk component, the OTS has the authority to
impose a higher individualized capital requirement on any savings association it
deems to have excess interest rate risk. The OTS also may adjust the risk-based
capital requirement on an individualized basis to take into account risks due to
concentrations of credit and non-traditional activities. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset
and Liability Management."
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings and
loan associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. 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 Association's capital at September 30, 1996, meets
the standards for the highest level, 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 5% 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,
association's 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
Association at September 30, 1996, was approximately $20.1 million, or 52.2%,
which exceeded the 5% liquidity requirement by approximately $18.2 million. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Liquidity and Capital Resources."
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, there was only one QTL test which
required savings associations to maintain a specified level of investments in
assets that are designated as qualifying thrift investments ("QTI"), which are
generally related to domestic residential real estate and manufactured housing
and include stock issued by any FHLB, the FHLMC or the FNMA. Under this test
65% of an institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business and 20% of liquid assets) must
consist of QTI on a monthly average basis in 9 out of every 12 months. Congress
created a second QTL
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test, effective September 30, 1996, pursuant to which a savings association may
also meet the QTL test under the Code, for thrift institution status. According
to the test under the Code, at least 60% of the institution's assets (on a tax
basis) must consist of specified assets (generally loans secured by residential
real estate or deposits, educational loans, cash and certain governmental
obligations). The OTS has not yet promulgated regulations for the new test.
The OTS may grant exceptions to the QTL test under certain circumstances. If a
savings association fails to meet the QTL test, the association and its holding
company become subject to certain operating and regulatory restrictions. A
savings association that fails to meet the QTL test will not be eligible for new
FHLB advances. At September 30, 1996, the Association met the QTL test.
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 Lending Limit Capital. A savings
association may lend to one borrower an additional amount not to exceed 10% of
the association's Lending Limit Capital, if the additional amount is fully
secured by certain forms of "readily marketable collateral." Real estate is not
considered "readily marketable collateral." Certain types of loans are not
subject to this limit. In applying this limit, the regulations require that
loans to certain related borrowers be aggregated. Notwithstanding the specified
limits, an association may lend to one borrower up to $500,000, for any purpose.
At September 30, 1996, the Association was in compliance with this lending
limit. See "THE BUSINESS OF THE ASSOCIATION - Lending Activities -- Loan
Originations, Purchases and Sales."
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests 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 Lending Limit Capital (or 200% of
Lending Limit Capital for qualifying institutions with less than $100 million in
assets). 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 or as offered to all employees
in a company-wide benefit program, and loans to executive officers are subject
to additional limitations. The Association was in compliance with such
restrictions at September 30, 1996.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with, the savings association. MFC
will be an affiliate of the Association. Generally, Sections 23A and 23B of the
FRA (i) limit the extent to which a savings 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 Association
was in compliance with these requirements and restrictions at September 30,
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.
The first rating category is Tier 1, consisting 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. The
second category, Tier 2, consists of associations that, before and after the
proposed capital distribution, meet their current minimum, but not fully
phased-in capital requirement. Associations in this category may make capital
distributions up to 75% of their net income over the most recent four quarters.
Tier 3 associations do not meet their current minimum capital requirement and
must obtain OTS approval of any capital distribution. A Tier 1 association
deemed to be in need of more than normal supervision by the OTS may be
downgraded to a Tier 2 or Tier 3 association.
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The Association meets the requirements for a Tier 1 association and has
not been notified of any need for more than normal supervision. The Association
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 Association
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 MFC, the Association 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 1995, the OTS issued a proposal to amend the capital
distributions limits. Under that proposal, associations not owned by a holding
company with an 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.
HOLDING COMPANY REGULATION. After the Conversion, MFC will be a savings
and loan holding company within the meaning of the HOLA. As such, MFC will
register with the OTS and will be subject to OTS regulations, examination,
supervision and reporting requirements.
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.
MFC 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. Congress is considering legislation which may
limit MFC's ability to engage in these activities and MFC cannot predict if and
in what form these proposals might become law. However, such limits would not
impact MFC's initial activity of holding stock of the Association. The broad
latitude under current law can be 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 both QTL Tests, then such unitary holding company would
become subject to the activities restrictions applicable to multiple holding
companies. At September 30, 1996, the Association met both QTL Tests. See
"Qualified Thrift Lender Test."
If MFC were to acquire control of another savings institution, other than
through a merger or other business combination with the Association, MFC 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 MFC and any of its subsidiaries (other
than the Association 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
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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. Bank holding companies have had more
expansive authority to make interstate acquisitions than savings and loan
holding companies since August 1995.
FDIC REGULATIONS
DEPOSIT INSURANCE. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of federally insured 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.
The FDIC is required to maintain designated levels of reserves in each fund.
Prior to October 1, 1996, the reserves of the SAIF were below the level required
by law, because a significant portion of the assessments paid into the fund have
been and are being used to pay the cost of prior thrift failures, while the
reserves of the BIF met the level required by law in May 1995. This resulted in
a significant disparity between BIF and SAIF assessments during 1996.
The Association is a member of the SAIF and its deposit accounts are
insured by the FDIC up to the prescribed limits. The FDIC has examination
authority over all insured depository institutions, including the Association,
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 FDIC is authorized to establish separate annual assessment rates for
deposit insurance each for members of the BIF and 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 its 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 based on the risk the institution poses to
its deposit insurance fund. The risk level is determined based on the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy savings associations were reduced significantly
below the level paid by healthy savings associations effective in mid-1995.
Assessments paid by healthy savings associations exceeded those paid by healthy
commercial banks by approximately $.19 per $100 in deposits in late 1995. Such
excess equaled approximately $.23 per $100 in deposits beginning in 1996.
Federal legislation, which was effective September 30, 1996, provided for
the recapitalization of the SAIF by means of a special assessment of $.657 per
$100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves
to the level required by law. Certain banks holding SAIF deposits are required
to pay the same special assessment on 80% of deposits at March 31, 1995. In
addition, the cost of prior thrift failures will be shared by both the SAIF and
the BIF. As a result of such cost sharing, BIF assessments for healthy banks in
1997 will be $.013 per $100 in deposits, and SAIF assessments for healthy
institutions in 1997 will be $.064 per $100 in deposits.
The Association had $37.6 million in deposits at March 31, 1995. The
Association paid a special assessment of $246,000 in November 1996, which was
accounted for and recorded as of September 30, 1996. This assessment is
tax-deductible but has reduced earnings for the year ended, and capital at,
September 30, 1996.
FRB REGULATIONS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $52.0
million in such accounts (subject to an exemption of $4.3 million) and of 10% of
net
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transaction accounts over $52.0 million. At September 30, 1996, the Association
was in compliance with this reserve requirement.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances. See
"THE BUSINESS OF THE ASSOCIATION - Deposits and Borrowings." The Association
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 Association'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 Association is in
compliance with this requirement with an investment in stock of the FHLB of
Cincinnati of $364,000 at September 30, 1996.
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.
FHLB advances to members such as the Association who meet the QTL Test are
generally limited to the lower of (i) 25% of the member's assets or (ii) 20
times the member's investment in FHLB stock. At September 30, 1996, the
Association's maximum limit on advances was approximately $7.3 million. The
granting of advances is subject also to the FHLB's collateral and credit
underwriting guidelines. The FHLB of Cincinnati currently offers advances with
fixed and variable interest rates ranging from 6.20% to 8.25%, which included
the following types of borrowings: short-term advances with terms ranging from
one day to one year, including cash management accounts and lines of credit;
fixed-rate, long-term advances with terms ranging from seven months to 20 years;
and various customized advances with terms ranging from one month to 30 years
and with call, balloon or mortgage-matching features.
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 Association has not participated in such program.
TAXATION
FEDERAL TAXATION
MFC and the Association are each subject to the federal tax laws and
regulations which apply to corporations generally. Certain thrift institutions,
including the Association, were, however, prior to the enactment of the Small
Business Jobs Protection Act, which was signed into law on August 21, 1996,
allowed deductions for bad debts under methods more favorable than those granted
to other taxpayers. Qualified thrift institutions could compute deductions for
bad debts using either the specific charge-off method of Section 166 of the
Code, or the reserve method of Section 593 of the Code.
Under Section 593, a thrift institution annually could elect to deduct bad
debts under either (i) the "percentage of taxable income" method applicable only
to thrift institutions, or (ii) the "experience" method that also was available
to small banks. Under the "percentage of taxable income" method, a thrift
institution generally was allowed a deduction for an addition to its bad debt
reserve equal to 8% of its taxable income (determined without regard to this
deduction and with additional adjustments). Under the experience method, a
thrift institution was generally allowed a deduction for an addition to its bad
debt reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1995, 1994 and
1993, the
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Association used the percentage of taxable income method because such method
provided a higher bad debt deduction than the experience method.
Section 1616(a) of the Small Business Job Protection Act repealed the
Section 593 reserve method of accounting for bad debts by thrift institutions,
effective for taxable years beginning after 1995. Thrift institutions that
would be treated as small banks are allowed to utilize the experience method
applicable to such institutions, while thrift institutions that are treated as
large banks are required to use only the specific charge off method. The
percentage of taxable income method of accounting for bad debts is no longer
available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer, and having been made with the consent of the
Secretary of the Treasury. Any adjustment under Section 481(a) of the Code
required to be recaptured with respect to such change generally will be
determined solely with respect to the "applicable excess reserves" of the
taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that becomes a large bank, the
amount of the institution's applicable excess reserves generally is the excess
of (i) the balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (I.E., the "pre-1988 reserves"). In the case of a thrift institution that
becomes a small bank, like the Association, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans and its reserve for losses
on nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or (b) what the thrift's reserves would have been at the close of its
last year beginning before January 1, 1996, had the thrift always used the
experience method.
For taxable years that begin after December 31, 1995, and before January
1, 1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be taken into
account as a Code Section 481(a) adjustment for the year will be suspended. A
thrift meets the residential loan requirement if, for the tax year, the
principal amount of residential loans made by the thrift during the year is not
less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential real and church property and certain
mobile homes), but only to the extent that the loan is made to the owner of the
property to acquire, construct, or improve the property.
In addition to the regular income tax, MFC and the Association are subject
to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate
of 20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include 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, MFC and the Association are 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.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Job Protection Act, which
requires recapture in the case of certain excessive distributions to
shareholders. The pre-1988 reserves may not 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 pre-1988 reserves; and
third, out of such other accounts as may be proper. To the extent a
distribution by the Association to MFC is deemed paid out of its pre-1988
reserves under these rules, the pre-1988 reserves would be reduced and the
Association's gross income for tax purposes would be increased by the amount
which,
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when reduced by the income tax, if any, attributable to the inclusion of such
amount in its gross income, equals the amount deemed paid out of the pre-1988
reserves. As of September 30, 1996, the Association's pre-1988 reserves for tax
purposes totaled approximately $1.3 million. The Association believes it had
approximately $5.7 million of accumulated earnings and profits for tax purposes
as of September 30, 1996, which would be available for dividend distributions,
provided regulatory restrictions applicable to the payment of dividends are met.
See "REGULATION - OTS Regulations -- Limitations on Capital Distributions." No
representation can be made as to whether the Association will have current or
accumulated earnings and profits in subsequent years.
The tax returns of the Association have been audited or closed without
audit through calendar year 1991. 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 Association.
OHIO TAXATION
MFC is subject to the Ohio corporation franchise tax, which, as applied to
MFC, is a tax measured by both net earnings and net worth. The rate of tax is
the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and
8.9% of computed Ohio taxable income in excess of $50,000 and (ii) 0.582% times
taxable net worth.
In computing its tax under the net worth method, MFC may exclude 100% of
its investment in the capital stock of the Association after the Conversion, as
reflected on the balance sheet of MFC, as long as it owns at least 25% of the
issued and outstanding capital stock of the Association. 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, MFC may be
entitled to various other deductions in computing taxable net worth that are not
generally available to operating companies.
A special litter tax is also applicable to all corporations, including
MFC, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
The Association 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
Association's book net worth determined in accordance with GAAP. As a
"financial institution," the Association is not subject to any tax based upon
net income or net profits imposed by the State of Ohio.
THE CONVERSION
THE OTS AND THE DIVISION HAVE APPROVED THE PLAN, SUBJECT TO THE APPROVAL
OF THE PLAN BY THE MEMBERS OF THE ASSOCIATION 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
On April 16, 1996, the Board of Directors of the Association unanimously
adopted the Plan and recommended that the voting members of the Association
approve the Plan at the Special Meeting. During and upon completion of the
Conversion, the Association will continue to provide the services presently
offered to depositors and borrowers, will maintain its existing offices and will
retain its existing management and employees.
Based on the current Valuation Range, between 858,500 and 1,161,500 Common
Shares are expected to be offered in the Subscription Offering and the
concurrent Community Offering at a price of $10 per share. Federal regulations
require, with certain exceptions, that shares offered in connection with the
Conversion must be sold up to at least the minimum point of the Valuation Range
in order for the Conversion to become effective. The actual number of Common
Shares sold in connection with the Conversion will be determined upon completion
of the Offering in the sole discretion of the Board of Directors based on the
final valuation of the Association, as converted. See "Pricing and Number of
Common Shares to be Sold."
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The Common Shares will be offered in the Subscription Offering to the ESOP
and certain present and former depositors of the Association. Any Common Shares
not subscribed for in the Subscription Offering will be concurrently offered 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 after
completion of the Subscription Offering, unless such period is extended by the
Association 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 MFC and the Association will consult
with the OTS and the Division to determine an appropriate alternative method of
selling, up to the minimum of the Valuation Range, the Common Shares for which
subscriptions were not received. 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 Association. The commencement and completion of the Conversion will be
subject to market conditions and other factors beyond the Association'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 Association. In such circumstances, the
Association may also incur substantial additional printing, legal and accounting
expenses in completing the Conversion. In the event the Conversion is not
successfully completed, the Association will be required to charge all
Conversion expenses against current earnings.
REASONS FOR THE CONVERSION
In unanimously adopting the Plan, the Board of Directors of the
Association determined that the Association will derive substantial benefits
from the Conversion and that the Conversion is in the best interests of the
Association and its members. The net proceeds from the sale of shares of stock
will increase the Association's regulatory capital and thereby enable further
growth, with the result that additional funds will be available for lending and
other investment purposes.
As a mutual institution, the Association has no stockholders and no
authority to issue capital stock. The Board of Directors of the Association
believes that the ability to issue and sell stock will provide additional
capital for investment, increase the Association's operational flexibility and
enable the Association to operate in the form used by commercial banks, most
business corporations and an increasing number of thrift institutions. The
formation of MFC will provide greater flexibility than the Association would
have alone for growth and diversification of business activities. The
Conversion also will enable the Association to utilize stock-related incentive
programs, which the Board of Directors believes will benefit the Association by
enabling it to attract and retain well-qualified directors, management and
staff.
The Conversion will also give members of the Association, at their option,
the opportunity to become shareholders of MFC. No member of the Association
will be obligated to subscribe for Common Shares by voting on the Plan, nor will
any member's savings account be converted into Common Shares by such vote.
PRINCIPAL EFFECTS OF THE CONVERSION
VOTING RIGHTS. Deposit holders who are members of the Association in its
mutual form will have no voting rights in the Association as converted and will
not participate, therefore, in the election of directors or otherwise control
the Association's affairs. Voting rights in MFC will be held exclusively by its
shareholders, and voting rights in the Association will be held exclusively by
MFC as the sole shareholder of the Association. Each holder of MFC's common
shares will be entitled to one vote for each share owned on any matter to be
considered by MFC's shareholders. See "DESCRIPTION OF AUTHORIZED SHARES."
DEPOSIT ACCOUNTS AND LOANS. Deposit accounts in the Association, as
converted, will be equivalent in amount, interest rate and other terms to the
present deposit accounts in the Association, 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 Association.
TAX CONSEQUENCES. The consummation of the Conversion is expressly
conditioned on receipt by the Association of a private letter ruling from 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 Code. The
Association intends to proceed with the Conversion based upon an
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opinion received from 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 Association in its mutual form or in its stock form as a
result of the Conversion. The Association in its mutual form and the
Association 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 Association upon the
receipt of money from MFC in exchange for the capital stock of the
Association, as converted;
(3) The assets of the Association 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 Association after the Conversion will include the period during
which the assets were held by the Association before the Conversion;
(4) No gain or loss will be recognized by the deposit account
holders of the Association upon the issuance to them, in exchange for
their respective withdrawable deposit accounts in the Association
immediately prior to the Conversion, of withdrawable deposit accounts in
the Association immediately after the Conversion, in the same dollar
amount as their withdrawable deposit accounts in the Association
immediately prior to the Conversion, plus, in the case of Eligible Account
Holders and Supplemental Eligible Account Holders, the interests in the
Liquidation Account of the Association, as described below;
(5) The basis of the withdrawable deposit accounts in the
Association held by its deposit account holders immediately after the
Conversion will be the same as the basis of their deposit accounts in the
Association immediately prior to the Conversion. The basis of the
interests in the Liquidation Account received by the Eligible Account
Holders and Supplemental Eligible Account Holders will be zero. The basis
of the nontransferable subscription rights received by Eligible Account
Holders, Supplemental Eligible Account Holders and Other Eligible Members
will be zero (assuming that at distribution such rights have no
ascertainable fair market value);
(6) No gain or loss will be recognized by Eligible Account
Holders, Supplemental Eligible Account Holders or Other Eligible Members
upon the distribution to them of nontransferable subscription rights to
purchase Common Shares (assuming that at distribution such rights have no
ascertainable fair market value), and no taxable income will be realized
by such Eligible Account Holders, Supplemental Eligible Account Holders or
Other Eligible Members as a result of their exercise of such
nontransferable subscription rights;
(7) The basis of the Common Shares purchased by members of the
Association 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 Association will
be treated as if there had been no reorganization. The taxable year of
the Association will not end on the effective date of the Conversion.
Immediately after the Conversion, the Association in its stock form will
succeed to and take into account the tax attributes of the Association in
its mutual form immediately prior to the Conversion, including the
Association's earnings and profits or deficit in earnings and profits;
(9) The bad debt reserves of the Association in its mutual form
immediately prior to the Conversion will not be required to be restored to
the gross income of the Association 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 Association in its stock
form as they would have had if there had been no Conversion. The
Association in its stock form will succeed to and take into account the
dollar amounts of those accounts of the Association in its mutual form
which represent bad debt reserves in respect of which the Association in
its mutual form has taken a bad debt deduction for taxable years ending on
or before the Conversion; and
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(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 Association 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 Association
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.
The Association 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.
For Ohio tax purposes, the tax consequences of the Conversion will
be as follows:
(1) The Association is a "financial institution" for State of Ohio
tax purposes, and the Conversion will not change such status;
(2) The Association is subject to the Ohio corporate franchise tax
on "financial institutions," which is imposed annually at a rate of 1.5%
of the Association's equity capital determined in accordance with GAAP,
and the Conversion will not change such status;
(3) As a "financial institution," the Association 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
Association 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 Association will increase if
the taxable net worth of the Association (i.e., book net worth computed in
accordance with GAAP at the close of the Association'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 Association in its mutual
or stock form for purposes of the Ohio corporate franchise tax and the
Ohio personal income tax.
Each Eligible Account Holder, Supplemental Eligible Account Holder and
Other Eligible Member is urged to consult his or her own tax advisor with
respect to the affect of such tax consequences on his or her own particular
facts and circumstances.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
the Association in its present mutual form, each depositor in the Association
would receive a pro rata share of any assets of the Association remaining after
payment of the claims of all creditors, including the claims of all depositors
to the withdrawable value of their deposit 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 deposit accounts bears to the total aggregate
value of all deposit accounts in the Association at the time of liquidation.
In the event of a complete liquidation of the Association in its stock
form after the Conversion, each depositor would have a claim of the same general
priority as the claims of all other general creditors of the Association.
Except as described below, each depositor's claim would be solely in the amount
of the balance in such depositor's deposit account plus accrued interest. The
depositor would have no interest in the assets of the Association above that
amount. Such assets would be distributed to MFC as the sole shareholder of the
Association.
For the purpose of granting a limited priority claim to the assets of the
Association in the event of a complete liquidation thereof to Eligible Account
Holders and Supplemental Eligible Account Holders who continue to maintain
deposit accounts at the Association after the Conversion, the Association will,
at the time of Conversion, establish a liquidation account in an amount equal to
the regulatory capital of the Association as of the latest practicable date
prior to the Conversion at which such regulatory capital can be determined (the
"Liquidation Account"). For this purpose, the Association will use the
regulatory capital figure set forth in its latest statement of regulatory
capital contained in the Prospectus. The Liquidation Account will not operate
to restrict the use or application of any of the regulatory capital of the
Association.
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Each Eligible Account Holder and Supplemental Eligible Account Holder will
have a separate inchoate interest (the "Subaccount") in a portion of the
Liquidation Account for Qualifying Deposits held on the Eligibility Record Date
or the Supplemental Eligibility Record Date.
The balance of each initial Subaccount shall be an amount determined by
multiplying the amount in the Liquidation Account by a fraction, the numerator
of which is the closing balance in the account holder's account as of the close
of business on the Eligibility Record Date or the Supplemental Eligibility
Record Date, as the case may be, and the denominator of which is the total
amount of all Qualifying Deposits of Eligible Account Holders and Supplemental
Eligible Account Holders on the corresponding 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 each fiscal year of MFC subsequent to the respective
record dates, the balance in the deposit account to which a Subaccount relates
is less than the lesser of (i) the deposit balance in such deposit account at
the close of business on the last day of any other fiscal year of MFC subsequent
to the Eligibility Record Date or the Supplemental Eligibility Record Date or
(ii) the amount of the Qualifying Deposit as of the Eligibility Record Date or
the Supplemental Eligibility Record Date, the balance of the Subaccount for such
deposit account shall be adjusted proportionately to the reduction in such
deposit 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 deposit account. If any deposit
account is closed, its related Subaccount shall be reduced to zero upon such
closing.
In the event of a complete liquidation of the converted Association (and
only in such event), each Eligible Account Holder and Supplemental Eligible
Account Holder shall receive from the Liquidation Account a distribution equal
to the current balance in each of such account holder's Subaccounts before any
liquidation distribution may be made to MFC as the sole shareholder of the
Association. Any assets remaining after satisfaction of such liquidation rights
and the claims of the Association's creditors would be distributed to MFC as the
sole shareholder of the Association. No merger, consolidation, purchase of bulk
assets or similar combination or transaction with another financial institution,
the deposits of which are insured by the FDIC, will be deemed to be a complete
liquidation for this purpose and, in any such transaction, the Liquidation
Account shall be assumed by the surviving institution.
COMMON SHARES. SHARES ISSUED UNDER THE PLAN CANNOT AND WILL NOT BE
INSURED BY THE FDIC. For a description of the characteristics of the Common
Shares, see "DESCRIPTION OF AUTHORIZED SHARES."
INTERPRETATION AND AMENDMENT OF THE PLAN
The Boards of Directors of the Association and MFC will interpret the
Plan. To the extent permitted by law, all interpretations of the Plan by the
Boards of Directors of MFC and the Association will be final. The Plan may be
amended by the Boards of Directors of MFC and the Association at any time with
the concurrence of the OTS and the Division. If the Association and MFC
determine 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 affirm, 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 and the
adoption of the Amended Articles of Incorporation and Amended Constitution by
the voting members of the Association at the Special Meeting and the sale of the
requisite amount of Common Shares within 24 months following the date of such
approval. If these conditions are not satisfied, the Plan will automatically
terminate and the Association 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 4:30 P.M., EASTERN TIME, ON MARCH
17, 1997. SUBSCRIPTION RIGHTS NOT EXERCISED BEFORE THE SUBSCRIPTION EXPIRATION
DATE WILL BE VOID, WHETHER OR NOT THE ASSOCIATION HAS BEEN ABLE TO LOCATE EACH
PERSON ENTITLED TO SUCH SUBSCRIPTION RIGHTS.
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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 ASSOCIATION THAT HE OR SHE IS PURCHASING SUCH 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 SUCH 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 Association 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, a nontransferable right to purchase up to the
greater of (i) 2% of the total number of Common Shares to be sold in the
Conversion (which would be 26,714 shares at the maximum of the Valuation
Range, as adjusted) or (ii) 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of Common Shares to
be sold in connection with the Conversion by a fraction, the numerator of
which is the amount of the Eligible Account Holder's Qualifying Deposit
and the denominator of which is the total amount of Qualifying Deposits of
all Eligible Account Holders, subject to the limitation that no person,
together with such person's Associates and other persons Acting in Concert
with such person, may purchase more than 4% of the Common Shares sold in
connection with the Conversion (which would be 53,429 shares at the
maximum of the Valuation Range, as adjusted) and subject to adjustments by
the Board of Directors of MFC and the Association as set forth in the
Plan. If the exercise of subscription rights by Eligible Account Holders
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. Notwithstanding the foregoing,
Common Shares in excess of 1,161,500, 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. For
purposes of this paragraph (a), increases in the Qualifying Deposits of
directors and executive officers of the Association during the twelve
months preceding the Eligibility Record Date shall not be considered.
(b) The ESOP shall receive, without payment
therefor, a nontransferable right to purchase Common Shares in an
aggregate amount of up to 10% of the Common Shares sold in the Conversion,
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,
MFC 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 Common Shares. If the ESOP purchases
authorized but unissued Common Shares, such purchases could have a
dilutive effect on the interests of MFC's shareholders.
(c) Each Supplemental Eligible Account Holder will
receive, without payment therefor, a nontransferable right to purchase up
to the greater of (i) 2% of the total number of Common Shares to be sold
in the Conversion (which would be 26,714 shares at the maximum of the
Valuation Range, as adjusted) or (ii) 15 times the product (rounded down
to the next whole number) obtained by multiplying the total number of
Common Shares to be sold in connection with the Conversion by a fraction,
the numerator of which is the amount of the Supplemental Eligible Account
Holder's Qualifying Deposit and the denominator of which is the total
amount of Qualifying Deposits of all Supplemental Eligible Account
Holders, subject to (i) the limitation that no person, together with such
person's Associates and other persons Acting in Concert with such person,
may purchase more than 4% of the Common Shares sold in connection with the
Conversion (which would be 53,429 shares at the maximum of the Valuation
Range, as
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adjusted) and (ii) the limitation that shares remain available after
satisfying the subscription rights of Eligible Account Holders and the
ESOP pursuant to paragraphs (a) and (b) above and subject to adjustments
by the Board of Directors of MFC and the Association as set forth in the
Plan. If the exercise of subscription rights by Supplemental Eligible
Account Holders results in an oversubscription, Common Shares will be
allocated among subscribing Supplemental Eligible Account Holders in a
manner which will, to the extent possible, make the total allocation of
each subscriber equal 100 shares or the amount subscribed for, whichever
is less. Any Common Shares remaining after such allocation has been made
will be allocated among the subscribing Supplemental Eligible Account
Holders whose subscriptions remain unfilled in the proportion which the
amount of their respective Qualifying Deposits on the Supplemental
Eligibility Record Date bears to the total Qualifying Deposits of all
Supplemental Eligible Account Holders on such date. No fractional shares
will be issued.
Subscription rights received by Supplemental Eligible Account
Holders will be subordinate to the subscription rights of Eligible Account
Holders and the ESOP.
(d) Each Other Eligible Member, other than an Eligible
Account Holder or Supplemental Eligible Account Holder, shall receive,
without payment therefor, a nontransferable right to purchase a number of
Common shares equal to up to 2% of the total number of Common Shares to be
sold in the Conversion (which would be 26,714 shares at the maximum of the
Valuation Range, as adjusted), subject to (i) the limitation that no
person, together with such person's Associates and other persons Acting in
Concert with such person, may purchase more than 4% of the Common Shares
sold in connection with the Conversion (which would be 53,429 shares at
the maximum of the Valuation Range, as adjusted) and (ii) the limitation
that shares remain available after satisfying the subscription rights of
Eligible Account Holders, the ESOP and Supplemental Eligible Account
Holders pursuant to paragraphs (a), (b) and (c) above and subject to
adjustment by the Boards of Directors of MFC and the Association as set
forth in the Plan. 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;
provided, however, that, to the extent sufficient Common Shares are
available, each subscribing Other Eligible Member shall receive 25 Common
Shares before the remaining available Common Shares are allocated.
Subscription rights received by Other Eligible Members will be subordinate
to the subscription rights of Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders.
The Board of Directors may reject any one or more subscriptions if, based
upon the Board of Directors' interpretation of applicable regulations, such
subscriber is not entitled to the shares for which he or she has subscribed or
if the sale of shares subscribed for would be in violation of any applicable
statutes, regulations or rules.
The Association 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) a small
number of persons otherwise eligible to subscribe for shares under the Plan
resides in such country or state; (ii) 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 MFC 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 (iii) such registration or
qualification would be impracticable for reasons of cost or otherwise.
The term "resident," as used herein with respect to the Subscription
Offering, means any person who, on the date of submission of an Order Form,
maintained a bona fide residence within a jurisdiction in which the Common
Shares are being offered for sale. If a person is a business entity, the
person's residence shall be the location of the principal place of business. If
the person is a personal benefit plan, the residence of the beneficiary shall be
the residence of the plan. In the case of all other benefit plans, the
residence of the trustee shall be the residence of the plan. In all cases, the
determination of a subscriber's residency shall be in the sole discretion of the
Association and MFC.
COMMUNITY OFFERING
Concurrently with the Subscription Offering, the Association is hereby
offering Common Shares in the Community Offering subject to the limitations set
forth below and to the extent such shares remain available after the
satisfaction of all subscriptions received in the Subscription Offering. If
subscriptions are received in the Subscription Offering for up to 1,335,725
Common Shares, Common Shares may not be available in the Community Offering.
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THE COMMUNITY OFFERING MAY BE TERMINATED AT ANY TIME AFTER ORDERS FOR AT
LEAST 1,335,725 COMMON SHARES HAVE BEEN RECEIVED BUT IN NO EVENT LATER THAN 45
DAYS AFTER THE SUBSCRIPTION EXPIRATION DATE, OR MAY 1, 1997, UNLESS EXTENDED BY
THE ASSOCIATION AND MFC WITH THE APPROVAL OF THE OTS AND THE DIVISION, IF
NECESSARY. IN ACCORDANCE WITH THE PLAN, THE OFFERING MAY NOT BE EXTENDED BEYOND
MARCH 24, 1999.
In the event shares are available for the Community Offering, each person,
together with any Associate or groups Acting in Concert, may purchase in the
Community Offering up to 2% of the Common Shares sold in connection with the
Conversion (which would be 26,714 shares at the maximum of the Valuation Range,
as adjusted). 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 MFC and the Association, subject to the following:
(i) Preference will be given to natural persons who are residents
of Hamilton County, Ohio, the county in which the offices of the
Association are located;
(ii) Orders received in the Community Offering will first be filled
up to 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 MFC and the Association to
accept or reject such purchases in whole or in part.
The term "resident," as used herein with respect to the Community
Offering, means any natural person who, on the date of submission of an Order
Form, maintains a bona fide residence within, as appropriate, Hamilton County,
Ohio, or a jurisdiction in which the Common Shares are being offered for sale.
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. No
fractional shares will be issued.
Currently, each Eligible Account Holder, Supplemental Eligible Account
Holder and Other Eligible Member in the Subscription Offering, and each person,
together with his Associates and persons Acting in Concert, in the Community
Offering, may purchase up to 2% of the Common Shares (which would be 26,714
shares at the maximum of the Valuation Range, as adjusted), subject to the
limitation that no person, together with such person's Associates and others
with whom such person may be Acting in Concert, may purchase more than 4% of the
Common Shares sold in connection with the Conversion (which would be 53,429
shares at the maximum of the Valuation Range, as adjusted). Such limitation does
not apply to the ESOP. Subject to applicable regulations but without further
approval of the members of the Association, the purchase limitation may be
increased or decreased after the commencement of the Offering in the sole
discretion of the Boards of Directors of MFC and the Association. If such
amount is increased, persons who subscribed for the maximum amount will be given
the opportunity to increase their subscriptions up to the then applicable
limits, subject to the rights and preferences of any person who has priority
subscription rights. In the event that the purchase limitation is decreased
after commencement of the Subscription Offering, the order of any person who
subscribed for the maximum number of Common Shares shall be decreased by the
minimum amount necessary so that such person shall be in compliance with the
then maximum number of Common Shares permitted to be subscribed for by such
person.
"Acting in Concert" is defined as "knowing participation in a joint
activity or independent conscious parallel action towards a common goal" or "a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose." Persons shall be presumed to be Acting in Concert
with each other if: (i) both are purchasing Common Shares in the Conversion and
are (a) executive officers, directors, trustees, or any one who performs, or
whose nominee or representative performs, a similar policy making function at a
company (other than the Association or MFC) or principal business units or
subsidiaries of a company, or (b) any person who directly or indirectly owns or
controls 10% or more of the stock of a company (other than the Association or
MFC); or (ii) one person provides credit to the other for the purchase of Common
Shares or is instrumental in obtaining that credit. In addition, if a person is
presumed to be Acting in Concert with another person, then the person is
presumed to Act in Concert with anyone else who is, or is presumed to be, acting
in concert with that other person.
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For purposes of the Plan, (i) the directors of the Association are not
deemed to be Acting in Concert solely by reason of their membership on the Board
of Directors of the Association, and (ii) an associate of a person (an
"Associate") is: (a) any corporation or organization (other than the
Association) 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 Association. Executive officers and directors of the
Association and their Associates may not purchase, in the aggregate, more than
35% of the total number of Common Shares sold in the Conversion. 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 Association.
Purchases of Common Shares in the Offering are also subject to the change
in control regulations which restrict direct and indirect purchases of 10% or
more of the stock of any savings association by any person or group of persons
acting in concert, under certain circumstances. See "RESTRICTIONS ON
ACQUISITION OF MFC AND THE ASSOCIATION AND RELATED ANTI-TAKEOVER PROVISIONS -
Federal Law and Regulation."
After the Conversion, Common Shares, except for Common Shares purchased by
officers and directors of MFC and the Association, will be freely transferable,
subject to OTS and Division regulations. See "Restrictions on Transferability
of Common Shares by Officers and Directors."
MARKETING PLAN
The offering of the Common Shares is made only pursuant to this
Prospectus, which is available to all eligible subscribers by mail. Additional
copies are available at the offices of the Association. See "ADDITIONAL
INFORMATION." Officers and directors of the Association 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 MFC or the Association unless such information is also set
forth in this Prospectus, nor will they render investment advice. MFC will rely
on Rule 3a4-1 under the Securities Exchange Act of 1934 (the "Exchange Act"),
and sales of Common Shares will be conducted within the requirements of Rule
3a4-1, which will permit officers, directors and employees of MFC and the
Association to participate in the sale of Common Shares. No officer, director
or employee of MFC or the Association will be compensated in connection with his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Shares.
To assist MFC and the Association in marketing the Common Shares, the
Association has retained the services of Webb, a broker-dealer registered with
the SEC and member of the National Association of Securities Dealers, Inc.
("NASD"). Webb will assist the Association in (i) training and educating the
Association's employees regarding the mechanics and regulatory requirements of
the conversion process; (ii) conducting information meetings for subscribers and
other potential purchasers; and (iii) keeping records of all stock
subscriptions. For providing these services, the Association has agreed to pay
Webb (a) a management fee of $25,000, all of which has been paid, and (b) a
marketing fee of 1.5% of the aggregate dollar amount of Common Shares sold in
the Subscription Offering and the Community Offering, excluding shares sold by
Selected Brokers (as defined below), if any, and shares purchased by the ESOP
and directors, officers, and employees of the Association and members of their
immediate families. The management fee will be deducted from the marketing fee.
Webb will also receive a fee of $6,500 for the performance of conversion agent
and other data processing duties, which Webb shall subcontract. Webb is not
obligated to purchase any Common Shares.
The Association has also agreed to reimburse Webb for its legal fees and
disbursements in an amount not to exceed $25,000. The Association and MFC have
also agreed to indemnify Webb, under certain circumstances, against liabilities
and expenses (including legal fees) arising out of or based upon untrue
statements or omissions contained in the materials used in the Offering or in
various documents submitted to regulatory authorities in respect of the
Conversion, including liabilities under the Securities Act of 1933, as amended
(the "Act").
SELECTED BROKERS
If Common Shares remain available after the satisfaction of all
subscriptions received in the Subscription Offering, Webb may enter into an
agreement with certain brokers (the "Selected Brokers") to assist in the sale of
Common Shares in the Community Offering. If Selected Brokers are used, Webb
will receive commissions of no more than 5.5% of the aggregate purchase price of
the Common Shares sold in the Community Offering by the Selected Brokers, and
Webb will
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pay to the Selected Brokers a portion of the 5.5% commission pursuant to
selected dealer agreements. During the Community Offering, Selected Brokers may
only solicit indications of interest from their customers to place orders with
the Association as of a certain date (the "Order Date") for the purchase of
Common Shares. When and if the Association believes that enough indications of
interest and orders have been received in the Community Offering to consummate
the Conversion, Webb will request, as of the Order Date, Selected Brokers to
submit orders to purchase shares for which they have previously received
indications of interest from the customers. Selected Brokers will send
confirmations of the orders to such customers on the next business day after the
Order Date. Selected Brokers will debit the accounts of their customers on the
date which will be three business days from the Order Date (the "Settlement
Date"). On the Settlement Date, funds received by Selected Brokers will be
remitted to the Association. It is anticipated that the Conversion will be
consummated on the Settlement Date. However, if consummation is delayed after
payment has been received by the Association from Selected Brokers, funds will
earn interest at the passbook rate, currently an annual percentage yield of
2.75%, until the completion of the offering. Funds will be returned promptly in
the event the Conversion is not consummated.
EFFECT OF EXTENSION OF COMMUNITY OFFERING
If the Community Offering extends beyond 45 days after the Subscription
Expiration Date, persons who have subscribed for Common Shares in the
Subscription Offering or in the Community Offering will receive a written notice
that until a date specified in the notice, they have the right to increase,
decrease or rescind their subscriptions or orders for Common Shares. Any person
who does not affirmatively elect to continue his subscription or elects to
rescind his subscription during any such extension will have all of his funds
promptly refunded with interest. Any person who elects to decrease his
subscription during any such extension shall have the appropriate portion of his
funds promptly refunded with interest.
USE OF ORDER FORMS
Subscriptions for Common Shares in the Subscription Offering and in the
Community Offering may be made only by completing and submitting an Order Form.
Any person who desires to subscribe for Common Shares in the Subscription
Offering or the Community Offering must do so by delivering to the Association
by mail or in person, prior to 4:30 p.m., Eastern Time, on March 17, 1997, a
properly executed and completed Order Form, together with full payment of the
subscription price of $10 for each Common Share for which subscription is made.
ANY ORDER FORM WHICH IS NOT RECEIVED BY THE ASSOCIATION PRIOR TO 4:30 P.M.,
EASTERN TIME, ON MARCH 17, 1997, OR FOR WHICH FULL PAYMENT HAS NOT BEEN RECEIVED
BY THE ASSOCIATION PRIOR TO SUCH TIME, WILL NOT BE ACCEPTED. PHOTOCOPIES,
TELECOPIES OR OTHER REPRODUCTIONS OF ORDER FORMS WILL NOT BE ACCEPTED. See
"ADDITIONAL INFORMATION." THE FAILURE TO DELIVER A PROPERLY EXECUTED ORIGINAL
ORDER FORM AND FULL PAYMENT IN A MANNER BY WHICH THEY ARE ACTUALLY RECEIVED BY
MFC NO LATER THAN 4:30 P.M. ON THE SUBSCRIPTION EXPIRATION DATE WILL PRECLUDE
THE PURCHASE OF COMMON SHARES IN THE OFFERING.
AN EXECUTED ORDER FORM, ONCE RECEIVED BY MFC, MAY NOT BE MODIFIED, AMENDED
OR RESCINDED WITHOUT THE CONSENT OF MFC, UNLESS (i) THE COMMUNITY OFFERING IS
NOT COMPLETED WITHIN 45 DAYS AFTER THE SUBSCRIPTION EXPIRATION DATE OR (ii) THE
FINAL VALUATION OF THE ASSOCIATION, AS CONVERTED, IS LESS THAN $8,585,000 OR
MORE THAN $13,357,250. IF EITHER OF THOSE EVENTS OCCUR, PERSONS WHO HAVE
SUBSCRIBED FOR COMMON SHARES IN THE SUBSCRIPTION OFFERING OR ORDERED COMMON
SHARES IN THE COMMUNITY OFFERING WILL RECEIVE WRITTEN NOTICE THAT, UNTIL A DATE
SPECIFIED IN THE NOTICE, THEY HAVE A RIGHT TO AFFIRM, INCREASE, DECREASE OR
RESCIND THEIR SUBSCRIPTIONS OR ORDERS. ANY PERSON WHO DOES NOT AFFIRMATIVELY
ELECT TO CONTINUE HIS SUBSCRIPTION OR ORDER OR ELECTS TO RESCIND HIS
SUBSCRIPTION OR ORDER DURING ANY SUCH EXTENSION WILL HAVE ALL OF HIS FUNDS
PROMPTLY REFUNDED WITH INTEREST. ANY PERSON WHO ELECTS TO DECREASE HIS
SUBSCRIPTION OR ORDER 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% OF THE COMMON SHARES,
PERSONS WHO HAVE SUBSCRIBED FOR 2% OF THE COMMON SHARES WILL BE GIVEN THE
OPPORTUNITY TO INCREASE THEIR SUBSCRIPTIONS.
PAYMENT FOR COMMON SHARES
Payment of the subscription or order price for all Common Shares for which
subscription or order is made must accompany all completed Order Forms in order
for subscriptions or orders 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
made payable to the Association; or (iii) by authorization of withdrawal from
deposit accounts in the Association (other than non-self-directed IRAs). The
Association cannot lend money or otherwise extend credit to any person to
purchase Common Shares, other than the ESOP.
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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 Association on such account at the Association's passbook savings account
rate, currently annual percentage yield of 2.75%, 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 deposit accounts, including
certificates of deposit, are provided in the Order Form. Once a withdrawal has
been authorized, none of the designated withdrawal amount may be used by a
subscriber for any purpose other than to purchase Common Shares, unless the
Conversion is terminated. All sums authorized for withdrawal will continue to
earn interest at the contract rate for such account or certificate until the
completion or termination of the Conversion. Interest penalties for early
withdrawal applicable to certificate accounts will be waived in the case of
withdrawals authorized for the purchase of Common Shares. If a partial
withdrawal from a certificate account results in a balance less than the
applicable minimum balance requirement, the certificate will be canceled and the
remaining balance will earn interest at the Association's passbook rate
subsequent to the withdrawal.
Persons who are beneficial owners of IRAs maintained at the Association do
not personally have subscription rights related to such account. The account
itself, however, may have subscription rights. In order to utilize funds in an
IRA maintained at the Association, the funds must be transferred to a
self-directed IRA that permits the funds to be invested in stock. There will be
no early withdrawal or IRS penalties for such transfer. The beneficial owner of
the IRA 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 at the
Association to subscribe for Common Shares should contact the Conversion
Information Center at (513) 521-8711 for instructions and assistance.
Subscriptions and orders will not be filled by the Association until
subscriptions and orders have been received in the Offering for up to 858,500
Common Shares, the minimum point of the Valuation Range. If the Conversion is
terminated, all funds delivered to the Association for the purchase of Common
Shares will be returned with interest, and all charges to deposit accounts will
be rescinded. If subscriptions and orders are received for at least 858,500
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 or orders have been accepted. The funds on
deposit with the Association for the purchase of Common Shares will be withdrawn
and paid to MFC 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, the
ESOP 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 Association and MFC and their Associates and persons with whom
they may be deemed to be Acting in Concert:
<TABLE>
<CAPTION>
Name Total shares (2) Percent of total offering (1) Aggregate purchase price (2)
- ---- ------------ ------------------------- ------------------------
<S> <C> <C> <C>
Robert Gandenberger 2,000 0.20% $ 20,000
L. Craig Martin 40,400 4.00 404,000
John T. Larimer (3) 20,200 2.00 202,000
Rae Skirvin Larimer (3) 15,200 1.50 152,000
R. C. Meyerenke 2,500 0.25 25,000
Edgar H. May 5,000 0.50 50,000
Una Schaeperklaus (3) 5,000 0.50 50,000
Wilbur H. Tisch 5,000 0.50 50,000
Kathleen A. White 500 0.05 5,000
Julie M. Bertsch 5,000 0.50 50,000
Thomas A. Gerdes 3,000 0.30 30,000
------ ------ ----------
All directors and executive
officers as a group (11 persons) 103,800 10.28% $1,038,000
------- ------ ----------
------- ------ ----------
</TABLE>
_____________________________
(footnotes on next page)
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(1) Assumes that 1,010,000 Common Shares, the mid-point of the Valuation
Range, will be sold in connection with the Conversion 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) Amounts under "Total shares" and "Aggregate purchase price" may
increase in the event that more than 1,010,000 Common Shares are sold
in connection with the Conversion.
(3) John T. Larimer is Rae Skirvin Larimer's spouse and Una Schaeperklaus'
sister-in-law. Rae Skirvin Larimer and Una Schaeperklaus are sisters.
All purchases by executive officers and directors of the Association 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 will be based on the pro
forma market value of the shares as determined by an independent appraisal of
the Association. Keller, a firm which evaluates and appraises financial
institutions, was retained by the Association to prepare an appraisal of the
estimated pro forma market value of the Association as converted. Keller will
receive a fee of $17,000 for its appraisal and one update. Such amount includes
out-of-pocket expenses.
Keller was selected by the Board of Directors of the Association because
Keller has extensive experience in the valuation of thrift institutions,
particularly in the mutual-to-stock conversion context. The Board of Directors
interviewed Keller's principal, reviewed the credentials of Keller's appraisal
personnel and obtained references and recommendations from other companies which
have engaged Keller. Keller is certified by the OTS as a mutual-to-stock
conversion appraiser. The Association 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
Association and the economic and demographic conditions in the Association's
existing market area; the quality and depth of the Association's management and
personnel; certain historical financial and other information relating to the
Association; a comparative evaluation of the operating and financial statistics
of the Association with those of other thrift institutions; the aggregate size
of the Offering; the impact of the Conversion on the Association'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 Association, 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 Association and the comparable group on specific factors. The net
Conversion proceeds are included for purposes of determining the pro forma book
value of the Association. The book value method focuses on the Association'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 Association is likely to trade, based on the multiple of earnings at which a
comparable group of thrift institutions trades. The comparable group consisted
of 10 thrift institutions located in the Midwest which had similar operating and
financial characteristics to the Association. In calculating the price to
earnings ratio, Keller used the Association's core earnings for the year ended
December 31, 1996. The use of core earnings eliminates items which are not
generated by the principal business activities of the Association. The price to
assets method does not consider the Association's financial condition or
earnings. Consequently, it is not heavily relied on in valuing financial
institutions. In determining the reasonableness and adequacy of the appraisal,
the Board of Directors reviewed and considered the foregoing methodology and the
appropriateness of the assumptions used by Keller in the preparation of the
appraisal.
The Pro Forma Value of the Association, as converted, determined by Keller,
is $1,010,000 as of January 27, 1997. The Valuation Range established in
accordance with the Plan is $8,585,000 to $11,615,000, which, based upon a per
share offering price of $10, will result in the sale of between 858,500 and
1,161,500 Common Shares. The total number of Common Shares sold in the
Conversion will be determined in the discretion of the Board of Directors, based
on the Valuation Range. Pro
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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 Association is higher or lower than the Pro
Forma Value, but is nevertheless within the Valuation Range, MFC will make an
appropriate adjustment by raising or lowering the total number of Common Shares
sold in the Conversion consistent with the final Valuation Range. If, due to
changing market conditions, the final valuation is less than $8,585,000 or more
than $11,615,000, subscribers will be given a 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 ASSOCIATION. KELLER DID
NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED
BY THE ASSOCIATION, NOR DID KELLER VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES
OF THE ASSOCIATION OR MFC. THE VALUATION CONSIDERS THE ASSOCIATION ONLY AS A
GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION
VALUE OF THE ASSOCIATION. 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 West Madison Street, Suite 1300, Chicago,
Illinois 60606; at the offices of the Division, 77 S. High Street, Columbus,
Ohio 43215; and at the offices of the Association.
RESTRICTIONS ON REPURCHASE OF COMMON SHARES
OTS regulations generally prohibit MFC 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 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 and will, under certain circumstances, permit
repurchases of more than 5% during a twelve-month period. In addition, after
such a repurchase, the Association's regulatory capital must equal or exceed all
regulatory capital requirements. Before the commencement of a repurchase
program, MFC 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 Association 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 MFC from repurchasing shares during the first
year after the Conversion if the effect thereof would cause the Association not
to meet its capital requirements.
RESTRICTIONS ON TRANSFER OF COMMON SHARES BY DIRECTORS AND OFFICERS
Common Shares purchased by directors and executive officers of MFC 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. The certificates evidencing Common Shares issued by MFC to
directors and executive officers will bear a legend giving appropriate notice of
the restriction imposed upon them. In addition, MFC will give appropriate
instructions to the transfer agent (if any) for MFC's common shares in respect
of the applicable restriction on 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 MFC or the Association, or any of their
Associates, may purchase any common shares of MFC 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 MFC or shares acquired
by any stock benefit plan of MFC or the Association.
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The Common Shares, like the stock of most public companies, are subject to
the registration requirements of the 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 MFC may be resold
without registration. Common Shares received by affiliates of MFC will be
subject to resale restrictions. An "affiliate" of MFC, 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, MFC. Rule 144
generally requires that there be publicly available certain information
concerning MFC 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 generally 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 MFC 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, such as Nasdaq SmallCap, the average weekly reported volume of
trading during the four weeks preceding the sale.
RIGHTS OF REVIEW
Any person aggrieved by a final action of the OTS which approves, with or
without conditions, or disapproves the Plan may obtain review of such action by
filing in the Court of Appeals of the United States for the circuit in which the
principal office or residence of such person is located or in the United States
Court of Appeals for the District of Columbia, a written petition praying that
the final action of the OTS be modified, terminated or set aside. Such petition
must be filed within 30 days after the date of mailing of proxy materials to the
voting members of the Association or within 30 days after the date of
publication in the Federal Register of notice of approval of the Plan by the
OTS, whichever is later.
RESTRICTIONS ON ACQUISITION OF MFC AND THE ASSOCIATION
AND RELATED ANTI-TAKEOVER PROVISIONS
GENERAL
Federal law and regulations, Ohio law, the Articles of Incorporation and
Code of Regulations of MFC, the Amended Articles of Incorporation and Amended
Constitution of the Association and certain employee benefit plans to be adopted
by MFC and the Association contain certain provisions which may deter or
prohibit a change of control of MFC and the Association. Such provisions are
intended to encourage any acquiror to negotiate the terms of an acquisition with
the Board of Directors of MFC, thereby reducing the vulnerability of MFC 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 sudden and other hostile 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
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in the Control Regulations concerning whether a group "acting in concert"
exists, including presumed action in concert among members of an "immediate
family." The Control Regulations apply to acquisitions of Common Shares in
connection with the Conversion and to acquisitions after the Conversion.
CHANGE IN CONTROL OF CONVERTED ASSOCIATIONS. 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 MFC or the Association 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 MFC or the Association if the person
holds any combination of stock and revocable and/or irrevocable proxies of MFC
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 MFC enabling the acquirer (a) to elect one-third or more of the
directors, (b) to cause MFC or the Association's shareholders to approve the
acquisition or corporate reorganization of MFC, or (c) to exert a controlling
influence on a material aspect of the business operations of MFC or the
Association, 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 MFC or the Association or any
underwriter or selling group acting on behalf of MFC or the Association, (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 MFC or the Association by a corporation whose ownership is or will
be substantially the same as the ownership of MFC or the Association 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 MFC or the
Association 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 MFC or the Association.
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 MFC.
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.
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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 MFC 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
MFC (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.
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 MFC
RESTRICTION ON ACQUISITION OF MORE THAN 10% OF THE COMMON SHARES. The
Articles of Incorporation of MFC provide that for five years after the effective
date of the Conversion, no person, except the ESOP, may offer to acquire or
acquire the beneficial ownership of more than 10% of any class of outstanding
equity securities of MFC. If such a prohibited acquisition occurs, the
securities owned by such person in excess of the 10% limit may not be voted on
any matter submitted to the shareholders of MFC. The term "person" is defined
as an individual, a group acting in concert, a corporation, a partnership, an
association, a joint stock company, a trust, an unincorporated organization or
similar company, a syndicate or any other group formed for the purpose of
acquiring, holding or disposing of the equity securities of MFC, but does not
include an employee stock ownership plan for the benefit of the employees of the
Association or MFC. The term "offer" includes every offer to buy or otherwise
acquire, solicitation of an offer to sell, tender offer for, or request or
invitation for tenders of MFC's Common Shares. The ability of management or any
other person to solicit revocable proxies from shareholders will not be
restricted by such 10% limit.
ABILITY OF THE BOARD OF DIRECTORS TO ISSUE ADDITIONAL SHARES. The Articles
of Incorporation of MFC permit the Board of Directors of MFC to issue additional
common shares. The ability of the Board of Directors to issue such additional
shares may create impediments to gaining, or otherwise discourage persons from
attempting to gain, control of MFC.
MATTERS REQUIRING ENLARGED SHAREHOLDER VOTE. Article Sixth of the Articles
of Incorporation of MFC 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 MFC are required to approve any such
matters:
(1) A proposed amendment to the Articles of Incorporation of
MFC;
(2) A proposed Amendment to the Code of Regulations of MFC;
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(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 MFC with or into one or
more other corporations;
(5) A proposed combination or majority share acquisition
involving the issuance of shares of MFC 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 MFC; or
(7) A proposed dissolution of MFC.
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 MFC have been
amended 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 of MFC.
EMPLOYEE BENEFIT PLANS
The Stock Option Plan, the ESOP and the RRP also may be deemed to have
certain anti-takeover effects. The ESOP may become the owner of a sufficient
percentage of the total outstanding common shares of MFC that the decision
whether to tender the shares held by the ESOP to a potential acquiror may
prevent a takeover. In addition, the acquisition by the directors and executive
officers of MFC of common shares of MFC upon grants under the RRP or upon the
exercise of options granted under the Stock Option Plan will have the effect of
giving the directors and executive officers greater influence in votes on
proposed takeover attempts and proxy contests. See "DESCRIPTION OF AUTHORIZED
SHARES" and "MANAGEMENT - Employee Stock Ownership Plan; - Stock Option Plan;
and - Recognition and Retention Plan and Trust."
DESCRIPTION OF AUTHORIZED SHARES
GENERAL
The Articles of Incorporation of MFC authorize the issuance of 4,000,000
common shares, without par value, and 1,000,000 preferred shares, without par
value. Upon receipt by MFC of the purchase price therefor and subsequent
issuance thereof, each Common Share issued in the Conversion will be fully paid
and nonassessable. Notwithstanding the foregoing, until payments are received
by MFC from the ESOP in accordance with the terms of a loan agreement to be
entered into by and between MFC and the ESOP, Common Shares issued to the ESOP
for which payment in money has not been received will not be fully paid and
non-assessable. The Common Shares 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.
None of the preferred shares of MFC will be issued in connection with the
Conversion. The Board of Directors of MFC is authorized, without shareholder
approval, to issue preferred shares and to fix and state the designations,
preferences or other special rights of such shares and the qualifications,
limitations and restrictions thereof. The preferred shares may rank prior
-73-
<PAGE>
to the common shares as to dividend rights, liquidation preferences or both.
Each holder of preferred shares will be entitled to one vote for each preferred
share held of record on all matters submitted to a vote of shareholders. The
issuance of preferred shares and any conversion rights which may be specified by
the Board of Directors for the preferred shares could adversely affect the
voting power of holders of the common shares. The Board of Directors has no
present intention to issue any of the preferred shares.
The following is a summary description of the rights of the common shares
of MFC, including the material express terms of such shares as set forth in
MFC's Articles of Incorporation.
LIQUIDATION RIGHTS
In the event of the complete liquidation or dissolution of MFC, the holders
of the Common Shares will be entitled to receive all assets of MFC available for
distribution, in cash or in kind, after payment or provision for payment of (i)
all debts and liabilities of MFC, (ii) any accrued dividend claims, and (iii)
any interests in the Liquidation Account payable as a result of a liquidation of
the Association. See "THE CONVERSION - Liquidation Account."
VOTING RIGHTS
The holders of the Common Shares will possess exclusive voting rights in
MFC. 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 MFC AND THE ASSOCIATION - Articles of
Incorporation of MFC -- 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 MFC 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 Repurchase of Common Shares" for a
description of the limitations on the repurchase of stock by MFC; "THE
CONVERSION - Restrictions on Transfer 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 MFC AND THE ASSOCIATION AND RELATED ANTI-TAKEOVER PROVISIONS" for
information regarding regulatory restrictions on acquiring Common Shares.
REGISTRATION REQUIREMENTS
MFC will register its common shares pursuant to Section 12(g) of the
Exchange Act prior to or promptly upon the completion of the Conversion and will
not deregister such shares for a period of three years following the completion
of the Conversion. Upon such registration, the proxy and tender offer rules,
insider trading restrictions, annual and periodic reporting and other
requirements of the Exchange Act will apply to MFC.
-74-
<PAGE>
LEGAL MATTERS
Certain legal matters pertaining to the Common Shares and the federal and
Ohio tax consequences of the Conversion are being passed upon for MFC and the
Association by Vorys, Sater, Seymour and Pease, Cincinnati, Ohio. Certain legal
matters are being passed upon for Webb by its counsel, Luse Lehman Gorman
Pomerenk & Schick, A Professional Corporation, Washington, D.C.
EXPERTS
Keller has consented to the publication herein of the summary of its letter
to the Association setting forth its opinion as to the estimated pro forma
market value of the Association as converted and to the use of its name and
statements with respect to it appearing herein.
The financial statements of the Association as of September 30, 1996 and
1995, and for each of the three years in the period ended September 30, 1996,
have been included herein in reliance upon the report of Grant Thornton LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
MFC has filed with the SEC a Registration Statement on Form S-1 (File No.
333-10347) under the Act with respect to the Common Shares offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the SEC. Such information may be inspected at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies may be obtained from the SEC at prescribed
rates.
The Association has filed an Application for Conversion (the "Application")
with the OTS and the Division. This document 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 West Madison, Suite 1300, Chicago, Illinois 60606; and at
the offices of the Division, 77 S. High Street, Columbus, Ohio 43215.
-75-
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
FINANCIAL STATEMENTS
CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL CONDITION F-3
STATEMENTS OF EARNINGS F-4
STATEMENTS OF RETAINED EARNINGS F-5
STATEMENTS OF CASH FLOWS F-6
NOTES TO FINANCIAL STATEMENTS F-8
The financial statements of Market Financial Corporation are not presented as
such Corporation was not active during any of the periods presented.
SCHEDULES: All schedules are omitted as the required information is either not
applicable or is contained in the financial statements.
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
The Market Building and Saving Company
We have audited the accompanying statements of financial condition of The Market
Building and Saving Company as of September 30, 1996 and 1995, and the related
statements of earnings, retained earnings, and cash flows for the years ended
September 30, 1996, 1995 and 1994. These financial statements are the
responsibility of the Company'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 The Market Building and Saving
Company as of September 30, 1996 and 1995, and the results of its operations and
its cash flows for the years ended September 30, 1996, 1995 and 1994, in
conformity with generally accepted accounting principles.
As more fully discussed in Notes A-1 and B, the Company changed its method of
accounting for certain investments and mortgage-backed securities as of October
1, 1994.
Grant Thornton LLP
Cincinnati, Ohio
November 22, 1996
F-2
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 512 $ 669
Federal funds sold 2,627 2,727
Interest-bearing deposits in other financial institutions 943 617
------ ------
Cash and cash equivalents 4,082 4,013
Certificates of deposit in other financial institutions 7,040 7,139
Investment securities - at amortized cost, approximate market
value of $9,071 and $8,023 at September 30,
1996 and 1995 9,062 7,984
Investment securities designated as available for sale - at market 712 504
Mortgage-backed securities - at cost, approximate
market value of $1,612 and $2,313 at
September 30, 1996 and 1995 1,549 2,211
Loans receivable - net 21,996 23,018
Office premises and equipment - at depreciated cost 168 121
Federal Home Loan Bank stock - at cost 364 339
Accrued interest receivable 339 341
Prepaid expenses and other assets 196 64
Prepaid federal income taxes 39 -
------ ------
Total assets $45,547 $45,734
------ ------
------ ------
LIABILITIES AND RETAINED EARNINGS
Deposits $37,282 $38,056
Advances by borrowers for taxes and insurance 50 57
Accrued interest payable 117 134
Other liabilities 273 13
Accrued federal income taxes - 14
Deferred federal income taxes 311 307
------ ------
Total liabilities 38,033 38,581
Commitments and contingencies - -
Retained earnings - substantially restricted 7,063 6,839
Unrealized gain on securities designated as available for sale,
net of related tax effects 451 314
------ ------
Total retained earnings 7,514 7,153
------ ------
Total liabilities and retained earnings $45,547 $45,734
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands)
1996 1995 1994
Interest income
Loans $1,867 $1,960 $1,799
Mortgage-backed securities 169 196 250
Investment securities 590 309 201
Interest-bearing deposits and other 635 717 658
----- ----- ------
Total interest income 3,261 3,182 2,908
Interest expense
Deposits 1,758 1,622 1,478
----- ----- ------
Net interest income before provision for
losses on loans 1,503 1,560 1,430
Provision for losses on loans 13 - -
----- ----- ------
Net interest income after provision for
losses on loans 1,490 1,560 1,430
Other operating income 7 8 12
General, administrative and other expense
Employee compensation and benefits 462 376 352
Occupancy and equipment 114 122 71
Federal deposit insurance premiums 327 92 94
Franchise taxes 100 101 93
Loss on sale of real estate acquired through
foreclosure - - 23
Other operating 150 170 203
----- ----- ------
Total general, administrative and
other expense 1,153 861 836
----- ----- ------
Earnings before income taxes 344 707 606
Federal income taxes
Current 187 210 171
Deferred (67) 30 23
----- ----- ------
120 240 194
----- ----- ------
NET EARNINGS $ 224 $ 467 $ 412
----- ----- ------
----- ----- ------
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
STATEMENTS OF RETAINED EARNINGS
Years ended September 30, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
UNREALIZED GAINS
ON SECURITIES
DESIGNATED AS TOTAL
RETAINED AVAILABLE RETAINED
EARNINGS FOR SALE EARNINGS
<S> <C> <C> <C>
Balance at October 1, 1993 $5,960 $- $5,960
Net earnings for the year ended September 30, 1994 412 - 412
----- --- -----
Balance at September 30, 1994 6,372 - 6,372
Cumulative effect of change in method of accounting
for securities designated as available for sale - net
of related tax effects - 238 238
Unrealized gains on securities designated as
available for sale, net of related tax effects - 76 76
Net earnings for the year ended September 30, 1995 467 - 467
----- --- -----
Balance at September 30, 1995 6,839 314 7,153
Unrealized gains on securities designated as available
for sale, net of related tax effects - 137 137
Net earnings for the year ended September 30, 1996 224 - 224
----- --- -----
Balance at September 30, 1996 $7,063 $451 $7,514
----- --- -----
----- --- -----
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 224 $ 467 $ 412
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of premiums and discounts on
investments and mortgage-backed securities, net (54) 2 23
Depreciation and amortization 31 25 11
Amortization of deferred loan origination fees (29) (20) (58)
Provision for losses on loans 13 - -
Loss on sale of real estate acquired through foreclosure - - 23
Federal Home Loan Bank stock dividends (25) (21) (16)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 2 (106) (92)
Accrued interest payable (17) 31 18
Prepaid expenses and other assets (132) 36 (13)
Other liabilities 260 1 (13)
Federal income taxes
Current (53) 52 (59)
Deferred (67) 30 23
----- ----- ------
Net cash provided by operating activities 153 497 259
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 660 221 1,202
Proceeds from maturity of investment securities 4,300 1,500 1,902
Proceeds from sale of real estate acquired through foreclosure - - 55
Loan disbursements (2,583) (2,358) (10,662)
Principal repayments on loans 3,621 3,018 6,008
Purchase of investment securities designated as held to maturity (5,322) (3,587) (4,300)
Purchase of office equipment (78) (34) (4)
(Increase) decrease in certificates of deposit in other
financial institutions - net 99 (1,000) (4,350)
----- ----- ------
Net cash provided by (used in) investing activities 697 (2,240) (10,149)
Cash flows provided by (used in) financing activities:
Net decrease in deposits (774) (618) (2,029)
Advances by borrowers for taxes and insurance (7) (6) 10
----- ----- ------
Net cash used in financing activities (781) (624) (2,019)
----- ----- ------
Net increase (decrease) in cash and cash equivalents
(balance carried forward) 69 (2,367) (11,909)
----- ----- ------
</TABLE>
F-6
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents (balance brought forward) $ 69 $(2,367) $(11,909)
Cash and cash equivalents at beginning of year 4,013 6,380 18,289
------ ------ -------
Cash and cash equivalents at end of year $4,082 $ 4,013 $ 6,380
------ ------ -------
------ ------ -------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 159 $ 155 $ 152
------ ------ -------
------ ------ -------
Interest on deposits $ 1,775 $ 1,591 $ 1,460
------ ------ -------
------ ------ -------
Supplemental disclosure of noncash investing activities:
Transfer of securities to an available for sale designation
upon adoption of SFAS No. 115 $ - $ 29 $ -
------ ------ -------
------ ------ -------
Unrealized gain on securities designated as available for sale,
net of related tax effects $ 137 $ 314 $ -
------ ------ -------
------ ------ -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES
The Market Building and Saving Company (the Company) is a state-chartered
mutual financial institution with two offices located in Hamilton County,
Ohio.
The Company conducts a general banking business in southwestern Ohio which
consists of attracting deposits from the general public and applying those
funds to the origination of loans for consumer and residential purposes.
The Company's profitability is significantly dependent on net interest
income, which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e. customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Company can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are
outside of management's control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles (GAAP) and general accounting
practices within the financial services industry. In preparing financial
statements in accordance with GAAP, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from such estimates.
The following is a summary of significant accounting policies which, with
the exception of the policy described in Note A-1, have been consistently
applied in the preparation of the accompanying financial statements.
1. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Prior to October 1, 1994, investment securities and mortgage-backed
securities were stated at the unpaid principal balance (cost), adjusted for
unamortized premiums and discounts. Premiums and discounts on investment
securities and mortgage-backed securities are amortized and accreted to
operations using the interest method over the estimated life of the
investment security or of the underlying loans collateralizing the
securities, respectively. Investment securities and mortgage-backed
securities held for portfolio investments were carried at cost, rather than
the lower of cost or market, as it was management's intent, and the Company
had the ability to hold the securities until maturity. Investment
securities and mortgage-backed securities which would be held for
indefinite periods of time, or used as part of the Company's
asset/liability management strategy, or that may be sold in response to
changes in interest rates, prepayment risk or the perceived need to
increase regulatory capital were classified as held for sale and were
carried at the lower of aggregate cost or market.
F-8
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
1. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting
for Certain Investments in Debt and Equity Securities". SFAS No. 115
requires that investments be categorized as held-to-maturity, trading, or
available for sale. Securities classified as held-to-maturity are carried
at cost only if the Company has the positive intent and ability to hold
these securities to maturity. Trading securities and securities designated
as available for sale are carried at fair value with resulting gains or
losses recorded to operations or retained earnings, respectively. The
Company adopted SFAS No. 115 for the fiscal year beginning October 1, 1994.
The effect of initial adoption was to increase retained earnings by
approximately $238,000, which represented the unrealized gain on securities
designated as available for sale, net of applicable deferred federal income
taxes. The amount of unrealized gains on securities designated as
available for sale had increased to a net unrealized gain of approximately
$451,000 and $314,000 at September 30, 1996 and 1995, respectively.
Realized gains and losses on the sale of investment and mortgage-backed
securities are recognized using the specific identification method.
2. LOANS RECEIVABLE
Loans are stated at the principal amount outstanding, adjusted for deferred
loan origination fees and the allowance for loan losses. 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.
The Company accounts for loan origination fees in accordance with SFAS No.
91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases".
Pursuant to the provisions of SFAS No. 91, origination fees received from
loans, net of direct origination costs, are deferred and amortized to
interest income using the level yield method, giving effect to actual loan
prepayments. Additionally, SFAS No. 91 generally limits the definition of
loan origination costs to direct costs attributable to originating a loan,
i.e., principally actual personnel costs.
F-9
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
3. ALLOWANCE FOR LOSSES ON LOANS
It is the Company's policy to provide valuation allowances for estimated
losses on loans based on past loss experience, current trends in the level
of delinquent and problem loans, loan concentrations, changes in the
composition of the loan portfolio, 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 areas. When the collection of a loan becomes doubtful, or
otherwise troubled, the Company records a charge-off 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
allowances are increased by a charge to earnings and decreased by
charge-offs (net of recoveries).
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." This Statement, which was amended by SFAS No. 118
as to certain income recognition provisions and financial statement
disclosure requirements, requires that impaired loans be measured based
upon the present value of expected future cash flows discounted at the
loans' effective interest rate or, as an alternative, at the loans'
observable market price or fair value of the collateral. SFAS No. 114 was
effective for years beginning after December 15, 1994 (October 1, 1995, as
to the Company). The Company adopted SFAS No. 114 effective October 1,
1995, without material effect on financial condition or results of
operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Company
considers its investment in one-to-four family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Company's investment in impaired nonresidential and multifamily residential
real estate loans, such loans are generally collateral dependent and, as a
result, are carried as a practical expedient at the lower of cost or fair
value. 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.
At September 30, 1996, the Company had no loans that would be defined as
impaired under SFAS No. 114.
F-10
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
4. OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation is provided on the straight-line method over the useful lives
of assets, estimated to be thirty to forty years for the buildings, thirty
years for building improvements and five to ten years for furniture and
equipment. An accelerated depreciation method is used for tax reporting
purposes.
5. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. The loan loss allowance is charged
for any write down in the loan's carrying value to fair value at the date
of acquisition. Loss provisions are recorded if the properties' fair value
subsequently declines below the value determined at the recording date.
Costs relating to development and improvement of property are capitalized
up to the fair value of the property, whereas, those relating to holding
the property are charged to expense.
6. FEDERAL INCOME TAXES
The Company accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109
established financial accounting and reporting standards for the effects of
income taxes that result from the Company's activities within the current
and previous years. Pursuant to the provisions of SFAS No. 109, a deferred
tax liability or deferred tax asset is computed by applying the expected
statutory tax rates to net taxable or deductible differences between the
tax basis of an asset or liability and its reported amount in the financial
statements that will result in taxable or deductible amounts in future
periods. Deferred tax assets are recorded only to the extent that the
amount of net deductible temporary differences or carryforward attributes
may be utilized against current period earnings, carried back against prior
years' earnings, offset against taxable temporary differences reversing in
future periods, or utilized to the extent of management's estimate of
future taxable income. A valuation allowance is provided for deferred tax
assets to the extent that the value of net deductible temporary differences
and carryforward attributes exceeds management's estimates of taxes payable
on future taxable income. Deferred tax liabilities are provided on the
total amount of net temporary differences taxable in the future.
Deferral of federal income taxes results primarily from the practice of
preparing tax returns on the cash basis of accounting, while the financial
statements are prepared on the accrual basis of accounting, and from
different methods of accounting for deferred loan origination fees, Federal
Home Loan Bank stock dividends and the Company's general loan loss
allowance. Additionally, a temporary difference is also recognized for
depreciation utilizing accelerated methods for federal income tax purposes.
F-11
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
7. PENSION PLAN
The Company has a defined benefit pension plan which covers substantially
all employees who have completed one year of service. This plan will be
terminated in fiscal 1997 upon receipt of all required regulatory
approvals. The pension plan is funded with an annuity policy using the
individual level premium method. It is the Company's policy to fund
pension costs accrued up through the date of termination. Annual pension
expense for the fiscal years ended September 30, 1996, 1995 and 1994,
totaled approximately $38,000, $24,000 and $25,000, respectively. The
required disclosure under Statement of Financial Accounting Standards No.
87, "Accounting for Pensions," has not been provided herein based on
materiality.
8. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents includes
cash and due from banks, federal funds sold and interest-bearing deposits
in other financial institutions with original terms to maturity of less
than ninety days.
9. ADVERTISING
Advertising costs are expensed when incurred.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both assets
and liabilities whether or not recognized in the statement of financial
condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Because of the
judgment and subjective considerations required in determining appropriate
and reasonable assumptions, the derived fair value estimates cannot be
substantiated by comparison to independent markets. Further, the amounts
which could be realized in immediate settlement of the instruments could
vary significantly from the fair value estimate depending upon bulk versus
individual settlements or sales as well as other factors. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate net fair
value amounts presented do not represent the underlying value of the
Company.
F-12
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments at
September 30, 1996:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in the
statement of financial condition for cash and cash equivalents are
deemed to approximate fair value.
CERTIFICATES OF DEPOSIT IN OTHER FINANCIAL INSTITUTIONS: The carrying
amounts presented in the statement of financial condition for
certificates of deposit in other financial institutions are deemed to
approximate fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
LOANS RECEIVABLE: The loan portfolio has been segregated into
categories with similar characteristics, such as one-to-four family
residential, home equity lines of credit, multi-family residential and
nonresidential real estate. These loan categories were further
delineated into fixed-rate and adjustable-rate loans. The fair values
for the resultant loan categories were computed via discounted cash
flow analysis, using current interest rates offered for loans with
similar terms to borrowers of similar credit quality. For loans on
deposit accounts, and consumer and other loans, fair values were
deemed to equal the historic carrying values. The historical carrying
amount of accrued interest on loans is deemed to approximate fair
value.
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in the
statement of financial condition is deemed to approximate fair value
since a quoted market price is not available on Federal Home Loan Bank
stock.
DEPOSITS: The fair value of passbook and club accounts and money
market demand accounts are deemed to approximate the amount payable on
demand at September 30, 1996. Fair values for fixed-rate certificates
of deposit have been estimated using a discounted cash flow
calculation using the interest rates currently offered for deposits of
similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT: For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between
current levels of interest rates and committed rates. The difference
between the fair value and notional amount of outstanding loan
commitments at September 30, 1996, was not material.
F-13
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Company's financial instruments at September 30, 1996, are as
follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
(In thousands)
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,082 $ 4,082
Certificates of deposit in other financial institutions 7,040 7,040
Investment securities held to maturity 9,062 9,071
Investment securities designated as available for sale 712 712
Mortgage-backed securities 1,549 1,612
Loans receivable - net 21,996 21,844
Federal Home Loan Bank stock 364 364
------ ------
$44,805 $44,725
------ ------
------ ------
Financial liabilities:
Deposits $37,282 $37,285
Advances by borrowers for taxes and insurance 50 50
------ ------
$37,332 $37,335
------ ------
------ ------
</TABLE>
11. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
reporting requirements of a publicly-held financial institution.
F-14
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and approximate market values of investment securities
at September 30 are summarized as follows:
1996 1995
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
(In thousands)
HELD TO MATURITY:
U.S. Government
agency obligations
Due within:
One year $4,865 $4,881 $4,288 $4,290
One to three years 4,197 4,190 3,696 3,733
----- ----- ----- -----
Total investment securities
held to maturity 9,062 9,071 7,984 8,023
AVAILABLE FOR SALE:
FHLMC stock 29 712 29 504
----- ----- ----- -----
Total investment securities $9,091 $9,783 $8,013 $8,527
----- ----- ----- -----
----- ----- ----- -----
At September 30, 1996, the market value appreciation of the Company's held
to maturity investment portfolio in excess of the cost carrying value
totaled $9,000, consisting of gross unrealized gains of $20,000 and gross
unrealized losses of $11,000.
At September 30, 1995, the market value appreciation of the Company's held
to maturity investment portfolio in excess of the cost carrying value
totaled $39,000, consisting of gross unrealized gains of $44,000 and gross
unrealized losses of $5,000.
Mortgage-backed securities at September 30, 1996 and 1995, were comprised
solely of Government National Mortgage Association participation
certificates. At September 30, 1996 and 1995, the market value
appreciation of the Company's mortgage-backed securities in excess of cost
was approximately $63,000 and $102,000, respectively, comprised solely of
gross unrealized gains. Maturities of mortgage-backed securities are due
ratably over the next fifteen fiscal years based on the contractual
repayment terms of the underlying loans.
F-15
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
1996 1995
(In thousands)
Real estate mortgage loans
One-to-four family $20,404 $21,093
Multifamily 407 465
Nonresidential 1,168 1,431
Construction - 146
Passbook loans 96 118
------ ------
22,075 23,253
Less:
Undisbursed portion of loans in process - 146
Deferred loan origination fees 27 50
Allowance for loan losses 52 39
------ ------
$21,996 $23,018
------ ------
------ ------
The Company's lending efforts have historically focused on residential real
estate loans, which comprised approximately $20.7 million, or 94%, of the
total loan portfolio at September 30, 1996 and $21.5 million, or 93%, of
the total loan portfolio at September 30, 1995. Generally, such loans have
been underwritten on the basis of no more than an 80% loan-to-value ratio,
which has historically provided the Company with adequate collateral
coverage in the event of default. Nevertheless, the Company, as with any
lending institution, is subject to the risk that residential real estate
values could deteriorate in its primary lending area of southwestern Ohio,
thereby impairing collateral values. However, management is of the belief
that real estate values in the Company's primary lending area are presently
stable.
In the ordinary course of business, the Company has granted loans to some
of the officers, employees and their related interests. Related party
loans are made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions
with unrelated persons and do not involve more than normal risk of
collectibility. The aggregate dollar amount of these loans was
approximately $211,000 and $187,000 at September 30, 1996 and 1995,
respectively.
Additionally, the Company has paid a retainer of $20,000 to a related party
for legal services during each of the fiscal years ended September 30, 1996
and 1995.
F-16
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses at September 30 is as
follows:
1996 1995 1994
(In thousands)
Beginning balance $39 $ 39 $ 39
Provision for loan losses 13 - -
-- ---- ----
Ending balance $52 $ 39 $ 39
-- ---- ----
-- ---- ----
At September 30, 1996, the Company's allowance for loan losses was
comprised primarily of a general loan loss allowance, which is includible
as a component of regulatory risk-based capital.
Nonperforming loans totaled approximately $139,000 at September 30, 1996.
There were no nonperforming loans at September 30, 1995 or 1994.
As of and for the year ended September 30, 1996, the Company had no loans
which would be defined as impaired under SFAS No. 114. As a result, there
was no interest income recognized or received on impaired loans for the
year ended September 30, 1996.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment is comprised of the following:
SEPTEMBER 30,
1996 1995
(In thousands)
Land $ 34 $ 34
Buildings and improvements 161 156
Furniture and equipment 226 153
--- ---
421 343
Less accumulated
depreciation 253 222
-- ---- ----
$168 $121
-- ---- ----
-- ---- ----
F-17
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
DEPOSIT TYPE AND
WEIGHTED-AVERAGE 1996 1995
INTEREST RATE AMOUNT % AMOUNT %
(Dollars in thousands)
Passbook accounts -
2.83% in 1996 and 3.09% in 1995 $11,027 29.6 $11,008 28.9
Club accounts - 5.08% in 1996 and
5.07% in 1995 51 .1 54 .1
Money market demand accounts -
3.09% in 1996 and 1995 3,380 9.1 3,857 10.2
------ ----- ------ -----
Total demand accounts 14,458 38.8 14,919 39.2
Certificates of deposit -
5.74% in 1996 and 5.04% in 1995 22,824 61.2 23,137 60.8
------ ----- ------ -----
Total deposit accounts $37,282 100.0 $38,056 100.0
------ ----- ------ -----
------ ----- ------ -----
Interest expense on deposits for the fiscal year ended September 30 is
summarized as follows:
1996 1995 1994
(In thousands)
Passbook and club accounts $ 324 $ 343 $ 433
Money market accounts 104 119 148
Certificates of deposit 1,330 1,160 897
----- ----- -----
$1,758 $1,622 $1,478
----- ----- -----
----- ----- -----
Maturities of outstanding certificates of deposit are summarized as follows
at September 30:
1996 1995
(In thousands)
Less than six months $ 6,295 $ 23
Six months to one year 11,281 12,033
One year to three years 5,248 11,081
------ ------
$22,824 $23,137
------ ------
------ ------
F-18
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE G - FEDERAL INCOME TAXES
The provision for federal income taxes on earnings differs from that
computed at the statutory corporate tax rate as follows at September 30:
1996 1995 1994
(In thousands)
Federal income taxes computed
at 34% statutory rate $117 $240 $206
Increase (decrease) resulting from:
Other 3 - (12)
---- ---- ----
Federal income tax provision per
financial statements $120 $240 $194
---- ---- ----
v ---- ---- ----
Effective tax rate 34.9% 34.0% 32.0%
---- ---- ----
---- ---- ----
The composition of the Company's net deferred tax liability is as follows
at September 30:
1996 1995
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY
DIFFERENCES AT STATUTORY RATE: (In thousands)
Deferred tax assets:
Deferred loan origination fees $ 6 $ 17
General loan loss allowance 17 12
SAIF recapitalization assessment 84 -
Other 5 1
---- ----
Total deferred tax assets 112 30
Deferred tax liabilities:
Unrealized gain on securities designated as
available for sale (232) (161)
Difference between cash and accrual basis of accounting (94) (92)
Federal Home Loan Bank stock dividends (60) (51)
Difference between book and tax depreciation (29) (24)
Percentage of earnings bad debt deduction (8) (8)
Other - (1)
---- ----
Total deferred tax liabilities (423) (337)
---- ----
Net deferred tax liability $(311) $(307)
---- ----
---- ----
F-19
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE G - FEDERAL INCOME TAXES (continued)
The Company was allowed a special bad debt deduction based on a percentage
of earnings, generally limited to 8% of otherwise taxable income, or the
amount of qualifying and nonqualifying loans outstanding and subject to
certain limitations based on aggregate loans and savings account balances
at the end of the calendar year. The Company was subject to such
limitations during the fiscal years ended September 30, 1996, 1995 and 1994
and, therefore, was precluded from utilizing the percentage of earnings bad
debt deduction. If the amounts that qualified as deductions for federal
income tax purposes are later used for purposes other than for bad debt
losses, including distributions in liquidation, such distributions will be
subject to federal income taxes at the then current corporate income tax
rate. Retained earnings at September 30, 1996, includes approximately $1.3
million for which federal income taxes have not been provided. The amount
of the unrecognized deferred tax liability relating to the cumulative
percentage of earnings bad debt deduction totaled approximately $430,000 at
September 30, 1996. See Note I for additional information regarding the
Company's future percentage of earnings bad debt deductions.
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments
involve, to varying degrees, elements of credit and interest-rate risk in
excess of the amount recognized in the statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of
the Company's involvement in such financial instruments.
The Company'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
Company uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At September 30, 1996 and 1995, the Company had outstanding commitments of
approximately $149,000 and $397,000 to originate fixed-rate residential
real estate loans at interest rates ranging from 7.88% to 8.38% and 7.50%
to 7.75%, respectively. In the opinion of management, the loan commitments
equaled or exceeded prevalent market interest rates as of those dates, and
such commitments have been underwritten on the same basis as the existing
loan portfolio. Management believes that all commitments will be funded
through cash flow from operations and existing excess liquidity. Fees
received in connection with these commitments have not been recognized in
earnings.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral on loans may vary but the preponderance of loans
granted generally include a mortgage interest in real estate as security.
F-20
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE I - RETAINED EARNINGS AND REGULATORY CAPITAL
The Company is subject to minimum regulatory capital standards promulgated
by the Office of Thrift Supervision (OTS). Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors. The minimum capital standards generally
require the maintenance of regulatory capital sufficient to meet each of
three tests, hereinafter described as the tangible capital requirement, the
core capital requirement and the risk-based capital requirement. The
tangible capital requirement provides for minimum tangible capital (defined
as retained earnings 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.
An OTS proposal, if adopted in present form, would increase the core
capital requirement to a range of 4% - 5% of adjusted total assets for
substantially all savings associations. Management anticipates no material
change to the Company's present excess regulatory capital position as a
result of this proposed change in the regulatory capital requirement. 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 Company multiplies the
value of each asset on its statement of financial condition by a defined
risk-weighted factor, e.g., one-to-four family residential loans carry a
risk-weighted factor of 50%.
Management believes as of September 30, 1996, that the Company meets all
regulatory capital requirements to which it is subject:
<TABLE>
<CAPTION>
RISK-
TANGIBLE CORE BASED
CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting principles $7,514 $7,514 $7,514
Unrealized gain on securities
designated as available for sale, net (451) (451) (451)
General valuation allowances - - 50
----- ----- -----
Regulatory capital computed 7,063 15.7 7,063 15.7 7,113 49.1
Minimum capital requirement 673 1.5 1,346 3.0 1,159 8.0
----- ---- ----- ---- ----- ----
Regulatory capital - excess $6,390 14.2 $5,717 12.7 $5,954 41.1
----- ---- ----- ---- ----- ----
----- ---- ----- ---- ----- ----
</TABLE>
F-21
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE I - RETAINED EARNINGS AND REGULATORY CAPITAL (continued)
At September 30, 1996, the Company met all regulatory requirements for
classification as a "well-capitalized" institution. A "well-capitalized"
institution must have risk-based capital of 10.0%, and core capital of
5.0%. The Company's capital exceeded the minimum required amounts for
classification as a "well-capitalized" institution by $5.7 million and $4.8
million, respectively.
The deposit accounts of the Company and of other savings associations are
insured up to certain defined limits by the FDIC in the Savings Association
Insurance Fund ("SAIF"). The reserves of the SAIF were below the level
required by law, because a significant portion of the assessments paid into
the fund were used to pay the cost of prior thrift failures. The deposit
accounts of commercial banks are insured by the FDIC in the Bank Insurance
Fund ("BIF"), except to the extent such banks have acquired SAIF deposits.
The reserves of the BIF met the level required by law in May 1995. As a
result of the respective reserve levels of the funds, deposit insurance
assessments paid by healthy savings associations exceeded those paid by
healthy commercial banks by approximately $.19 per $100 in deposits in
1995. In 1996, no BIF assessments were required for healthy commercial
banks except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provided for a
special assessment totaling $.657 per $100 of SAIF deposits held at March
31, 1995, in order to increase SAIF reserves to the level required by law.
The Company had $37.6 million in deposits at March 31, 1995, resulting in
an after-tax charge to operations of $162,000 in fiscal 1996. The
recapitalization legislation will reduce federal deposit insurance premiums
from $.23 per $100 in deposits to $.065 per $100 in deposits, effective
January 1, 1997.
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 1999, assuming the elimination of the thrift
charter or of the separate federal regulation of thrifts prior to the
merger of the deposit insurance funds. Under other proposed legislation,
the Company would be regulated as a bank under federal laws which would
subject it to the more restrictive activity limits imposed on national
banks. Under separate legislation, the Company is required to recapture
approximately $25,000 of its bad debt reserve as taxable income, which
represents the post-1987 additions to the reserve, and will be unable to
utilize the percentage of earnings method to compute its reserve in the
future. The Company has provided deferred taxes for this amount and will
be permitted to amortize the recapture of its bad debt reserve over six
years.
NOTE J - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
In April 1996, the Company's Board of Directors adopted an overall plan of
conversion and reorganization (the Plan) whereby the Company will convert
to the stock form of ownership, followed by the issuance of all the
Company's outstanding stock to a newly formed holding company, Market
Financial Corporation. Pursuant to the Plan, as amended, Market Financial
Corporation will offer for sale between 858,500 and 1,335,725 common shares
at $10.00 per share to the Company's depositors, members of the community,
and a newly formed Employee Stock Ownership Plan (ESOP). The costs of
issuing the common stock will be
F-22
<PAGE>
THE MARKET BUILDING AND SAVING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE J - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM (continued)
deferred and deducted from the sale proceeds of the offering. If the
conversion is unsuccessful, all deferred costs will be charged to
operations. At September 30, 1996, the Company had incurred deferred
conversion costs totaling approximately $122,000. The transaction is
subject to approval by regulatory authorities and members of the Company.
At the completion of the conversion to stock form, the Company will
establish a liquidation account in the amount of retained earnings
contained in the final offering circular. The liquidation account will be
maintained for the benefit of eligible savings account holders who maintain
deposit accounts in the Company after conversion.
In the event of a complete liquidation (and only in such event), each
eligible member will be entitled to receive a liquidation distribution from
the liquidation account in the amount of the then current adjusted balance
of deposit accounts held, before any liquidation distribution may be made
with respect to common stock. Except for the repurchase of stock and
payment of dividends by the Company, the existence of the liquidation
account will not restrict the use or application of such retained earnings.
The Company may not declare, pay a cash dividend on, or repurchase any of
its common stock, if the effect thereof would cause retained earnings to be
reduced below either the amount required for the liquidation account or the
regulatory capital requirements for SAIF insured institutions.
F-23
<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 MFC. 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.............................................................1
SELECTED FINANCIAL INFORMATION AND
OTHER DATA.................................................................6
RISK FACTORS...................................................................8
USE OF PROCEEDS...............................................................12
MARKET FOR COMMON SHARES......................................................12
DIVIDEND POLICY...............................................................13
REGULATORY CAPITAL COMPLIANCE.................................................14
CAPITALIZATION................................................................15
PRO FORMA DATA................................................................16
SUMMARY STATEMENTS OF EARNINGS................................................19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................20
SUMMARY OF RECENT DEVELOPMENTS................................................29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RECENT DEVELOPMENTS.......................................................31
THE BUSINESS OF THE ASSOCIATION...............................................31
MANAGEMENT....................................................................44
REGULATION....................................................................49
TAXATION......................................................................55
THE CONVERSION................................................................57
RESTRICTIONS ON ACQUISITION OF MFC AND THE
ASSOCIATION AND RELATED ANTI-TAKEOVER
PROVISIONS................................................................70
DESCRIPTION OF AUTHORIZED SHARES..............................................73
REGISTRATION REQUIREMENTS.....................................................74
LEGAL MATTERS.................................................................75
EXPERTS.......................................................................75
ADDITIONAL INFORMATION........................................................75
FINANCIAL STATEMENTS.........................................................F-1
UNTIL 25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS OBLIGATION IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
Up to 1,161,500 Common Shares
MARKET FINANCIAL CORPORATION
____________
PROSPECTUS
____________
CHARLES WEBB & COMPANY
February 12, , 1997
A Division of Keefe, Bruyette & Woods, Inc.
