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PROSPECTUS
DELPHOS CITIZENS BANCORP, INC.
(Proposed Holding Company for Citizens Bank of Delphos, now known as Citizens
Federal Savings and Loan Association of Delphos)
Up to 1,782,500 Shares of Common Stock
$10.00 Purchase Price Per Share
Delphos Citizens Bancorp, Inc. (the "Company" or "Delphos Citizens"), a
Delaware corporation, is offering up to 1,782,500 shares of its common stock,
par value $.01 per share (the "Common Stock"), in connection with the
conversion of Citizens Federal Savings and Loan Association of Delphos (the
"Association" or "Citizens Federal") from a federally chartered mutual
savings and loan association to a federally chartered stock savings bank to
be known as Citizens Bank of Delphos pursuant to the Association's plan of
conversion (the "Plan" or "Plan of Conversion"). The simultaneous conversion
of the Association to stock form, the issuance of the Association's stock to
the Company and the offer and sale of the Common Stock by the Company are
herein referred to as the "Conversion." In certain circumstances, the
Company may increase the amount of Common Stock offered hereby to 2,049,875
shares. See Footnote 5 to the table below.
FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE FOR COMMON STOCK, PLEASE
CALL THE STOCK INFORMATION CENTER AT 419-692-3627 OR 419-692-3628.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 15.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT ACCOUNTS OR DEPOSITS AND
ARE NOT FEDERALLY INSURED OR GUARANTEED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER
FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ESTIMATED UNDERWRITING
SUBSCRIPTION AND OTHER FEES AND ESTIMATED
PRICE(1) EXPENSES(2) NET PROCEEDS(3)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share(4). . . . . . . . . . . . . . $10.00 $0.33 $9.67
- ------------------------------------------------------------------------------------------------------
Total Minimum(1). . . . . . . . . . . . $13,175,000 $480,000 $12,695,000
- ------------------------------------------------------------------------------------------------------
Total Midpoint(1) . . . . . . . . . . . $15,500,000 $513,000 $14,987,000
- ------------------------------------------------------------------------------------------------------
Total Maximum(1). . . . . . . . . . . . $17,825,000 $544,000 $17,281,000
- ------------------------------------------------------------------------------------------------------
Total Maximum, as adjusted(5) . . . . . $20,498,750 $581,000 $19,917,750
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by
Keller & Company, Inc. ("Keller") dated August 9, 1996, which states
that the estimated aggregate pro forma market value of the Common
Stock ranged from $13.2 million to $17.8 million, with a midpoint of
$15.5 million (the "Valuation Range"). Based on the Valuation Range,
the Boards of Directors of the Company and the Association established
the estimated price range of $13.2 million to $17.8 million (the
"Estimated Price Range"), or between 1,317,500 and 1,782,500 shares of
Common Stock at a price of $10.00 per share (the "Purchase Price") to
be paid for each share of Common Stock subscribed for or purchased in
the offerings. Keller's appraisal is based upon estimates and
projections that are subject to change, and the valuation must not be
construed as a recommendation as to the advisability of purchasing
such shares nor that a purchaser will thereafter be able to sell such
shares at or above the Purchase Price. See "The Conversion - Stock
Pricing" and "- Number of Shares to be Issued."
(2) Consists of the estimated costs to the Association and the Company
arising from the Conversion, including estimated fixed expenses and
marketing fees to be paid to Charles Webb & Company ("Webb"), A
Division of Keefe, Bruyette & Woods, Inc. ("KBW") in connection with
the Subscription and Community Offerings as hereafter defined, which
fees are estimated to be $172,673 and $235,744 at the minimum and the
maximum of the Estimated Price Range, respectively. See "The
Conversion - Marketing and Underwriting Arrangements." Webb may be
deemed to be an underwriter, and certain amounts to be paid to Webb
may be deemed to be underwriting fees for purposes of the Securities
Act of 1933, as amended (the "Securities Act"). See "Pro Forma Data"
for the assumptions used to arrive at these estimates. The actual
fees and expenses may vary from the estimates.
(3) Actual net proceeds may vary substantially from estimated amounts
depending on the number of shares sold in each of the offerings and
other factors. Includes the purchase of shares of Common Stock by the
Citizens Bank of Delphos Employee Stock Ownership Plan and related
trust (the "ESOP") funded by a loan from the Company to the ESOP,
which will initially be deducted from the Company's stockholders'
equity. See "Use of Proceeds," "Pro Forma Data" and "The Conversion -
Stock Pricing."
(4) Based on the midpoint of the Valuation Range. The estimated net
proceeds per share at the minimum, maximum and maximum, as adjusted,
are expected to be $9.64, $9.69 and $9.72, respectively.
(5) As adjusted to reflect the sale of up to an additional 15% of the
Common Stock which may be offered at the Purchase Price, without
resolicitation of subscribers or any right of cancellation, due to
regulatory considerations, changes in market conditions or general
financial and economic conditions. See "Pro Forma Data" and "The
Conversion - Stock Pricing." For a discussion of the distribution and
allocation of the additional shares, if any, see "The Conversion -
Subscription Offering and Subscription Rights," "- Community Offering"
and "- Limitations on Common Stock Purchases."
CHARLES WEBB & COMPANY
A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
THE DATE OF THIS PROSPECTUS IS OCTOBER 11, 1996.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK IN A SUBSCRIPTION
OFFERING (THE "SUBSCRIPTION OFFERING") HAVE BEEN GRANTED, IN ORDER OF PRIORITY,
TO EACH OF THE ASSOCIATION'S ELIGIBLE ACCOUNT HOLDERS, THE ESOP, THE
ASSOCIATION'S SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS, AND CERTAIN OTHER MEMBERS,
(EACH AS DEFINED IN THE PLAN OF CONVERSION). SUBSCRIPTION RIGHTS ARE
NON-TRANSFERABLE. PERSONS FOUND TO BE TRANSFERRING SUBSCRIPTION RIGHTS WILL BE
SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION ("OTS"). Concurrently,
and subject to the prior rights of holders of subscription rights, the Company
is offering the shares of Common Stock not subscribed for in the Subscription
Offering for sale in a community offering (the "Community Offering") to certain
members of the general public, with preference given to natural persons residing
in postal zip code 45833, which generally encompasses the city of Delphos in the
State of Ohio (the Subscription Offering and Community Offering are referred to
collectively as the "Subscription and Community Offerings"). Depending on
market conditions, the shares may be offered for sale to certain members of the
public on a best efforts basis through a syndicate of registered broker-dealers
be coordinated by Webb (the "Syndicated Community Offering") (the Subscription
and Community Offerings and the Syndicated Community Offering are referred to
collective as the "Offerings"). See "The Conversion - Subscription Offering and
Subscription Rights," "- Community Offering," "-Syndicated Community Offering"
"- Restrictions on Transfer of Subscription Rights and Shares" and
"- Limitations on Common Stock Purchases."
Except for the ESOP, which intends to subscribe for 8.0% of the total
number of shares of Common Stock issued in the Conversion, no Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member may, in their
capacity as such, subscribe in the Subscription Offering for more than 0.5%
(8,912 shares based on the issuance of 1,782,500 shares) of the total number of
shares of Common Stock offered in the Conversion; no person, together with
associates of and persons acting in concert with such person, may purchase in
the Community Offering and the Syndicated Community Offering more than 0.5%
(8,912 shares based on the issuance of 1,782,500 shares) of the total number of
shares of Common Stock offered in the Conversion; and no person, together with
associates of and persons acting in concert with such person, may purchase in
the Offerings more than the overall maximum purchase limitation of 1.0% (17,825
shares based on the issuance of 1,782,500 shares) of the total number of shares
of Common Stock to be issued in the Conversion, in each case, exclusive of any
shares issued pursuant to an increase in the Estimated Price Range of up to 15%;
provided, however, that the overall maximum purchase limitation may be increased
and the amount that may be subscribed for may be increased or decreased in the
sole discretion of the Association or the Company without further approval of
the Association's members. See "The Conversion - Subscription Offering and
Subscription Rights," - "Community Offering" and "- Limitations on Common Stock
Purchases." The minimum purchase is 25 shares. The Company and the Association
reserve the right, in their absolute discretion, to accept or reject, in whole
or in part, any or all subscriptions in the Community Offering, either at the
time of receipt of an order or as soon as practicable following the termination
of the Offerings.
The Association has engaged Webb to consult with and advise the Company and
the Association with respect to the Offerings and Webb has agreed to assist the
Company with the solicitation of subscriptions and purchase orders for shares of
Common Stock in the Offerings. Neither Webb nor any other registered
broker-dealer is obligated to take or purchase any shares of Common Stock in the
Offerings. The Association and the Company will pay a fee to Webb which will be
based on the aggregate Purchase Price of the Common Stock sold in the Offerings.
The Company and the Association have agreed to indemnify Webb against certain
liabilities arising under the Securities Act. See "The Conversion - Marketing
and Underwriting Arrangements."
THE SUBSCRIPTION AND COMMUNITY OFFERINGS WILL TERMINATE AT 5:00 P.M.,
DELPHOS, OHIO TIME, ON NOVEMBER 11, 1996 (THE "EXPIRATION DATE") UNLESS
EXTENDED BY THE ASSOCIATION AND THE COMPANY, WITH APPROVAL OF THE OTS, IF
NECESSARY. Subscriptions paid by cash, check, bank draft or money order will
be placed in a segregated account at the Association and will earn interest
at the Association's passbook rate of interest from the date of receipt until
completion or termination of the Conversion. Payments authorized by
withdrawal from deposit accounts at the Association will continue to earn
interest at the contractual rate until the Conversion is completed or
terminated; these funds will be otherwise unavailable to the depositor until
such time. Orders submitted are irrevocable until the completion of the
Conversion; provided that, if the Conversion is not completed within 45 days
after the close of the Subscription and Community Offerings, unless such
period has been extended with the consent of the OTS, if necessary, all
subscribers will have their funds returned promptly with interest, and all
withdrawal authorizations will be cancelled. If an extension of time has
been granted, all subscribers will be notified of such extension, and of any
rights to confirm their subscriptions, or to modify or rescind their
subscriptions and have their funds returned promptly with interest, and of
the time period within which the subscriber must notify the Association of
his intention to confirm, modify or rescind his subscription. A
resolicitation of subscribers will also be made if the pro forma market value
of the Common Stock is either more then 15% above the maximum of the
Estimated Price Range or less than the minimum of the Estimated Price Range.
If an affirmative response to any resolicitation is not received by the
Company from a subscriber, such order will be rescinded and all funds will be
returned promptly with interest. Such extensions may not go beyond November
14, 1998. See "The Conversion - Subscription Offering and Subscription
Rights," "- Community Offering" and "- Procedure for Purchasing Shares in
Subscription and Community Offerings."
The Company has received conditional approval from the Nasdaq National
Market ("Nasdaq") to have its Common Stock quoted on the Nasdaq under the symbol
"DCBI" upon completion of the Conversion. Prior to this offering there has not
been a public market for the Common Stock, and there can be no assurance that an
active and liquid trading market for the Common Stock will develop or that the
Common Stock will trade at or above the Purchase Price. The absence or
discontinuance of a market may have an adverse impact on both the price and
liquidity of the Common Stock. See "Risk Factors - Absence of Market for Common
Stock" and "Market for Common Stock." KBW has advised the Company that upon
completion of the Conversion, it intends to act as a market maker in the Common
Stock, depending on the volume of trading and subject to compliance with
applicable laws and regulatory requirements. Webb also will assist the Company
in obtaining additional market makers.
<PAGE>
[MAP GOES HERE]
<PAGE>
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
AND CONSOLIDATED FINANCIAL STATEMENTS OF THE ASSOCIATION AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS.
DELPHOS CITIZENS BANCORP, INC.
Delphos Citizens is a Delaware corporation recently organized by the
Association for the purpose of acquiring all of the capital stock of the
Association to be issued in the Conversion. Immediately following the
Conversion, the only significant assets of the Company will be the capital stock
of the Association, the Company's loan to the ESOP, and the net proceeds of the
Offerings retained by the Company. The Company will purchase all of the capital
stock of the Association to be issued upon the Conversion in exchange for 50% of
the net proceeds with the remaining net proceeds to be retained by the Company.
Net proceeds retained by the Company will be used for general business
activities, including a loan by the Company directly to the ESOP to enable the
ESOP to purchase 8.0% of the Common Stock issued in the Conversion. On an
interim basis, the net proceeds are expected to be invested in short to
intermediate-term investment securities and mortgage-backed securities. See
"Use of Proceeds," "Business of the Association" and "Regulation - Holding
Company Regulation."
The Company's executive offices are located at the home office of the
Association at 114 East 3rd Street, Delphos, Ohio, 45833 (419) 692-2010.
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION OF DELPHOS
The Association conducts business from its home office in Delphos, Ohio.
At May 31, 1996, the Association had total assets of $91.7 million, loans
receivable of $69.6 million, total deposits of $79.1 million, and total equity
of $11.4 million. The Association's deposits are insured up to the maximum
allowable amount by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC").
The Association is a community-oriented savings institution and, as such,
its primary business consists of accepting deposits from customers within its
market area and making conventional mortgage loans secured by one -to
four-family residences within its market area, which it retains within its
portfolio. At May 31, 1996, 83.35% of Citizens Federal's total gross loan
portfolio consisted of one- to four-family mortgage loans. To a significantly
lesser extent, the Association invests in construction and land loans (primarily
to individual borrowers for the construction of owner-occupied residential
properties), commercial real estate loans, multi-family loans and consumer
loans. In addition to its lending activities, Citizens Federal also invests in
mortgage-backed and investment securities, primarily those insured or guaranteed
by governmental agencies. At May 31, 1996, mortgage-backed and other securities
totalled $16.2 million, or 17.7% of total assets, and total loans totalled $69.6
million, or 75.9% of total assets. Citizens Federal's primary source of funds
is deposit accounts, which totalled $79.1 million, or 86.3% of total liabilities
at May 31, 1996. Certificate accounts represented 72.2% of the Association's
total deposits.
Financial highlights of Citizens Federal include the following:
- ASSET QUALITY. The Association has historically maintained low levels of
non-performing assets, primarily due to management's emphasis upon one- to
four-family mortgage lending and conservative underwriting standards. The
Association's ratio of non-performing assets to total assets was 0.35% at
May 31, 1996 and was 0.40%, 0.33%, 0.41%, 0.50% and 0.76% at
4
<PAGE>
September 30, 1995, 1994, 1993, 1992 and 1991, respectively. See "Business
of the Association - Lending Activities - Non-Performing Assets." The
Association's total loan charge-offs for the five-year period ended
September 30, 1995 amounted to $22,000.
- - PROFITABILITY. The Association has maintained consistent levels of
profitability, earning $582,000 for the eight months ended May 31, 1996 and
$944,000, $912,000, $971,000, $909,000 and $709,000 for the years ended
September 30, 1995, 1994, 1993, 1992 and 1991. Net earnings for the year
ended September 30, 1996 will be adversely affected by a $323,000 charge
(after tax) to be recorded as of September 30, 1996 to reflect the effect
of recently enacted legislation imposing a special assessment on all
SAIF-insured deposits. See "Risk Factors-Recapitalization of SAIF and Its
Impact on SAIF Premiums." The Association's return on average assets for
the eight months ended May 31, 1996 was 0.97% (annualized) and has averaged
1.22% over the five year period ended September 30, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition, the Association's return on average equity was an
annualized 7.68% for the eight months ended May 31, 1996. However, based
upon the amount of the estimated net proceeds of the offerings, it is
anticipated that the Company will achieve returns on equity in future
periods which will be lower than historical returns on equity of the
Association and which may be lower than that of its peer group.
- - CAPITAL STRENGTH. The Association's regulatory capital ratios exceeded
required minimum levels at May 31, 1996 with tangible, core and risk-based
capital ratios of 12.41%, 12.41% and 27.01%, respectively, as compared to
required minimum ratios of 1.50%, 3.00% and 8.00%, respectively. Assuming
the Company utilizes 50% of the net proceeds from the sale of the Common
Stock at the midpoint of the Estimated Price Range to purchase the
Association's capital stock, the Association's pro forma tangible, core
and risk-based capital levels at May 31, 1996 would be 17.5%, 17.5%, and
39.1%, respectively. See "Regulatory Capital Compliance."
THE CONVERSION AND THE SUBSCRIPTION AND COMMUNITY OFFERINGS
On June 11, 1996, the Board of Directors of the Association adopted the
Plan of Conversion. Pursuant to the Plan, the Association is converting from
a federally chartered mutual savings and loan association to a federally
chartered stock savings bank to be known as Citizens Bank of Delphos. The
Common Stock of the Company will be offered and sold hereby and all of the
outstanding capital stock of the Association will be acquired by the Company
in exchange for 50% of the net proceeds of the Offering. The Conversion and
the Offerings are subject to OTS approval, which was received on
October 11, 1996, and approval of the Association's members at a special
meeting to be held on November 14, 1996 (the "Special Meeting"). See "The
Conversion - General."
The Association is converting to the stock form to increase its capital and
structure itself in a form used by banks, a growing number of savings
institutions and other business entities. The Conversion will enhance the
Association's ability to access capital markets, expand its current operations,
acquire other financial institutions or branch offices or diversify into other
financial services, to the extent allowable by applicable law and regulation.
See "The Conversion - Purposes of Conversion." The holding company form of
organization will provide additional flexibility to diversify the Association's
business activities through existing or newly formed subsidiaries, or through
acquisitions of or mergers with other financial institutions, or other
companies. Although there are no current arrangements, understandings or
agreements regarding any such opportunities, the Company will be better
positioned after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any such opportunities that
may arise. The holding company form of organization also provides certain
5
<PAGE>
anti-takeover protection. See "Risk Factors - Certain Anti-Takeover
Provisions." The Plan provides that the Board of Directors of the Association
may, at any time prior to the issuance of the Common Stock and for any reason,
decide not to use a holding company form. See "The Conversion - General".
Common Stock offered in the Subscription Offering will be offered in the
following order of priority: (1) depositors whose accounts with the
Association totalled $50 or more on December 31, 1994 ("Eligible Account
Holders"); (2) the ESOP; (3) depositors whose accounts with the Association
totalled $50 or more on September 30, 1996 ("Supplemental Eligible Account
Holders") ; and (4) other members of the Association, consisting of
depositors of the Association as of September 30, 1996, the voting record
date ("Voting Record Date") for the Special Meeting and borrowers with loans
outstanding as of May 20, 1996 which continue to be outstanding as of the
Voting Record Date, other than those members who otherwise qualify as
Eligible Account Holders or Supplemental Eligible Account Holders ("Other
Members"). Subject to the prior rights of holders of subscription rights,
Common Stock not subscribed for in the Subscription Offering is being
concurrently offered in the Community Offering to certain members of the
general public, with preference given to natural persons residing in postal
zip code 45833, which generally encompasses the City of Delphos in the State
of Ohio. The Company and Webb may also agree to utilize a Syndicated
Community Offering in connection with the sale of shares of Common Stock not
subscribed for in the Subscription and Community Offering. The Company and
the Association reserve the right, in their absolute discretion, to reject or
accept, in whole or in part, any orders in the Community Offering, either at
the time of receipt of an order or as soon as practicable following the
Expiration Date. If an order is rejected, the funds submitted with such
order will be returned promptly. Subscription rights will expire if not
exercised by 5:00 p.m., Delphos, Ohio Time, on November 12, 1996, unless
extended by the Association and the Company. See "The Conversion -
Subscription Offering and Subscription Rights," "- Community Offering" and "-
Marketing and Underwriting Arrangements."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), no Prospectus will be
mailed any later than five days prior to the Expiration Date or hand
delivered any later than two days prior to such date. Order forms will only
be distributed with a Prospectus. Execution of the order form will confirm
receipt of the Prospectus in accordance with Rule 15c2-8. The Association
and the Company are not obligated to accept orders not submitted on original
order forms. Order forms unaccompanied by an executed acknowledgment form
will not be accepted. Payment by check, money order, bank draft, cash or
debit authorization to an existing account at the Association must accompany
the order and acknowledgment forms. No wire transfers will be accepted. The
Association is prohibited from lending funds to any person or entity for the
purpose of purchasing shares of Common Stock in the Conversion.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, such depositors and borrowers must list all deposit
and/or loan accounts on the order form, giving all names on each account and
the account numbers. Failure to properly list all account numbers may result
in the inability of the Company or the Association to fill all or part of a
subscription order. In addition, registration of shares in a name or title
different from the names or titles listed on the account may adversely affect
such subscriber's purchase priority. See "The Conversion - Procedure for
Purchasing Shares in Subscription and Community Offerings."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
6
<PAGE>
Prior to the completion of the Conversion, no person may transfer or enter
into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan or the shares of
Common Stock to be issued upon their exercise. Each person exercising
subscription rights will be required to certify that a purchase of Common
Stock is solely for the purchaser's own account and that there is no
agreement or understanding regarding the sale or transfer of such shares.
The Company and the Association will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription
rights and will not honor orders known by them to involve the transfer of
such rights. See "The Conversion - Restrictions on Transfer of Subscription
Rights and Shares."
Following the Conversion there generally will be no restrictions on the
transfer or sale of shares by purchasers other than affiliates of the Company
and the Association. See "Regulation - Federal Securities Laws" and "The
Conversion - Certain Restrictions on Purchase or Transfer of Shares After
Conversion."
PURCHASE LIMITATIONS
The minimum purchase in the Subscription and Community Offerings is 25
shares. The ESOP intends to subscribe for 8.0% of the shares of Common Stock
issued in the Conversion pursuant to the subscription rights granted under the
Plan. No Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member, in their capacity as such, may subscribe in the Subscription
Offering for more than 0.5% (8,912 shares based on the issuance of 1,782,500
shares) of the Common Stock to be issued; no person, together with associates
of or persons acting in concert with such person, may purchase in the
Community Offering and the Syndicated Community Offering in the aggregate
more than 0.5% (8,912 shares based on the issuance of 1,782,500 shares) of
the Common Stock issued; and no person, together with associates of or
persons acting in concert with such person, may purchase in the Offerings
more than the overall maximum purchase limitation of 1.0% (17,825 shares
based on the issuance of 1,782,500 shares) of the total number of shares of
Common Stock to be issued in the Conversion, in each case, exclusive of any
shares issued pursuant to an increase in the Estimated Price Range of up to
15%. At any time during the Conversion and without further approval by the
Association's members, the Company and the Association may in their sole
discretion decrease the maximum purchase limitation below 0.5% (8,912 shares
based on the issuance of 1,782,500 shares) of the Common Stock to be issued
in the Subscription and Community Offerings. Additionally, at any time during
the Conversion and without further approval by the Association's members or
the resolicitation of subscribers, the Company and the Association may in
their sole discretion increase the overall maximum purchase limitation and/or
increase the amount that may be subscribed for in the Subscription and
Community Offerings up to 5.0% of the shares to be issued in the Conversion.
Prior to consummation of the Conversion, if the maximum purchase limitation
is increased, subscribers for the maximum amount will be, and certain other
large subscribers in the sole discretion of the Association may be, given the
opportunity to increase their subscriptions up to the then applicable limit.
See "The Conversion - Limitations on Common Stock Purchases." In the
Community Offering, a preference will be given to natural persons residing in
postal zip code 45833, which generally encompasses the City of Delphos in the
State of Ohio. See "The Conversion - Community Offering." In the event of
an increase in the Estimated Price Range, the additional shares will be
distributed and allocated to fill unfilled orders in the Subscription and
Community Offerings, with priority given to the ESOP, without any
resolicitation of subscribers, as described in "The Conversion - Subscription
Offering and Subscription Rights," "- Community Offering" and "- Limitations
on Common Stock Purchases."
7
<PAGE>
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
Federal regulations require that the aggregate purchase price of the
Common Stock to be issued in the Conversion be consistent with an independent
appraisal of the estimated pro forma market value of the Common Stock giving
effect to the Conversion. Keller & Company, Inc., an independent appraiser,
has advised the Association that in its opinion, dated August 9, 1996, the
estimated aggregate pro forma market value of the Common Stock ranged from $13
.2 million to $17.8 million, with a midpoint of $15.5 million.
THE APPRAISAL OF THE COMMON STOCK IS NOT INTENDED AND SHOULD NOT BE
CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING
SUCH STOCK NOR CAN ANY ASSURANCE BE GIVEN THAT PURCHASERS OF THE COMMON STOCK
IN THE CONVERSION WILL BE ABLE TO SELL SUCH SHARES AT OR ABOVE THE PURCHASE
PRICE AFTER THE COMPLETION OF THE CONVERSION.
Based upon the above Valuation Range, the Board of Directors of the
Association has established the Estimated Price Range of $13.2 million to $17.8
million, or between 1,317,500 and 1,782,500 shares of Common Stock at the
Purchase Price of $10.00 per share. All shares of Common Stock issued in the
Conversion will be sold at the Purchase Price of $10.00 per share, as
determined by the Association and approved by the Company. The actual number
of shares to be issued in the Conversion will be determined by the Company
and the Association based upon the final updated estimate at the completion
of the Offerings of the aggregate pro forma market value of the Common Stock
giving effect to the Conversion. The maximum of the Estimated Price Range
may be increased by up to 15% and the number of shares of Common Stock to be
issued in the Conversion may be increased up to 2,049,875 shares due to
regulatory considerations, changes in market conditions or general financial
and economic conditions. No resolicitation of subscribers will be made and
subscribers will not be permitted to modify or cancel their subscriptions
unless the gross proceeds from the sale of the Common Stock are less than the
minimum or more than 15% above the maximum of the current Estimated Price
Range. See "Risk Factors - Possible Increase in Estimated Price Range and
Number of Shares Issued," "Pro Forma Data," and "The Conversion - Stock
Pricing" and "- Number of Shares to be Issued."
USE OF PROCEEDS
Net proceeds from the sale of the Common Stock are estimated to be between
$12.7 million and $17.3 million (or $19.9 million if the Estimated Price Range
is increased by 15%) depending on the number of shares sold and the expenses
of the Conversion. See "Pro Forma Data." The Company will purchase all of
the outstanding capital stock of the Association to be issued upon Conversion
in exchange for 50% of the net proceeds with the remaining net proceeds to be
retained by the Company. In determining the amount of net proceeds to be
used for the purchase of the capital stock of the Association, consideration
was given to such factors as the regulatory capital position of the
Association (both before and after giving effect to the Conversion) and the
rules and regulations of the OTS governing the amount of proceeds which may
be retained by the Company. Net proceeds to be retained by the Company after
the purchase of the capital stock of the Association, and including the loan
to the ESOP, are estimated to be between $6.3 million and $8.6 million
(or $10.0 million if the Estimated Price Range is increased by 15%). The
Company will be unable to utilize any of the net proceeds until the close of
the Offerings.
Net proceeds retained by the Company will be used for general business
purposes, including a loan by the Company directly to the ESOP and, subject to
applicable limitations, may be used for the possible payment of dividends and
repurchases of Common Stock. The Board of Directors of the Company does not
intend to initially pay dividends on the Common Stock. The Board of Directors
may consider a policy of paying dividends on the Common Stock in the future.
No decision has been made as to the amount
8
<PAGE>
or timing of any such dividends, if any. See "Dividend Policy." Assuming the
acquisition by the ESOP of 8.0% of the shares to be issued in the Conversion,
the amount of the loan to the ESOP is estimated to be between $1.1 million
and $1.4 million (or $1.6 million if the Estimated Price Range is increased
by 15%) to be repaid over a 17 year period at an interest rate of 8.25%.
See "The Board of Directors and Management of the Association - Benefits -
Employee Stock Ownership Plan and Trust." A portion of the net proceeds
retained by the Company may also be used to acquire shares of Common Stock
in the open market to fund a performance-based stock program or programs
("Stock Programs"). Based upon a market value of $10.00 per share, the
aggregate market value of Common Stock intended to be distributed under the
Stock Programs would be $527,000 and $713,000, at the minimum and the
maximum of the Estimated Price Range, respectively. The actual value of the
Common Stock distributed under the Stock Programs will depend upon the
market value of the Common Stock at the time the shares are distributed,
which may be more or less than $10.00 per share. Consequently, no assurance
can be given as to what the actual value will be of the Common Stock
distributed under the Stock Programs. See "The Board of Directors and
Management of the Association - Benefits - Stock Programs." Funds received
by the Association from the Company's purchase of its capital stock will be
used for general business purposes. See "Business of the Association." The
Company and the Association may also use such funds to expand operations
through the acquisition or establishment of branch offices and the
acquisition of other financial institutions. Neither the Company nor the
Association has any pending agreements or understandings regarding
acquisitions of any specific financial institutions or branch offices. On
an interim basis, the net proceeds are expected to be invested in short to
intermediate-term investment securities and mortgage-backed securities. See
"Use of Proceeds."
DIVIDEND POLICY
The Board of Directors of the Company intends to consider a policy of
paying cash dividends on the Common Stock. However, no decision has been made
as to the amount or timing of such dividends, if any. See "Dividend Policy."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors. The factors discussed therein include:
Potential Impact of Changes in Interest Rates, Concentration in Real Estate
Lending in Northwestern Ohio, Increased Credit Risks Associated with
Multi-Family and Commercial Real Estate Loans, Competition, Benefits to
Management and Directors, Possible Dilutive Effect of Stock Programs and Stock
Options, Certain Anti-Takeover Provisions, Absence of Market for Common Stock,
Possible Increase in Estimated Price Range and Number of Shares Issued,
Financial Institution Regulation and Possible Legislation, Recapitalization of
SAIF and Its Impact on SAIF Premiums, Possible Adverse Income Tax Consequences
of the Distribution of Subscription Rights and Risk of Delayed Offering.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE ASSOCIATION
The selected consolidated financial and other data of the Association set
forth below is derived in part from, and should be read in conjunction with,
the Consolidated Financial Statements of the Association and Notes thereto
presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT MAY 31, ----------------------------------------------
1996(1) 1995 1994 1993 1992 1991
-------- ------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets. . . . . . . . . $ 91,697 $ 88,022 $ 82,613 $ 77,608 $ 68,322 $ 64,973
Cash and cash equivalents . . 4,830 4,257 6,331 16,969 9,628 9,162
Investment securities(2). . . 500 500 500 500 1,000 541
Mortgage-backed securities(2). 14,921 17,421 17,755 10,875 9,705 10,561
FHLB Stock - at cost. . . . . 764 726 570 543 516 488
Loans receivable, net(3). . . 69,637 64,043 56,451 47,747 46,563 43,479
Deposits . . . . . . . . . . 79,097 76,664 72,255 68,241 59,973 57,776
Total Equity. . . . . . . . . 11,367 10,799 9,855 8,943 7,972 6,739
</TABLE>
<TABLE>
<CAPTION>
FOR THE EIGHT
MONTHS ENDED
MAY 31, FOR THE YEAR ENDED SEPTEMBER 30,
------------------- ----------------------------------------------
1996(1) 1995(1) 1995 1994 1993 1992 1991
--------- -------- ------ ------ ------ ------ ------
(IN THOUSANDS)
SELECTED OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income . . . . . . . $ 4,417 $ 4,060 $ 6,217 $ 5,424 $ 5,382 $ 5,682 $ 5,801
Interest expense. . . . . . . 2,676 2,325 3,601 2,952 3,027 3,391 3,860
------- ------- ------- ------- ------- ------ -------
Net interest income . . . . 1,741 1,735 2,616 2,472 2,355 2,291 1,941
Provision for loan losses . . -- -- -- 60 25 -- --
------- ------- ------- ------- ------- ------ -------
Net interest income
after provision for
loan losses . . . . . . . 1,741 1,735 2,616 2,412 2,330 2,291 1,941
Non-interest income . . . . . 159 88 151 261 335 285 58
Non-interest expense. . . . . 1,018 885 1,342 1,284 1,230 1,057 913
------- ------- ------- ------- ------- ------ -------
Income before income taxes. . 882 938 1,425 1,389 1,435 1,519 1,086
Income taxes . . . . . . . . 300 319 481 477 464 610 377
------- ------- ------- ------- ------- ------ -------
Net income . . . . . . . . . $ 582 $ 619 $ 944 $ 912 $ 971 $ 909 $ 709
------- ------- ------- ------- ------- ------ -------
------- ------- ------- ------- ------- ------ -------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
EIGHT MONTHS ENDED AT OR FOR THE YEAR ENDED
------------------- SEPTEMBER 30,
MAY 31, MAY 31, ----------------------------------------------
1996(1) 1995(1) 1995 1994 1993 1992 1991
------- ------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER
DATA(4):
PERFORMANCE RATIOS:
Return on average assets . . . . . . .97% 1.09% 1.10% 1.14% 1.32% 1.36% 1.16%
Return on average equity . . . . . . 7.68 8.95 8.94 9.84 12.77 13.61 12.81
Average equity to average assets . . 12.59 12.22 12.30 11.62 10.30 10.01 9.05
Equity to total assets at end of period 12.40 12.00 12.27 11.93 11.52 11.67 10.37
Average interest rate spread(5). . . 2.41 2.57 2.54 2.68 2.75 2.86 2.48
Net interest margin(6) . . . . . . . 2.97 3.11 3.10 3.15 3.25 3.49 3.22
Average interest-earning assets to
average interest-bearing liabilities 112.37 112.92 112.20 112.61 111.98 112.18 111.47
Efficiency ratio(7). . . . . . . . . 58.47 51.00 51.29 51.93 52.21 46.12 47.03
Non-interest expense to average assets 1.69 1.56 1.56 1.61 1.67 1.58 1.49
REGULATORY CAPITAL RATIOS(8):
Tangible capital . . . . . . . . . . 12.41 12.00 12.27 11.93 11.52 11.67 10.37
Core capital . . . . . . . . . . . . 12.41 12.00 12.27 11.93 11.52 11.67 10.37
Risk-based capital . . . . . . . . . 27.01 28.12 27.90 28.45 27.57 26.98 23.98
ASSET QUALITY RATIOS:
Non-performing loans as a percent of
gross loans receivable(9)(10). . . 0.43 0.30 0.55 0.46 0.63 0.70 0.67
Non-performing assets as a percent of
total assets(10) . . . . . . . . . 0.35 0.21 0.40 0.33 0.41 0.50 0.76
Allowance for loan losses as a percent of
gross loans receivable(9). . . . . 0.13 0.15 0.14 0.16 0.06 0.06 0.05
Allowance for loan losses as a percent of
non-performing loans(10). . . . . 29.19 49.45 26.02 34.17 10.16 8.43 7.63
</TABLE>
- ----------------------------
(1) Financial information at May 31, 1996 and for the eight month periods
ended May 31, 1996 and May 31, 1995 is derived from unaudited financial
data, but in the opinion of management, reflects all adjustments
(consisting only of normal recurring adjustments) which are necessary to
present fairly the results for such interim periods. Ratio data for the
eight month periods ended May 31, 1996 and May 31, 1995 are annualized.
Interim results at and for the eight months ended May 31, 1996 are not
necessarily indicative of the results that may be expected for the year
ending September 30, 1996.
(2) The Association adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"), effective as of October 1, 1994. Prior to
the adoption of SFAS No. 115, investment securities and mortgage-backed
securities held for sale were carried at the lower of amortized cost or
market value, as adjusted for amortization of premiums and accretion of
discounts over the remaining terms of the securities from the dates of
purchase.
(3) Loans receivable are shown net of loans in process, net deferred loan
origination fees and the allowance for loan losses.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods and are
annualized where appropriate.
(5) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) The efficiency ratio represents non-interest expense as a percent of net
interest income before provision for loan losses and non-interest income.
(8) For definitions and further information relating to the Association's
regulatory capital requirements, see "Regulation - Federal Savings
Institution Regulation - Capital Requirements." See "Regulatory Capital
Compliance" for the Association's pro forma capital levels as a result of
the Offerings.
(9) Gross loans receivable are stated at unpaid principal balances.
(10) Non-performing assets consist of non-performing loans and real estate
owned ("REO"). Non-performing loans consist of all loans 90 days or more
past due and all other non-accrual loans. The Association generally
ceases accruing interest on loans 90 days or more past due. See
"Business of the Association - Non-Performing Assets" and "- Real
Estate Owned."
11
<PAGE>
SUMMARY OF RECENT DEVELOPMENTS
The selected balance sheet and operating data presented below at August
31, 1996 and for the eleven-month periods ended August 31, 1996 and 1995 are
derived from unaudited financial data, but, in the opinion of management
reflects all adjustments (consisting only of normal recurring adjustments) which
are necessary to present fairly the results for such interim periods. The
results of operations for the eleven months ended August 31, 1996 are not
necessarily indicative of the results of operations that may be expected for the
year ended September 30, 1996.
AT AT
AUGUST 31, SEPTEMBER 30,
1996 1995
------------ ------------
(IN THOUSANDS)
SELECTED BALANCE SHEET DATA:
Total assets. . . . . . . . . . . . . . . . . . . . $92,286 $88,022
Cash and cash equivalents . . . . . . . . . . . . . 4,607 4,257
Investment securities . . . . . . . . . . . . . . . 500 500
Mortgage-backed securities . . . . . . . . . . . . 14,419 17,421
FHLB Stock-at cost. . . . . . . . . . . . . . . . . 778 726
Loans receivable, net (1) . . . . . . . . . . . . . 70,455 64,043
Deposits. . . . . . . . . . . . . . . . . . . . . . 79,455 76,664
Total equity. . . . . . . . . . . . . . . . . . . . 11,673 10,799
ELEVEN MONTHS ENDED
---------------------------
AUGUST 31, AUGUST 31,
1996 1995
------------ ------------
(IN THOUSANDS)
SELECTED OPERATING DATA:. . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . $6,141 $5,656
Interest expense . . . . . . . . . . . . . . . . . 3,669 3,286
------ ------
Net interest income . . . . . . . . . . . . . . . 2,472 2,370
Provision for loan losses . . . . . . . . . . . . . 1 -
------ ------
Net interest income after provision for loan
losses . . . . . . . . . . . . . . . . . . . 2,471 2,370
Noninterest income . . . . . . . . . . . . . . . . 212 135
Noninterest expense . . . . . . . . . . . . . . . . 1,347 1,215
------- ------
Income before income taxes . . . . . . . . . . . . 1,336 1,290
Income taxes . . . . . . . . . . . . . . . . . . . 432 431
------- -------
Net income. . . . . . . . . . . . . . . . . . . . . $ 904 $ 859
------- -------
------- -------
12
<PAGE>
AT OR FOR THE ELEVEN
MONTHS ENDED
-------------------------
AUGUST 31, AUGUST 31,
1996 1995
---------- ----------
SELECTED FINANCIAL RATIOS AND OTHER DATA(2):
PERFORMANCE RATIOS:
Return on average assets . . . . . . . . . . . . 1.15% 1.09%
Return on average equity . . . . . . . . . . . . 8.81 9.16
Average equity to average assets . . . . . . . . 13.07 11.90
Equity to total assets at end of period . . . . 12.65 12.14
Average interest rate spread (3) . . . . . . . . 2.49 2.64
Net interest margin (4). . . . . . . . . . . . . 3.05 3.12
Average interest-earning assets to
average interest-bearing liabilities. . . . . 112.35 110.99
Efficiency ratio(5) . . . . . . . . . . . . . . 54.49 51.27
Noninterest expense to average assets. . . . . . 1.71 1.54
REGULATORY CAPITAL RATIOS(6):
Tangible capital . . . . . . . . . . . . . . . . 12.68 12.14
Core capital . . . . . . . . . . . . . . . . . . 12.68 12.14
Risk-based capital . . . . . . . . . . . . . . . 27.37 27.84
ASSET QUALITY RATIOS:
Non-performing loans as a percent of gross
loans receivable(7)(8). . . . . . . . . . . . 1.36 0.99
Non-performing assets as a percent of
total assets(8) . . . . . . . . . . . . . . . 1.04 0.71
Allowance for loan losses as a percent of
gross loans receivable(7) . . . . . . . . . . 0.13 0.50
Allowance for loan losses as a percent of
non-performing loans(8). . . . . . . . . . . . 9.70 14.77
- -----------------------
(1) Loans receivable are shown net of loans in process, net deferred loan
origination fees and the allowance for loan losses.
(2) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods and are annualized
where appropriate.
(3) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
costs of interest-bearing liabilities.
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(5) The efficiency ratio represents noninterest expense as a percent of net
interest income and noninterest income before provision for loan losses.
(6) For definitions and further information relating to the Association's
regulatory capital requirements, see "Regulation - Federal Savings
Institution Regulation - Capital Requirements."
(7) Gross loan receivables are stated at unpaid principal balances.
(8 Non-performing assets consist of non-performing loans and REO.
Non-performing loans consist of all loans 90 days or more past due and all
other non-accrual loans. The Association generally ceases accruing
interest on loans 90 days or more past due. See "Business of the
Association - Lending Activities - Non-performing Assets" and
"- Real Estate Owned."
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT AUGUST 31, 1996 AND SEPTEMBER 30, 1995
Total assets at August 31, 1996 were $92.3 million compared to $88.0
million at September 30, 1995, an increase of $4.3 million. The primary factor
in this increase was a $6.5 million increase in the amount of net loans
receivable from $64.0 million at September 30, 1995 to $70.5 million at August
31, 1996.
Total deposits of the Association increased by $2.8 million from $76.7
million at September 30, 1995 to $79.5 million at August 31, 1996 due
principally to an increase in certificate accounts.
Total equity at August 31, 1996 was $11.7 million compared to $10.8 million
at September 30, 1995, an increase of $874,000, or 8.3%, due primarily to net
earnings of $904,000 for the eleven months ended August 31, 1996, which was
partially offset by a $30,000 SFAS No. 115 adjustment for a decline in the
market value of certain mortgage-backed securities available for sale.
COMPARISON OF OPERATING RESULTS FOR THE ELEVEN MONTHS ENDED AUGUST 31, 1996 AND
AUGUST 31, 1995
GENERAL
Net earnings for the eleven months ended August 31, 1996 were $904,000, an
increase of $48,000, or 5.2%, from net earnings of $859,000 for the eleven
months ended August 31, 1995. The increase in net earnings resulted primarily
from a $102,000, or 4.3%, increase in net interest income between the two
periods. Although the Association's average net interest margin decreased from
3.12% for the eleven months ended August 31, 1995 to 3.05% for the eleven months
ended August 31, 1996, the effect of this decrease was more than offset by a
larger increase in the average balance of interest-earning assets than the
increase in the average balance of interest-bearing liabilities. Net earnings
for the year ended September 30, 1996, will be adversely affected by a $323,000
charge to be recorded as of September 30, 1996 to reflect the effect of recently
enacted legislation imposing a special assessment on all SAIF-insured deposits.
See "Risk Factors - Recapitalization of SAIF and Its Impact on SAIF Premiums."
INTEREST INCOME
Interest income for the eleven months ended August 31, 1996 was $6.1
million compared to $5.7 million for the eleven months ended August 31, 1995, an
increase of $400,000 or 7.0%. The increase in interest income was the result of
a $5.4 million increase in average interest-earning assets from $82.9 million
for the eleven months ended August 31, 1995 to $88.3 million for the eleven
months ended August 31, 1996.
INTEREST EXPENSE
Interest expense for the eleven months ended August 31, 1996 was $3.7
million compared to $3.3 million for the eleven months ended August 31, 1995,
an increase of $400,000, or 12.1%. The increase in interest expense was due
in part to the increase of $3.9 million in the average balance of
interest-bearing liabilities from $74.7 million for the eleven months ended
August 31, 1995 to $78.6 million for the eleven months ended August 31, 1996.
The increase in interest expense also reflects the higher interest rate
environment, as the average cost of interest-bearing liabilities increased 30
basis points from 4.79% for the months ended August 31, 1995 to 5.09% for the
eleven months ended August 31, 1996.
14
<PAGE>
The increase in average interest-bearing liabilities was primarily due to the
$3.4 million increase in the average balance of certificate accounts from
$49.4 million for the eleven months ended August 31, 1995 to $56.9 million
for the eleven months ended August 31, 1996. The increase in the average
balance of certificate accounts reflects the increased customer demand
arising from higher interest rates paid by the Association on these accounts
in response to higher market rates.
PROVISION FOR LOAN LOSSES
The Association's provision for loan losses for the eleven months ended
August 31, 1996 was $1,000 compared to no provision for the eleven months ended
August 31, 1995. The amount of the provision for loan losses based upon
management's periodic analysis of the adequacy of the allowance for loan losses.
The Association has historically experienced very low levels of loan losses.
Based upon recent increases in the size of the Association's loan portfolio,
and the resultant increased risk of loss inherent in a larger portfolio
management has begun making additional provisions for loan losses. See
"Business of the Association - Lending Activities - Allowance for Loan
Losses."
NONINTEREST INCOME
Noninterest income for the eleven months ended August 31, 1996 was $212,000
compared to $135,000 for the eleven months ended August 31, 1995, an increase of
$77,000, or 57.0%. The increase in non-interest income between the two periods
resulted primarily from an increase in service charges and fees.
NONINTEREST EXPENSE
Noninterest expense was $1.3 million for the eleven months ended August 31,
1996 compared to $1.2 million for the eleven months ended August 31, 1995, a
$100,000 or 8.9% increase. Compensation and benefits expense was increased to
$584,000 for the eleven months ended August 31, 1996 compared to $510,000 for
the eleven months ended August 31, 1995, a $74,000, or 14.5%, increase.
INCOME TAXES
Income taxes remained relatively stable at $432,000 for the eleven months
ended August 31, 1996 compared to $431,000 for the eleven months ended
August 31, 1995, an increase of $1,000.
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be considered by investors in deciding whether to
purchase the Common Stock offered hereby.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The Association's profitability, like that of most financial institutions,
is dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. A significant portion of the Association's assets
consist of fixed-rate residential mortgage loans. At May 31, 1996, the
Association had $49.0 million of fixed-rate mortgage loans, or 66.8% of the
Association's gross loans receivable, with average weighted maturities of 16.4
years. The Association emphasizes fixed-rate mortgage loans due to the consumer
preference for fixed-rate mortgage loans in the Association's market area. The
Association also retains in its portfolio all of the loans that
15
<PAGE>
it originates, including fixed-rate mortgage loans. Investment in fixed-rate
mortgage loans generally results in increased interest rate risk as such
loans generally do not reprice as quickly as adjustable-rate mortgage loans
during periods of rising interest rates. In addition, the Association
generally has accepted deposits for considerably shorter terms than its
fixed-rate mortgage loans. At May 31, 1996, the Association had $43.9
million of certificate accounts maturing in less than twelve months.
Consequently, management expects that the yield on interest-earning assets of
the Association will adjust to changes in interest rates at a slower rate
than the cost of the Association's interest-bearing liabilities, and that any
significant increase in interest rates will have an adverse effect on the
Association's results of operations. The Association attempts to offset the
risks associated with its predominantly fixed-rate loan portfolio by
investing in adjustable-rate mortgage-backed and other securities and by
maintaining a strong level of capital, although the Association also invests
in fixed-rate mortgage-backed and other securities.
Increases in the level of interest rates also may adversely affect the
amount of loans originated by the Association, as well as the value of the
Association's securities and other interest-earning assets and the resultant
ability to realize gains on the sale of such assets. The value of fixed-rate
instruments fluctuates inversely with changes in interest rates. As a result,
increases in interest rates could result in decreases in the carrying value of
interest-earning assets which could adversely affect the Company's and
Association's results of operations if such assets were sold. Increases in
interest rates also can adversely affect the type (fixed-rate or
adjustable-rate) of loans originated by the Association and the average life of
loans and securities, which can adversely impact the yields earned on the
Association's loan and securities portfolio. In periods of decreasing interest
rates, the average life of loans held by the Association may be shortened to the
extent increased prepayment activity occurs during such periods which may result
in the Association investing funds from such prepayments in lower yielding
assets. Accordingly, the Association's results of operations and financial
condition are largely dependent on movements in market interest rates and its
ability to manage its assets and liabilities in response to such movements. In
addition, fluctuations in interest rates may also result in disintermediation,
which is the flow of funds away from depository institutions into direct
investments which pay a higher rate of return, and may adversely affect the
value of the Association's investment securities and other interest-earning
assets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Management of Interest Rate Risk" and "Regulation and
Supervision - Capital Requirements."
CONCENTRATION IN REAL ESTATE LENDING IN NORTHWESTERN OHIO
At May 31, 1996, 97.34% of the Association's total gross loan portfolio
was secured by real estate, substantially all of which is located in the
Association's primary market area in Northwestern Ohio. The Association's
primary market area includes the city of Lima, which has experienced
increases in unemployment in the last several years due to the closing of
several large industrial plants. See "Business of the Association -Market
Area and Competition" and "- Lending Activities." Accordingly, a substantial
decline in real estate values or the onset of other recessionary economic
conditions in the Association's primary market area could adversely affect
the Association's operating results and financial condition by, among other
things, requiring increased provisions for loan losses and increased
non-interest expense associated with the management and disposition of real
estate owned as well as decreasing demand for one- to four-family mortgage
loans.
INCREASED CREDIT RISKS ASSOCIATED WITH MULTI-FAMILY AND COMMERCIAL REAL ESTATE
LOANS
At May 31, 1996, $1.4 million, or 1.88%, of the Association's total gross
loan portfolio consisted of multi-family loans and $5.1 million, or 6.96%, was
secured by commercial real estate loans. Multi-family and commercial real
estate loans are generally considered to involve a higher degree of credit risk,
16
<PAGE>
to be more vulnerable to deteriorating economic conditions than one- to
four-family residential mortgage loans and typically involve higher loan
principal amounts. Income producing property values are also subject to greater
volatility than owner-occupied residential property values. Repayment of
multi-family and commercial real estate loans generally is dependent, in large
part, on sufficient income from the property to cover operating expenses and
debt service. The Association currently originates loans secured by
multi-family and commercial real estate properties on a limited basis. The
Association attempts to offset the risks associated with multi-family and
commercial real estate lending by primarily lending to individuals who will be
actively involved in the management of the property and who have proven
management experience. Economic events and government regulations, which are
outside the control of the borrower or lender, could impact the value of the
security for such loans or the future cash flow of the affected properties. See
"Business of the Association - Lending Activities - Multi-family Lending and -
Commercial Real Estate Lending."
COMPETITION
The Association faces significant competition in its market area both in
attracting deposits and in originating loans. The Association's primary market
area is a competitive market for financial services. The Association faces
direct competition from a number of financial institutions, many with a
state-wide or regional presence, and, in some cases, a national presence. This
competition arises from other savings institutions, commercial banks, credit
unions and other providers of financial services, many of which are
significantly larger than the Association and therefore have greater financial
and marketing resources than the Association. See "Business of the
Association - Market Area and Competition."
BENEFITS TO MANAGEMENT AND DIRECTORS
STOCK PROGRAMS. The Company intends to seek stockholder approval of a
performance-based stock program or programs (the "Stock Programs") for the
benefit of directors, officers and employees of the Company and the Association
at a meeting of stockholders following the Conversion, which, under current OTS
regulations, may be held no earlier than six months after completion of the
Conversion. Assuming the receipt of stockholder approval, a trustee is expected
to acquire Common Stock on behalf of the Stock Programs in an amount equal to
4.0% of the Common Stock issued in the Conversion, or 52,700 shares and 71,300
shares at the minimum and maximum of the Estimated Price Range, respectively.
These shares will be acquired either through open market purchases, if
permissible, or from authorized but unissued Common Stock. Based upon a market
value of $10.00 per share, the aggregate market value of Common Stock intended
to be distributed under the Stock Programs would be $527,000 and $713,000, at
the minimum and the maximum of the Estimated Price Range, respectively. The
actual value of the Common Stock distributed under the Stock Programs will
depend upon the market value of the Common Stock at the time the shares are
distributed, which may be more or less than $10.00 per share. Consequently,
no assurance can be given as to what the actual value will be of the Common
Stock distributed under the Stock Programs. See "- Possible Dilutive Effect
of Stock Programs and Stock Options." Although no specific award
determinations have been made, the Company anticipates that, if stockholder
approval is obtained, it will provide awards to its directors, officers and
key employees to the extent permitted by applicable regulations. Current OTS
regulations provide that no individual may receive more than 25% of the
shares of any plan and non-employee directors may not receive more than 5.0%
individually, or 30% in the aggregate, of the shares awarded under any plan.
These shares will be awarded at no cost to the recipients. See "The Board of
Directors and Management of the Association - Benefits - Stock Programs."
STOCK OPTION PLANS. The Company also intends to seek stockholder approval
of a benefit plan or plans which would provide options to purchase Common Stock
to non-employee directors, officers and
17
<PAGE>
employees (the "Stock Option Plans") at a meeting of stockholders following
the Conversion, which under current OTS regulations may be held no earlier
than six months after completion of the Conversion. Although no specific
determinations have been made, assuming the receipt of stockholder approval,
the Company expects that directors, officers and key employees will be
granted options to purchase an amount of authorized but unissued Common Stock
or treasury stock, if any, equal to 10% of the Common Stock issued in the
Conversion, or 131,750 shares and 178,250 shares at the minimum and maximum
of the Estimated Price Range. Under the Stock Option Plans, the exercise
price will be equal to the fair market value of the underlying Common Stock
on the date of grant. Such options will permit such officers and directors
to benefit from any increase in the market value of the shares in excess of
the exercise price at the time of exercise. Officers and directors receiving
such options will not be required to pay for the shares until the date of
exercise. See "The Board of Directors and Management of the Association
- -Benefits - Stock Option Plans."
EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the Conversion, certain
officers and employees of the Association and the Company will obtain the
benefit of stock ownership through the establishment of the ESOP, which is a
tax-qualified plan for the benefit of all eligible employees, including
executive officers, of the Association. The ESOP intends to purchase in the
Subscription Offering up to 8.0% of the Common Stock issued in the Conversion,
or 105,000 shares and 143,000 shares at the minimum and maximum of the Estimated
Price Range, respectively. The ESOP's purchase of Common Stock in the
Conversion will be funded by a loan obtained from the Company and participants
in the ESOP will be allocated shares of Common Stock int he ESOP at no cost to
them in accordance with the terms of the ESOP. See "The Board of Directors and
Management of the Association - Benefits - Employee Stock Ownership Plan and
Trust."
CHANGE IN CONTROL PROVISIONS OF EMPLOYMENT AGREEMENTS. Upon completion of
the Conversion, and subject to the approval of the OTS, the Company and the
Association intend to enter into employment agreements with the President. See
"The Board of Directors and Management of the Association - Employment
Agreements." Such employment agreements provide for benefits and cash payments
in the event of a change in control of the Company or the Association. These
provisions may have the effect of increasing the cost of acquiring the Company,
thereby discouraging future attempts to take over the Company or the
Association. Based on the President's current salary, cash payments to be paid
in the event of a change in control pursuant to the employment agreements would
be approximately $210,000. However, the actual amount to be paid in the event
of a change in control of the Association or the Company cannot be estimated
at this time because the actual amount is based on the average salary of the
employee and other factors existing at the time of the change in control
which cannot be determined at this time. See "Restrictions on Acquisition of
the Company and the Association - Restrictions in the Company's Certificate
of Incorporation and Bylaws," "The Board of Directors and Management of the
Association - Employment Agreements," "- Benefits - Stock Option Plans" and
"- Benefits - Stock Programs."
POSSIBLE DILUTIVE EFFECT OF STOCK PROGRAMS AND STOCK OPTIONS
Following the Conversion, the Stock Programs, if approved by the
stockholders of the Company, will acquire an amount of shares equal to 4.0% of
the shares of Common Stock issued in the Conversion, either through open market
purchases, if permissible, or the issuance of authorized but unissued shares of
Common Stock from the Company. If the Stock Programs are funded by the issuance
of authorized but unissued shares, the voting interests of existing shareholders
will be diluted by approximately 3.9%. Also following the Conversion,
directors, officers and employees will be granted options, if the Stock Option
Plans are approved by the stockholders of the Company. Although no specific
determinations have been made, the Company expects that executive officers and
directors will be granted options to purchase
18
<PAGE>
authorized but unissued shares in an amount equal to 10% of the Common Stock
issued in the Conversion. Under certain circumstances, such options may be
exercised and sold on the same day, thereby eliminating any risk to officers
and directors in exercising options in the event that the market price
exceeds the exercise price. If all of the options were to be exercised using
authorized but unissued Common Stock, the voting interests of existing
stockholders would be diluted by approximately 9.9%.
CERTAIN ANTI-TAKEOVER PROVISIONS
PROVISIONS IN THE COMPANY'S AND THE ASSOCIATION'S GOVERNING INSTRUMENTS.
Certain provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Association's Stock
Charter and Bylaws, as well as certain federal regulations, assist the Company
in maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting on certain
matters, staggered terms for directors, non-cumulative voting for directors,
limits on the calling of special meetings, limits on voting shares in excess of
10% of the outstanding shares, and certain uniform price provisions for certain
business combinations. The Association's Stock Charter also prohibits, for five
years, the acquisition or offer to acquire, directly or indirectly, the
beneficial ownership of more than 10% of the Association's equity securities.
Any person violating this restriction may not vote the Association's securities
in excess of 10%. These provisions in the Association's and the Company's
governing instruments may discourage potential proxy contests and other
potential takeover attempts, particularly those which have not been negotiated
with the Board of Directors, and thus, generally may serve to perpetuate current
management. For a more detailed discussion of these provisions, see
"Restrictions on Acquisition of the Company and the Association."
VOTING CONTROL OF OFFICERS AND DIRECTORS. Directors and executive officers
of the Association and the Company expect to purchase between approximately
4.65% and 3.91% of the shares of Common Stock to be issued in the Conversion,
based upon the minimum and the maximum of the Estimated Price Range,
respectively, exclusive of shares that may be attributable to directors and
officers through the Stock Programs, the Stock Options Plans and the ESOP. See
"Risk Factors - Benefits to Management and Directors," "The Board of Directors
and Management of the Association - Benefits - Stock Option Plans," "- Benefits
- - Stock Programs" and "- Benefits - Employee Stock Ownership Plan and Trust."
Management's potential voting control could, together with additional
stockholder support, defeat stockholder proposals requiring 80% approval of
stockholders. As a result, this potential voting control may preclude takeover
attempts that certain stockholders deem to be in their best interest and may
tend to perpetuate existing management. See "Restrictions on Acquisition of
the Company and the Association - Restrictions in the Company's Certificate
of Incorporation and Bylaws."
ABSENCE OF MARKET FOR COMMON STOCK
The Company and the Association have never issued capital stock. The
Company has received conditional approval from the Nasdaq to have its Common
Stock quoted on the Nasdaq National Market under the symbol "DCBI" upon
completion of the Conversion. However, there can be no assurance that an active
and liquid trading market for the Common Stock will develop, or, once developed,
will continue, nor can there be any assurances that purchasers of the Common
Stock will be able to sell their shares at or above the Purchase Price. The
absence or discontinuance of a market for the Common Stock may have an adverse
impact on both the price and liquidity of the Common Stock. See "Market for the
Common Stock."
19
<PAGE>
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% due to
regulatory considerations, changes in market conditions or general financial and
economic conditions following the commencement of the Subscription and Community
Offerings. In the event that the Estimated Price Range is so increased, it is
expected that the Company will issue up to 2,049,875 shares of Common Stock at
the Purchase Price for an aggregate price of up to $20,498,750. An increase in
the number of shares issued will decrease a subscriber's pro forma net earnings
per share and stockholders' equity per share and will increase the Company's
pro forma consolidated stockholders' equity and net earnings. Such an increase
will also increase the Purchase Price as a percentage of pro forma stockholders'
equity per share and as a multiple of pro forma net earnings per share.
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Association is subject to extensive regulation and supervision as a
federal savings association. In addition, the Company, as a savings association
holding company, is subject to extensive regulation and supervision. Such
regulations, which affect the Association on a daily basis, may be changed at
any time, and the interpretation of the relevant law and regulations is also
subject to change by the authorities who examine the Association and interpret
those laws and regulations. Any change in the regulatory structure or the
applicable statutes or regulations, whether by the OTS, the FDIC or the
Congress, could have a material impact on the Company, the Association, its
operations or the Association's Conversion. See "Regulation."
In its last session, Congress considered various proposals to eliminate the
federal thrift charter and abolish the OTS. Several of the bills would require
that all federal savings associations convert to national or state banks by no
later than January 1, 1998 and would treat all state savings associations as
state banks for purposes of federal banking laws as of that date. Subject to a
narrow grandfathering, all savings and loan holding companies would become bank
holding companies under the legislative proposals and would be subject to the
activities restrictions applicable to bank holding companies. Under the bills,
any lawful activity in which a savings association was engaged on September 13,
1995 would be grandfathered for up to 2 years following the effective date of
its conversion to a bank charter, plus two additional one year extensions at the
discretion of the regulator, and existing thrift intrastate and interstate
branches which were operated as branches on September 13, 1995 would also be
grandfathered. The legislative proposals would also abolish the OTS and
transfer its functions to three federal bank regulators and to the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") with
respect to the regulation of holding companies. All state savings and loan
associations would be regulated as state banks by the FDIC. The outcome of
any proposed legislation is uncertain. Therefore, the Association is unable
to determine the extent to which such legislation, if enacted, would affect
its business.
Legislation regarding bad debt recapture has been signed into law
effective for tax years beginning on or after January 1, 1996. The
legislation requires recapture of reserves accumulated after 1987. The
recapture tax on post 1987 reserves must be paid over a six year period
starting in 1996. The payment of the tax can be deferred in each of 1996 and
1997 if an institution originates at least the same average annual principal
amount of mortgage loans that it originated in the six years prior to 1996.
See "Federal and State Taxation - Federal Taxation - Bad Debt Reserve."
20
<PAGE>
RECAPITALIZATION OF SAIF AND ITS IMPACT ON SAIF PREMIUMS
Deposits of the Association are presently insured by the SAIF. Both the
SAIF and the Bank Insurance Fund ("BIF"), the deposit insurance fund that
covers most commercial bank deposits, are statutorily required to be
recapitalized to a 1.25% of insured deposits ratio. The BIF achieved the
required ratio in 1995 but the SAIF was not expected to achieve the ratio
until after the year 2000, largely because a portion of the insurance
assessment paid by SAIF members is required by statute to be used to make
payments on bonds issued by the Financing Corporation ("FICO") which were
issued in the late 1980's to recapitalize the predecessor to the SAIF.
Until recently, members of the SAIF and BIF were paying deposit
insurance premiums of between 23 and 31 basis points. For 1996, in view of
the BIF's achieving the 1.25% ratio, the FDIC adopted a new assessment rate
schedule of 0 to 27 basis points for BIF members. Under that schedule,
approximately 92% of BIF members are required to pay only $2,000 per year,
the legal minimum, in insurance premiums. With respect to SAIF member
institutions, the existing assessment rate schedule applicable to SAIF member
institutions of 23 to 31 basis points was retained. Consequently, a
significant differential in the insurance premiums paid by BIF and SAIF
members was created. As long as the premium differential continued, it
placed SAIF members, such as the Association, at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
Legislation has recently been enacted to mitigate the effect of the
BIF/SAIF premium disparity. Among other things, the legislation imposes a
special assessment on SAIF-member institutions, including the Association, to
recapitalize the SAIF fund and spreads the FICO payments across all BIF and
SAIF members. It is presently estimated that the amount of the special
assessment would be 65.7 basis points on the amount of deposits held by
SAIF-members institutions as of March 31, 1995. BIF members will begin
paying a portion of the FICO payment equal to approximately 1.3 basis points
on BIF-insured deposits on January 1, 1997, compared to an estimated 6.4
basis points on SAIF-insured deposits, and will pay a PRO RATA share of the
FICO payment on the earlier of January 1, 2000 or the date upon which the
last savings association ceases to exist. The legislation also requires the
BIF and the SAIF to be merged by January 1, 1999 provided that subsequent
legislation is adopted to eliminate the savings association charter and
there are no remaining savings associations as of that date. The payment of
the special assessment would have the effect of immediately reducing the
capital of SAIF-member institutions by the amount of the fee, net of any tax
effect. See "Regulatory Capital Compliance" and "Regulation - Insurance of
Deposit Accounts." Management cannot predict the level of FDIC insurance
assessments on an on-going basis or whether the BIF and SAIF will eventually
be merged.
21
<PAGE>
The Association will record a charge of approximately $323,000, on an
after-tax basis, as of September 30, 1996, to reflect the effect of the
special assessment to recapitalize the SAIF fund.The Association's assessment
rate for 1995 was 23 basis points and the premiums paid for the year ended
September 30, 1995 were $166,000.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Association has received an opinion from Keller which states that,
pursuant to Keller's valuation, subscription rights granted to Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members have
no value. However, such valuation is not binding on the Internal Revenue
Service ("IRS"). If the subscription rights granted to Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members are deemed
to have an ascertainable value, such rights may be taxable as ordinary income
or capital gain to those Eligible Account Holders, Supplemental Eligible
Account Holders or Other Members who receive and/or exercise the subscription
rights in an amount equal to such value. Additionally, the Association could
recognize a gain for tax purposes on such distribution. Whether subscription
rights are considered to have ascertainable value is an inherently factual
determination. See "The Conversion - Effects of Conversion" and "- Tax
Aspects."
RISK OF DELAYED OFFERING
The Company and the Association expect to complete the Conversion within
the time periods indicated in this Prospectus. Nevertheless, it is possible,
although not anticipated, that adverse market, economic or regulatory
conditions, or other factors could significantly delay the completion of the
Conversion and result in increased Conversion costs or in changes in the
Conversion valuation. The Subscription and Community Offerings could be
extended to December 27, 1996 before subscribers would have the
right to confirm, modify or rescind their subscriptions. If the Subscription
and Community Offerings are extended beyond December 27, 1996,
all subscribers will have the right to confirm, modify or rescind their
subscriptions and to have their subscription funds returned promptly, with
interest at a rate equal to the Association's interest rate paid on passbook
accounts, or to have their withdrawal authorization terminated. See "The
Conversion."
DELPHOS CITIZENS BANCORP, INC.
The Company was recently organized at the direction of the Board of
Directors of the Association for the purpose of acquiring all of the capital
stock to be issued by the Association. The Company has applied to the OTS to
become a savings and loan holding company, and, as such, will be subject to
regulation by the OTS. See "The Conversion - General." After completion of the
Conversion, the Company will conduct business initially as a unitary savings and
loan holding company. See "Regulation - Holding Company Regulation." Upon
consummation of the Conversion, the Company's assets will consist of all of the
outstanding shares of the Association's capital stock issued to the Company in
the Conversion and that portion of the net proceeds of the Offerings retained by
the Company. The Company intends to use part of the net proceeds it retains to
make a loan directly to the ESOP to enable the ESOP to purchase 8% of the Common
Stock in the Conversion. See "Use of Proceeds." The Company will have no
significant liabilities. The management of the Company is set forth under "The
22
<PAGE>
Board of Directors and Management of the Company." Initially, the Company will
neither own nor lease any property, but will instead use the premises, equipment
and furniture of the Association. At the present time, the Company does not
intend to employ any persons other than officers, but will utilize the support
staff of the Association from time to time. Additional employees will be hired
as appropriate to the extent the Company expands its business in the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so, its
business activities through existing or newly-formed subsidiaries, or through
acquisitions of other financial institutions and financial services related
companies. Although there are no current arrangements, understandings or
agreements, written or oral, regarding any such opportunities or transactions,
the Company will be in a position after the Conversion, subject to regulatory
limitations and the Company's financial position, to take advantage of any such
acquisition and expansion opportunities that may arise. The initial activities
of the Company are anticipated to be funded by the net proceeds retained by the
Company and earnings thereon or, alternatively, through dividends from the
Association.
The Company's executive offices are located at the home office of the
Association at 114 East 3rd Street, Delphos, Ohio 45833. The Company's
telephone number is (419) 692-2010.
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
The Association has operated for over one hundred years as a
community-oriented savings institution. The Association's primary market area
consists of the areas in and surrounding the city of Delphos and includes
portions of the counties of Allen, Putnam and Van Wert in Northwestern Ohio.
The Association's primary market area also includes the city of Lima, located in
Allen County. The Association conducts its business from its home office
located in Delphos, Ohio.
The Association's business has been and continues to be attracting deposits
from the general public in its primary market area and investing such deposits
and other funds, generated from operations and borrowings, primarily in
conventional mortgage loans secured by one- to four-family residences. At May
31, 1996, $61.2 million, or 83.35%, of the Association's gross loans receivable
consisted of one- to four-family mortgage loans. To a significantly lesser
extent, the Association invests in multi-family, commercial real estate,
construction (primarily to individual borrowers for the construction of
owner-occupied residential properties) and land, and consumer loans. In
addition to its lending activities, the Association also invests in
mortgage-backed securities, primarily those guaranteed by governmental
agencies such as the Government National Mortgage Association ("GNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC") and investment
securities.
The Association is subject to extensive regulation, supervision and
examination by the OTS, its primary regulator, and the FDIC, which insures its
deposits. As of May 31, 1996, the Association exceeded all regulatory capital
requirements with tangible, core and risk-based capital of $11.4 million, $11.4
million and $11.5 million, respectively. Additionally, the Association's
regulatory capital was in excess of the amount necessary to be
"well-capitalized" under the Federal Deposit Insurance Corporation Improvement
Act of 1992 ("FDICIA"). See "Regulatory Capital Compliance" and "Regulation."
The Association is a member of the Federal Home Loan Bank of Cincinnati ("FHLB -
Cincinnati") which is one of the twelve regional banks which comprise the FHLB
system.
The Association's executive offices are located at its home office at 114
East 3rd Street, Delphos, Ohio. The Association's telephone number is (419)
692-2010.
23
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At May 31, 1996, the Association exceeded all regulatory capital
requirements. See "Regulation - Federal Savings Institution Regulation -
Capital Requirements." Set forth below is a summary of the Association's
compliance with regulatory capital standards as of May 31, 1996, on a historical
and pro forma basis assuming that the indicated number of shares were sold as of
such date and receipt by the Association of 50% of the net proceeds and that
such net proceeds are invested in assets that carry a 20% risk-weighting, such
as short-term interest-bearing deposits. For purposes of the table below, the
amount expected to be borrowed by the ESOP and the cost of the shares expected
to be acquired by the Stock Programs are deducted from pro forma regulatory
capital.
<TABLE>
<CAPTION>
PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
---------------------------------------------------------------------------------
1,317,500 1,555,000
SHARES SHARES
(MINIMUM OF (MIDPOINT OF
ESTIMATED ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE)
----------------------- ------------------- --------------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------ --------- ------ --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital. . . . . . . . $11,367 12.40% $16,134 16.7% $17,000 17.5%
-------- ------ -------- -------- -------- --------
-------- ------ -------- -------- -------- --------
Tangible Capital:
Capital Level(3). . . . . $11,380 12.41% $16,148 16.7% $17,014 17.5%
Requirement . . . . . . . 1,376 1.50 1,447 1.5 1,460 1.5
-------- ------ -------- -------- -------- --------
Excess. . . . . . . . . . $10,006 10.91% $14,701 15.2% $15,554 16.0%
-------- ------ -------- -------- -------- --------
-------- ------ -------- -------- -------- --------
Core Capital:
Capital Level(3). . . . . $11,380 12.41% $16,148 16.7% $17,014 17.5%
Requirement(4). . . . . . 2,752 3.00 2,894 3.0 2,920 3.0
-------- ------ -------- -------- -------- --------
Excess. . . . . . . . . . $ 8,628 9.41% $13,254 13.7% $14,094 14.5%
-------- ------ -------- -------- -------- --------
-------- ------ -------- -------- -------- --------
Total Risk-Based Capital:
Capital Level(3). . . . . $11,474 27.01% $16,226 37.5% $17,092 39.1%
Requirement . . . . . . . 3,398 8.00 3,464 8.0 3,495 8.0
-------- ------ -------- -------- -------- --------
Excess. . . . . . . . . . $ 8,076 19.01% $12,762 29.5% $13,597 31.1%
-------- ------ -------- -------- -------- --------
-------- ------ -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
------------------------------------------------------
2,049,875 SHARES
1,782,500 SHARES (15% ABOVE
(MAXIMUM OF MAXIMUM
ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE(1)
-------------------- ----------------------
PERCENT PERCENT
OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
GAAP Capital. . . . . . . . $17,869 18.2% $18,867 19.0%
------- ----- ------- ----
------- ----- ------- ----
Tangible Capital:
Capital Level(3). . . . . $17,883 18.2% $18,881 19.0%
Requirement . . . . . . . 1,473 1.5 1,488 1.5
------- ----- ------- ----
Excess. . . . . . . . . . $16,410 16.7% $17,393 17.5%
------- ----- ------- ----
------- ----- ------- ----
Core Capital:
Capital Level(3). . . . . $17,883 18.2% $18,881 19.0%
Requirement(4). . . . . . 2,946 3.0 2,976 3.0
------- ----- ------- ----
Excess. . . . . . . . . . $14,937 15.2% $15,905 16.0%
------- ----- ------- ----
------- ----- ------- ----
Total Risk-Based Capital:
Capital Level(3). . . . . $17,961 40.7% $18,959 42.6%
Requirement . . . . . . . 3,527 8.0 3,562 8.0
------- ----- ------- ----
Excess. . . . . . . . . . $14,434 32.7% $15,397 34.6%
------- ----- ------- ----
------- ----- ------- ----
</TABLE>
- ---------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations, changes in market conditions or
general financial and economic conditions following the commencement of
the Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of tangible assets.
Core capital levels are shown as a percentage of total adjusted assets.
Risk-based capital levels are shown as a percentage of risk-weighted
assets.
(3) Certain deductions and additions are made to equity as calculated under
generally accepted accounting principles ("GAAP") to determine regulatory
capital. See Footnote 12 to the Financial Statements for a description of
the additions to (reductions from) GAAP capital to determine regulatory
tangible and core capital. The general valuation allowance of $92,000 is
added to GAAP capital to arrive at total risk-based capital.
(4) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements
which would require a core capital ratio of 3% of total adjusted assets
for thrifts that receive the highest supervisory rating for safety and
soundness and a 4% to 5% core capital ratio requirement for all other
thrifts. See "Regulation - Federal Savings Institution Regulation -
Capital Requirements."
24
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Conversion is completed, it is presently anticipated
that the net proceeds from the sale of the Common Stock will be between $12.7
million and $17.3 million (or $19.9 million if the Estimated Price Range is
increased by 15%). See "Pro Forma Data" and "The Conversion - Stock Pricing"
as to the assumptions used to arrive at such amounts. The Company will be
unable to utilize any of the net proceeds of the Offerings until the
consummation of the Conversion.
The Company will purchase all of the outstanding capital stock of the
Association to be issued upon Conversion in exchange for 50% of the net
proceeds of the Offering. Such proceeds will be added to the Association's
general funds to be used for general corporate purposes, including investment
in one- to four-family residential mortgage loans and other loans and
investment in short- to intermediate-term securities and mortgage-backed
securities. The Association may also use such funds to expand operations
through acquisitions of other financial institutions, branch offices or other
financial services companies. The Association has no current arrangements,
understandings or agreements regarding any such transactions.
Net proceeds to be retained by the Company after the purchase of the
capital stock of the Association, and including the loan to the ESOP, are
estimated to be between $6.3 million and $8.6 million (or $10.0 million if the
Estimated Price Range is increased by 15%). The net proceeds retained by the
Company will initially be invested primarily in short- to intermediate-term
securities and mortgage-backed securities. The Company intends to use a
portion of the net proceeds to make a loan directly to the ESOP to enable the
ESOP to purchase 8.0% of the Common Stock issued in the Conversion. Based upon
the issuance of 1,317,500 shares and 1,782,500 shares at the minimum and
maximum of the Estimated Price Range, the amount of the loan to the ESOP would
be $1.1 million or $1.4 million, respectively (or $1.6 million if the Estimated
Price Range is increased by 15%) to be repaid over a 17-year period at an
interest rate of 8.25%. See "The Board of Directors and Management of the
Association - Benefits - Employee Stock Ownership Plan and Trust."
A portion of the net proceeds retained by the Company may also be used to
acquire shares of Common Stock in the open market to find a performance-based
stock program or programs (the "Stock programs"). See "The Board of Directors
and Management of the Association - Benefits - Stock Programs." Based upon a
market value of $10.00 per share, the aggregate market value of Common Stock
intended to be distributed under the Stock Programs would be $527,000 and
$713,000, at the minimum and the maximum of the Estimated Price Range,
respectively. The actual value of the Common Stock distributed under the Stock
Programs will depend upon the market value of the Common Stock at the time the
shares are distributed, which may be more or less than $10.00 per share.
Consequently, no assurance can be given as to what the actual value will be of
the Common Stock distributed under the Stock Programs.
The net proceeds retained by the Company may also be used to support the
future expansion of operations through the acquisition of other savings
associations and commercial banks or diversification into other banking related
businesses. The Company may use a portion of the net proceeds to fund the
Stock Programs. The Company has no current arrangements, understandings or
agreements regarding any such transactions. The Company, upon the Conversion,
will be a unitary savings and loan holding company, which under existing laws
would generally not be restricted as to the types of business activities in
which it may engage, provided that the Association continues to be a qualified
thrift lender ("QTL"). See "Regulation - Holding Company Regulation" for a
description of certain regulations and proposed regulations applicable to the
Company.
25
<PAGE>
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to adopt stock repurchase plans, subject to statutory
and regulatory requirements. Unless approved by the OTS, the Company, pursuant
to OTS regulations, will be prohibited from repurchasing any shares of the
Common Stock for three years except (i) for an offer to all stockholders on a
pro rata basis, (ii) for the repurchase of qualifying shares of a director, or
(iii) a purchase in the open market by an employee stock benefit plan.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the Conversion, the Company may repurchase its Common
Stock so long as (i) the repurchases within the following two years are part of
an open-market program not involving greater than 5% of its outstanding capital
stock during a twelve-month period, (ii) the repurchases do not cause the
Association to become "undercapitalized" within the meaning of the OTS prompt
corrective action regulation, and (iii) the Company provides to the Regional
Director of the OTS no later than 10 days prior to the commencement of a
repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
See "Regulation - Prompt Corrective Regulatory Action." In addition, under
current OTS policies, repurchases may be allowed in the first year following
Conversion and in amounts greater than 5% in the second and third years
following Conversion provided there are valid and compelling business reasons
for such repurchases and the OTS does not object to such repurchases.
Based upon facts and circumstances following Conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but
not be limited to: (i) market and economic factors such as the price at which
the stock is trading in the market, the volume of trading, the attractiveness
of other investment alternatives in terms of the rate of return and risk
involved in the investment, the ability to increase the book value and/or
earnings per share of the remaining outstanding shares, and the opportunity to
improve the Company's return on equity; (ii) the avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans; and (iii) any other
circumstances in which repurchases would be in the best interests of the
Company and its shareholders. In the event the Company determines to
repurchase stock, such repurchases may be made at market prices which may be in
excess of the Purchase Price in the Conversion.
Any stock repurchases will be subject to the determination of the Board of
Directors that both the Company and the Association will be capitalized in
excess of all applicable regulatory requirements after any such repurchases and
that such capital will be adequate, taking into account, among other things,
the level of non-performing and other risk assets, the Company's and the
Association's current and projected results of operations and asset/liability
structure, the economic environment and tax and other considerations. See "The
Conversion - Certain Restrictions on Purchase or Transfer of Shares after
Conversion."
While the Company's Board of Directors intends to consider a policy of
paying dividends in the future, the Board has not currently formulated a policy
with respect to the payment of dividends. The payment of dividends or
repurchase of stock, however, would be prohibited if stockholders' equity would
be reduced below the amount required to maintain the Association's liquidation
account. See "Dividend Policy" and "The Conversion - Liquidation Rights" and
"- Certain Restrictions on Purchase or Transfer of Shares After Conversion."
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. The Company is newly formed and has conducted no
operations to date. The Board of Directors intends to consider a policy of
paying dividends on the Common Stock in the future. No decision has been made
as to the amount or timing of such dividends, if any. Declarations of
dividends by the Board of Directors will depend upon a number of factors,
including the amount of net proceeds retained by the Company in the
Conversion, investment opportunities available to the Company or the
Association, capital requirements, regulatory limitations, the Company's and
the Association's financial condition and results of operations, tax
26
<PAGE>
considerations and general economic conditions. No assurances can be given,
however, that any dividends will be paid or, if commenced, will continue to be
paid.
The Association will not be permitted to pay dividends on its capital
stock if its stockholders' equity would be reduced below the amount required
for the liquidation account. See "The Conversion - Liquidation Rights." For
information concerning federal regulations which apply to the Association in
determining the amount of proceeds which may be retained by the Company and
regarding a savings institution's ability to make capital distributions
including payment of dividends to its holding company, see "Federal and State
Taxation - Federal Taxation - Distributions" and "Regulation - Federal Savings
Institution Regulation - Limitation on Capital Distributions."
Unlike the Association, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders. The Company is
subject, however, to the requirements of Delaware law, which generally limit
dividends to an amount equal to the excess of the net assets of the Company
(the amount by which total assets exceed total liabilities) over its statutory
capital, (generally defined as the aggregate par value of the outstanding
shares of the Company's capital stock having a par value plus the amount of the
consideration paid for shares of the Company's capital stock without par value)
or, if there is no such excess, to its net profits for the current and/or
immediately preceding fiscal year. Since the Company initially will have no
significant source of income other than dividends from the Association and
earnings from the net proceeds retained by the Company, the payment of
dividends by the Company may be dependent, in part, upon dividends from the
Association which is subject to various tax and regulatory restrictions on the
payment of dividends.
MARKET FOR THE COMMON STOCK
The Company and Association have not previously issued capital stock, and,
consequently, there is no established market for the Common Stock. The Company
has been approved by the Nasdaq to have its Common Stock quoted on the Nasdaq
National Market System under the symbol "DCBI" upon completion of the
Conversion. One of the requirements for continued quotation of the Common
Stock on the Nasdaq is that there be at least two market makers for the Common
Stock. The Company will seek to encourage at least two market makers to make a
market in its Common Stock. Making a market involves maintaining bid and ask
quotations and being able, as principal, to effect transactions in reasonable
quantities at those quoted prices, subject to various securities laws and other
regulatory requirements. KBW has advised the Company that upon completion of
the Conversion, it intends to act as a market maker in the Common Stock,
depending on the volume of trading and subject to compliance with applicable
laws and regulatory requirements. Webb also will assist the Company in
obtaining additional market makers. The development of a public market having
the desirable characteristics of depth, liquidity and orderliness, however,
depends on the presence in the marketplace of a sufficient number of willing
buyers and sellers at any given time, over which the Company, the Association
nor any market maker has any control. Accordingly, there can be no assurance
that an established and liquid trading market for the Common Stock will develop
or that, if developed, it will continue. Furthermore, there can be no
assurance that persons purchasing shares will be able to sell them at or above
the Purchase Price or that quotations will be available on the Nasdaq as
contemplated. The absence or discontinuance of a market for the Common Stock
may have an adverse impact on both the price and the liquidity of the Common
Stock. The Company and the Association will make reasonable efforts to comply
with the securities law of all states in the United States in which persons
entitled to subscribe for stock pursuant to the Plan reside; however, the
Company and the Association are not required to offer stock in the Subscription
Offering to any person who resides in a state of the United States with respect
to which the Company or the Association determine that compliance with the
securities laws of such state would be impracticable for reasons of cost or
otherwise.
27
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Association at May 31, 1996, and the pro forma
consolidated capitalization of the Company after giving effect to the
Conversion, based upon the sale of the number of shares indicated in the table
and the other assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
-----------------------------------------------------
2,049,875
1,317,500 1,550,000 1,782,500 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
ASSOCIATION ESTIMATED ESTIMATED ESTIMATED ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
----------- ------------ ------------- ------------ ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total deposits. . . . . . . . . . . . . . $79,097 $79,097 $79,097 $79,097 $79,097
------- ------- ------- -------- -------
------- ------- ------- -------- -------
Stockholders' equity:
Preferred Stock, $0.01 par value,
1,000,000 shares authorized;
none to be issued . . . . . . . . . . $ -- $ -- $ -- $ -- $ --
Common Stock, $0.01 par value,
4,000,000 shares authorized;
shares to be issued as reflected. . . -- 13 16 18 20
Additional paid-in capital(3) . . . . . -- 12,682 14,971 17,263 19,898
Retained earnings(4). . . . . . . . . . 11,381 11,381 11,381 11,381 11,381
Unrealized loss on securities
available for sale. . . . . . . . . . (14) (14) (14) (14) (14)
Common Stock acquired by the
ESOP(5) . . . . . . . . . . . . . . . -- (1,054) (1,240) (1,426) (1,639)
Common Stock acquired by the
Stock Programs(6) . . . . . . . . . . -- (527) (620) (713) (820)
------- ------- ------- -------- -------
Total stockholders' equity. . . . . . . $11,367 $22,481 $24,494 $26,509 $28,826
------- ------- ------- -------- -------
------- ------- ------- -------- -------
</TABLE>
- ------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations, or changes in market conditions
or general financial and economic conditions following the commencement of
the Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase dsof
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
28
<PAGE>
(3) No effect has been given to the issuance of additional shares of
Common Stock pursuant to the Stock Option Plans intended to be
adopted by the Company and presented for approval of stockholders at
a meeting of stockholders following the Conversion. If approved by
the stockholders of the Company, an amount equal to 10% of the shares
of Common Stock issued in the Conversion will be reserved for
issuance upon the exercise of options to be granted under the Stock
Option Plans. See "Risk Factors - Possible Dilutive Effect of Stock
Programs and Stock Options," Footnote 3 to the tables under
"Pro Forma Data" and "The Board of Directors and Management of the
Association - Benefits - Stock Option Plans."
(4) The retained earnings of the Association will be substantially restricted
after the Conversion. See "The Conversion - Liquidation Rights" and
"Regulation - Federal Savings Institution Regulation - Limitations on
Capital Distributions." Does not reflect the payment of any possible
future dividends. See "Dividend Policy."
(5) Assumes that 8.0% of the shares offered for sale in the Conversion will be
purchased by the ESOP and that the funds used to acquire such shares will
be borrowed from the Company. The Common Stock acquired by the ESOP is
reflected as a reduction of stockholders' equity. See "The Board of
Directors and Management of the Association - Benefits - Employee Stock
Ownership Plan and Trust."
(6) Assumes that an amount equal to 4.0% of the shares of Common Stock issued
in the Conversion is purchased by the Stock Programs subsequent to the
Conversion through open market purchases. The Common Stock purchased by
the Stock Programs is reflected as a reduction of stockholder's equity.
Implementation of the Stock Programs is subject to the approval of the
Company's stockholders at a meeting following the Conversion. See "Risk
Factors - Possible Dilutive Effect of Stock Programs and Stock Options,"
Footnote 2 to the tables under "Pro Forma Data" and "The Board of
Directors and Management of the Association - Benefits - Stock Programs."
29
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $12.7 million and $17.3 million (or $19.9
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) all of the shares of Common Stock will be sold
in the Subscription and Community Offerings; (ii) directors, officers and
employees of the Association and members of their immediate families
(collectively, "Affiliates") will purchase an aggregate of 70,000 shares of
Common Stock; (iii) Webb will receive a fee equal to 1.5% of the aggregate
Purchase Price of the shares sold in the Subscription and Community Offerings
up to the maximum of the Estimated Price Range, excluding shares purchased by
Affiliates and the ESOP for which there is no fee; and (iv) Conversion
expenses, excluding the marketing fees paid to Webb, will be approximately
$309,000. Actual Conversion expenses may vary from those estimated.
Pro forma consolidated net earnings of the Company for the eight months
ended May 31, 1996, and for the year ended September 30, 1995, have been
calculated as if the Common Stock had been sold at the beginning of the
respective periods and the net proceeds had been invested at 5.91% and 5.45%,
respectively, the arithmetic average of the weighted average yield earned by
the Association on its interest-earning assets and the weighted average rate
paid on its deposits during such periods (as required by OTS regulations). The
tables below do not reflect the effect of withdrawals from deposit accounts for
the purchase of Common Stock or the effect of any possible use of the net
conversion proceeds. The pro forma after-tax yields for the Company and the
Association are assumed to be 3.90% for the eight months ended May 31, 1996,
based on an effective tax rate of 34%, and 3.60% for the year ended September
30, 1995, based on an effective tax rate of 34%. Historical and pro forma net
earnings per share amounts have been calculated by dividing historical and
pro forma amounts by the indicated number of shares of Common Stock issued, as
adjusted to give effect to the purchase of shares by the ESOP. Historical and
pro forma stockholders' equity per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of shares of
Common Stock issued. No effect has been given in the pro forma stockholders'
equity calculations for the assumed earnings on the net proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company computed in accordance with GAAP. The pro forma stockholders' equity
is not intended to represent the fair market value of the Common Stock and may
be greater than amounts that would be available for distribution to
stockholders in the event of liquidation.
The following tables summarize historical data of the Association and
pro forma data of the Company at or for the eight months ended May 31, 1996,
and at or for the year ended September 30, 1995, based on the assumptions set
forth above and in the table and should not be used as a basis for projections
of market value of the Common Stock following the Conversion. The tables below
give effect to the Stock Programs, which are expected to be adopted by the
Company following the Conversion and presented to stockholders for approval at
a meeting of stockholders. See Footnote 2 to the tables and "The Board of
Directors and Management of the Association - Benefits - Stock Programs." No
effect has been given in the tables to the possible issuance of additional
shares reserved for future issuance pursuant to the Stock Option Plans which
are expected to be adopted by the Board of Directors of the Company and
presented to stockholders for approval at a meeting of stockholders, nor does
book value give any effect to the liquidation account to be established for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders
or the bad debt reserve in liquidation. See Footnote 3 to the tables below,
"The Conversion - Liquidation Rights" and "The Board of Directors and
Management of the Association - Benefits - Stock Option Plans."
30
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE EIGHT MONTHS ENDED MAY 31, 1996
-------------------------------------------------------------
1,317,500 1,550,000 1,782,500 2,049,875
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(5)
------------ ------------ ------------ ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds. . . . . . . . . . . . . . . . . $13,175 $15,500 $17,825 $20,499
Less: Offering expenses and
commissions . . . . . . . . . . . . . . (480) (513) (544) (581)
-------- -------- -------- --------
Estimated net proceeds. . . . . . . . . . . . . 12,695 14,987 17,281 19,918
Less: Common Stock acquired by
ESOP . . . . . . . . . . . . . . . . . (1,054) (1,240) (1,426) (1,640)
Common Stock acquired by
Stock Programs . . . . . . . . . . . . (527) (620) (713) (820)
-------- -------- -------- --------
Estimated net proceeds, as adjusted . . . . $11,114 $13,127 $15,142 $17,458
-------- -------- -------- --------
-------- -------- -------- --------
Consolidated net earnings:
Historical. . . . . . . . . . . . . . . . . $ 582 $ 582 $ 582 $ 582
Pro forma adjustments:
Net income from proceeds . . . . . . . . 289 341 394 454
ESOP (1) . . . . . . . . . . . . . . (27) (32) (37) (42)
Stock programs (2) . . . . . . . . . . . (46) (55) (63) (72)
-------- -------- -------- --------
Pro forma net income . . . . . . . . . $ 798 $ 836 $ 876 $ 922
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share:
Historical. . . . . . . . . . . . . . . . . $ 0.48 $ 0.41 $ 0.35 $ 0.31
Pro forma adjustments:
Net income from proceeds . . . . . . . . 0.24 0.24 0.24 0.24
ESOP (1). . . . . . . . . . . . . . . . (0.02) (0.02) (0.02) (0.02)
Stock programs (2) . . . . . . . . . . . (0.04) (0.04) (0.04) (0.04)
-------- -------- -------- --------
Pro forma net income . . . . . . . . . $ 0.66 $ 0.59 $ 0.53 $ 0.49
-------- -------- -------- --------
-------- -------- -------- --------
Stockholders' equity:
Historical. . . . . . . . . . . . . . . . . $11,367 $11,367 $11,367 $11,367
Estimated net conversion proceeds . . . . . 12,695 14,987 17,281 19,918
Less: Common Stock acquired
by ESOP(1). . . . . . . . . . . . . (1,054) (1,240) (1,426) (1,640)
Common Stock acquired
by Stock Programs(2). . . . . . . . (527) (620) (713) (820)
Pro forma stockholders'
equity(2)(3)(4) . . . . . . . . . . . $22,481 $24,494 $26,509 $28,826
-------- -------- -------- --------
-------- -------- -------- --------
Stockholders' equity per share:
Historical. . . . . . . . . . . . . . . . . $ 8.64 $ 7.34 $ 6.38 $ 5.55
Estimated net conversion proceeds . . . . . 9.64 9.67 9.69 9.72
Less: Common Stock acquired
by ESOP(1). . . . . . . . . . . . . (0.80) (0.80) (0.80) (0.80)
Common Stock acquired
by Stock Programs(2). . . . . . . . (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity
per share(2)(3)(4) . . . . . . . . . . $ 17.08 $ 15.81 $ 14.87 $ 14.07
-------- -------- -------- --------
-------- -------- -------- --------
Purchase price as a percentage of
pro forma stockholders' equity
per share. . . . . . . . . . . . . . . . 58.55% 63.25% 67.25% 71.07%
Purchase price to pro forma net
earnings per share. . . . . . . . . . . . . 10.10x 11.30x 12.58x 13.61x
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
31
<PAGE>
- ------------------------
(1) It is assumed that 8.0% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. For purposes of this table, the
funds used to acquire such shares are assumed to have been borrowed by the
ESOP from the Company. The amount borrowed is reflected as a reduction of
stockholders' equity. The Association intends to make annual
contributions to the ESOP in an amount at least equal to the principal and
interest requirement of the debt. The Association's total annual payment
of the ESOP debt is based upon seventeen equal annual installments of
principal and interest. The pro forma net earnings assumes: (i) that the
Association's contribution to the ESOP is equivalent to the debt service
requirement (excluding interest, which is assumed to be paid to the
Company and therefore eliminated in consolidation) for the eight months
ended May 31, 1996, and was made at the end of the period; (ii) that
4,133, 4,863, 5,592 and 6,431 shares at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Price Range, respectively, were
committed to be released during the eight months ended May 31, 1996, at an
average fair value of $10.00 per share in accordance with Statement of
Position ("SOP") 93-6; and (iii) only the ESOP shares committed to be
released were considered outstanding for purposes of the net earnings per
share calculations. See "The Board of Directors and Management of the
Association - Benefits - Employee Stock Ownership Plan and Trust." Under
SOP 93-6, the Company will recognize compensation cost equal to the fair
value of the ESOP shares during the periods in which they become committed
to be released. To the extent that the fair value of the Association's
ESOP shares differs from the cost of such shares, this differential will
be charged or credited to equity.
(2) Gives effect to the Stock Programs expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. If the Stock Programs are approved by stockholders, the
Stock Programs intend to acquire an amount of Common Stock equal to 4.0%
of the shares of Common Stock issued in the Conversion, or 52,700, 62,000,
71,300 and 81,995 shares of Common Stock at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Price Range, respectively,
either through open market purchases, if permissible, or from authorized
but unissued shares of Common Stock or treasury stock of the Company, if
any. Funds used by the Stock Programs to purchase the shares will be
contributed to the Stock Programs by the Association. In calculating the
pro forma effect of the Stock Programs, it is assumed that the required
stockholder approval has been received, that the shares were acquired by
the Stock Programs at the beginning of the period presented in open market
purchases at the Purchase Price and that 13.2% of the amount contributed
was an amortized expense during such period. The issuance of authorized
but unissued shares of the Company's Common Stock to the Stock Programs
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.9% and pro forma net earnings per
share would be $0.64, $0.57, $0.52 and $0.48 and pro forma stockholders'
equity per share would be $16.80, $14.74, $13.89 and $13.15. There can be
no assurance that stockholder approval of the Stock Programs will be
obtained, or that the actual purchase price of the shares will be equal to
the Purchase Price. See "The Board of Directors and Management of the
Association - Benefits - Stock Programs."
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plans expected to be adopted by the
Company following the Conversion. The Company expects to present the
Stock Option Plans for approval at a meeting of stockholders. If the
Stock Option Plans are approved by stockholders, an amount equal to 10% of
the Common Stock issued in the Conversion, or 131,750, 155,000, 178,250
and 204,987 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively, will be reserved for
future issuance upon the exercise of options to be granted under the Stock
Option Plans. The issuance of Common Stock pursuant to the exercise of
options under the Stock Option Plans will result in the dilution of
existing stockholders' interests. Assuming stockholder approval of the
Stock Option Plans and all options were exercised at the end of the period
at an exercise price of $10.00 per share, the pro forma net earnings per
share would be $0.59, $0.53, $0.48 and $0.44, respectively, and the
pro forma stockholders' equity per share would be $16.43, $15.28, $14.44
and $13.70, respectively. See "The Board of Directors and Management of
the Association - Benefits - Stock Option Plans."
(4) The retained earnings of the Association will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion -
Liquidation Rights" and "Regulation - Federal Savings Institution
Regulation - Limitation on Capital Distributions."
(5) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations, changes in market conditions or
general financial and economic conditions following the commencement of
the Subscription and Community Offerings.
32
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30, 1995
------------------------------------------------------------
1,317,500 1,550,000 1,782,500 2,049,875
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE
(MINIMUM (MIDPOINT (MAXIMUM (15% ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(5)
------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Gross proceeds . . . . . . . . . . . . . . $13,175 $15,500 $17,825 $20,499
Less: Offering expenses and
commission. . . . . . . . . . . . (480) (513) (544) (581)
-------- ------- -------- -------
Estimated net proceeds . . . . . . . . . . . 12,695 14,987 17,281 19,918
Less: Common Stock acquired by
ESOP. . . . . . . . . . . . . . . . (1,054) (1,240) (1,426) (1,640)
Common Stock acquired by
Stock Programs. . . . . . . . . . . (527) (620) (713) (820)
-------- ------- -------- -------
Estimated net proceeds, as adjusted. . . . $11,114 $13,127 $15,142 $17,458
-------- ------- -------- -------
-------- ------- -------- -------
Consolidated net earnings:
Historical . . . . . . . . . . . . . . . . $ 944 $ 944 $ 944 $ 944
Pro forma adjustments:
Net income from proceeds. . . . . . . . 400 472 545 628
ESOP (1). . . . . . . . . . . . . . . . (41) (48) (55) (64)
Stock programs (2). . . . . . . . . . . (70) (82) (94) (108)
-------- ------- -------- -------
Pro forma net income. . . . . . . . . . $ 1,233 $ 1,286 $ 1,340 $ 1,400
-------- ------- -------- -------
-------- ------- -------- -------
Net earnings per share:
Historical . . . . . . . . . . . . . . . . $ 0.77 $ 0.66 $ 0.57 $ 0.50
Pro forma adjustments:
Net income from proceeds. . . . . . . . 0.33 0.33 0.33 0.33
ESOP (1). . . . . . . . . . . . . . . . (0.03) (0.03) (0.03) (0.03)
Stock programs (2). . . . . . . . . . . (0.06) (0.06) (0.06) (0.06)
-------- ------- -------- -------
Pro forma net income. . . . . . . . . . $ 1.01 $ 0.90 $ 0.81 $ 0.74
-------- ------- -------- -------
-------- ------- -------- -------
Stockholders' equity:
Historical . $10,799 $10,799 $10,799 $10,799
Estimated net conversion proceeds. . . . . 12,695 14,987 17,281 19,918
Less: Common Stock acquired
by ESOP(1) . . . . . . . . . . . . (1,054) (1,240) (1,426) (1,640)
Common Stock acquired
by Stock Programs(2) . . . . . . . (527) (620) (713) (820)
-------- ------- -------- -------
Pro forma stockholders'
equity(2)(3)(4) . . . . . . . . . . . $21,913 $23,926 $25,941 $28,257
-------- ------- -------- -------
-------- ------- -------- -------
Stockholders' equity per share:
Historical . . . . . . . . . . . . . . . . $ 8.20 $ 6.97 $ 6.06 $ 5.27
Estimated net conversion proceeds. . . . . 9.64 9.67 9.69 9.72
Less: Common Stock acquired
by ESOP(1) . . . . . . . . . . . . (0.80) (0.80) (0.80) (0.80)
Common Stock acquired
by Stock Programs(2) . . . . . . . (0.40) (0.40) (0.40) (0.40)
-------- ------- -------- -------
Pro forma stockholders' equity
per share(2)(3)(4). . . . . . . . . . $ 16.64 $ 15.44 $ 14.55 $ 13.79
-------- ------- -------- -------
-------- ------- -------- -------
Purchase price as a percentage of
pro forma stockholders' equity
per share . . . . . . . . . . . . . . 60.10% 64.77% 68.73% 72.52%
Purchase price to pro forma
net earnings per share . . . . . . . . . . 9.90x 11.11x 12.35x 13.51x
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
33
<PAGE>
- ---------------------------
(1) It is assumed that 8.0% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. For purposes of this table, the
funds used to acquire such shares are assumed to have been borrowed by the
ESOP from the Company. The amount borrowed is reflected as a reduction of
stockholders' equity. The Association intends to make annual
contributions to the ESOP in an amount at least equal to the principal and
interest requirement of the debt. The Association's total annual payment
of the ESOP debt is based upon seventeen equal annual installments of
principal and interest. The pro forma net earnings assumes: (i) that the
Association's contribution to the ESOP is equivalent to the debt service
requirement (excluding interest, which is assumed to be paid to the
Company and therefore eliminated in consolidation) for the year ended
September 30, 1995, and was made at the end of the period; (ii) that
6,200, 7,294, 8,388 and 9,647 shares at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Price Range, respectively, were
committed to be released during the year ended September 30, 1995, at an
average fair value of $10.00 per share in accordance with Statement of
Position ("SOP") 93-6; and (iii) only the ESOP shares committed to be
released were considered outstanding for purposes of the net earnings per
share calculations. See "The Board of Directors and Management of the
Association - Benefits - Employee Stock Ownership Plan and Trust." Under
SOP 93-6, the Company will recognize compensation cost equal to the fair
value of the ESOP shares during the periods in which they become committed
to be released. To the extent that the fair value of the Association's
ESOP shares differs from the cost of such shares, this differential will
be charged or credited to equity.
(2) Gives effect to the Stock Programs expected to be adopted by the
Company following the Conversion and presented for approval at a
meeting of stockholders. If the Stock Programs are approved by
stockholders, the Stock Programs intend to acquire an amount of
Common Stock equal to 4.0% of the shares of Common Stock issued in
the Conversion, or 52,700, 62,000, 71,300 and 81,995 shares of Common
Stock at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Price Range, respectively, either through open market
purchases, if permissible, or from authorized but unissued shares of
Common Stock or treasury stock of the Company, if any. Funds used by
the Stock Programs to purchase the shares will be contributed to the
Stock Programs by the Association. In calculating the pro forma
effect of the Stock Programs, it is assumed that the required
stockholder approval has been received, that the shares were acquired
by the Stock Programs at the beginning of the period presented in
open market purchases at the Purchase Price and that 20% of the
amount contributed was an amortized expense during such period. The
issuance of authorized but unissued shares of the Company's Common
Stock to the Stock Programs instead of open market purchases would
dilute the voting interests of existing stockholders by approximately
3.9% and pro forma net earnings per share would be $0.99, $0.88,
$0.80 and $0.73 and pro forma stockholders' equity per share would be
$16.38, $15.23, $14.38 and $13.64. There can be no assurance that
stockholder approval of the Stock Programs will be obtained, or that
the actual purchase price of the shares will be equal to the Purchase
Price. See "The Board of Directors and Management of the
Association - Benefits - Stock Programs."
(3) No effect has been given to the issuance of additional shares of
Common Stock pursuant to the Stock Option Plans expected to be
adopted by the Company following the Conversion. The Company expects
to present the Stock Option Plans for approval at a meeting of
stockholders. If the Stock Option Plans are approved by
stockholders, an amount equal to 10% of the Common Stock issued in
the Conversion, or 131,750, 155,000, 178,250 and 204,987 shares at
the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively, will be reserved for future
issuance upon the exercise of options to be granted under the Stock
Option Plans. The issuance of Common Stock pursuant to the exercise
of options under the Stock Option Plans will result in the dilution
of existing stockholders' interests. Assuming stockholder approval
of the Stock Option Plans and all options were exercised at the end
of the period at an exercise price of $10.00 per share, the pro forma
net earnings per share would be $0.93, $0.82, $0.74, and $0.68,
respectively, and the pro forma stockholders' equity per share would
be $16.03, $14.94, $14.14 and $13.44, respectively. See "The Board
of Directors and Management of the Association - Benefits - Stock
Option Plans."
(4) The retained earnings of the Association will continue to be
substantially restricted after the Conversion. See "Dividend
Policy," "The Conversion - Liquidation Rights" and "Regulation -
Federal Savings Institution Regulation - Limitation on Capital
Distributions."
(5) As adjusted to give effect to an increase in the number of shares
which could occur due to an increase in the Estimated Price Range of
up to 15% as a result of regulatory considerations, changes in market
conditions or general financial and economic conditions following the
commencement of the Subscription and Community Offerings.
34
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION OF DELPHOS
STATEMENTS OF INCOME
The following Statements of Income of the Association for each of the years
in the three year period ended September 30, 1995 have been audited by Lentol,
Violet, Kienitz & Company, independent certified public accountants, whose
report thereon appears elsewhere herein. The information for the eight-month
periods ended May 31, 1996 and May 31, 1995 is unaudited, but, in the opinion of
management reflects all adjustments (consisting of only normal recurring
adjustments) which are necessary to present fairly the results for such interim
periods. The results of operations for the eight months ended May 31, 1996 are
not necessarily indicative of the results of operations that may be expected for
the year ended September 30, 1996. These statements should be read in
conjunction with the other Financial Statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED YEAR ENDED SEPTEMBER 30,
--------------------------- ----------------------------------------
MAY 31, 1996 MAY 31, 1995 1995 1994 1993
------------ ------------ ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
First mortgage loans . . . . . . . . . . . $3,332,510 $2,928,841 $4,503,056 $3,870,470 $3,923,619
Consumer and other loans . . . . . . . . . 68,891 51,507 83,978 129,731 126,526
Investment securities. . . . . . . . . . . 15,902 12,770 21,133 17,162 45,616
Mortgage-backed and related securities . . 798,488 845,323 1,276,199 991,911 931,107
Dividends on FHLB stock. . . . . . . . . . 38,908 27,552 39,344 26,945 23,302
Interest bearing deposits in banks . . . . 162,210 193,801 293,674 387,880 331,958
---------- ---------- ---------- ---------- ----------
Total interest income. . . . . . . . . 4,416,909 4,059,794 6,217,384 5,424,099 5,382,128
Interest expense:
Deposits (Note 7). . . . . . . . . . . . . (2,676,059) (2,324,947) (3,601,490) (2,951,663) (3,027,247)
---------- ---------- ---------- ---------- ----------
Net interest income . . . . . . . . . . . . 1,740,850 1,734,847 2,615,894 2,472,436 2,354,881
Provision for loan losses. . . . . . . . . . 60,000 25,000
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses . . . . . . . . . . . . . 1,740,850 1,734,847 2,615,894 2,412,436 2,329,881
---------- ---------- ---------- ---------- ----------
Noninterest income:
Service charges and fees . . . . . . . . . 134,284 69,715 123,623 220,662 279,113
Gain on sale of mortgage-backed securities
available for sale . . . . . . . . . . 8,259
Other non-interest income. . . . . . . . . 16,632 18,783 27,290 40,404 55,619
---------- ---------- ---------- ---------- ----------
Total non-interest income. . . . . . 159,175 88,498 150,913 261,066 334,732
---------- ---------- ---------- ---------- ----------
Non-interest expense:
Compensation and benefits (Note 8) . . . . 441,178 380,580 552,215 524,240 497,112
Occupancy and equipment. . . . . . . . . . 49,443 46,982 88,042 78,784 106,015
FDIC premium . . . . . . . . . . . . . . . 117,617 109,849 166,347 156,096 133,560
Data processing and maintenance. . . . . . 106,317 89,420 146,234 147,898 134,924
---------- ---------- ---------- ---------- ----------
Franchise taxes. . . . . . . . . . . . . . 109,019 99,013 150,438 134,861 119,430
Loss on sale of fixed assets . . . . . . . 7,678
Other non-interest expense . . . . . . . . 194,209 158,917 238,574 242,075 230,778
---------- ---------- ---------- ---------- ----------
Total non-interest expense . . . . . 1,017,783 884,761 1,341,850 1,283,954 1,229,497
---------- ---------- ---------- ---------- ----------
Income before income taxes . . . . . . . . . 882,242 938,584 1,424,957 1,389,548 1,435,116
Income tax expense (Note 9). . . . . . . . . 300,000 319,119 480,752 477,504 464,565
---------- ---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . $582,242 $619,465 $944,205 $912,044 $970,551
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no results
of operations. The Association's results of operations are dependent primarily
on net interest income, which is the difference between the interest income
earned on the Association's interest-earning assets, such as loans and
investments, and the interest expense on its interest-bearing liabilities, such
as deposits and borrowings. The Association also generates non-interest income
such as income from loan origination and other fees. The Association's non-
interest expenses primarily consist of employee compensation and benefits,
occupancy and equipment expenses, federal deposit insurance premiums and other
operating expenses. The Association's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory agencies. The Association exceeded all of its regulatory capital
requirements at May 31, 1996. See "Regulatory Capital Compliance" for a
discussion of the historical and pro forma capital of the Association and
capital requirements. See also "Regulation - Federal Savings Institution
Regulation - Capital Requirements."
MANAGEMENT STRATEGY
Management's primary goals have been and continue to be to maintain the
Association's profitability and high level of asset quality while serving the
residential mortgage lending and deposit needs of its local community. In
furtherance of these goals, the Association has employed an operating strategy
which: (i) emphasizes the origination of conventional one- to four-family fixed-
rate mortgage loans secured by properties in its market area for retention in
its portfolio; (ii) utilizes conservative underwriting standards to maintain
asset quality; (iii) seeks to limit interest rate risk by maintaining high
levels of liquidity through the purchase of adjustable rate mortgage-backed
securities and other short- and intermediate-term securities; and (iv) maintains
a low level of non-interest expense. The foregoing operating strategies have
enabled the Association to maintain consistent profitability over the past five
years. However, there can be no assurance that this operating strategy will
continue to be successful in future periods. In particular, the Association's
net interest income, which is the primary component of its net income, remains
vulnerable to increases in market interest rates due to the Association's
emphasis upon the origination of fixed-rate mortgage loans for retention in its
portfolio. See "Management of Interest Rate Risk."
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Association's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of risk appropriate given the Association's
business focus, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with Board approved
guidelines. Through such management, the Association seeks to reduce the
vulnerability of its operations to changes in interest rates. The Association
monitors its interest rate risk as such risk relates to its operating
strategies. The Association's Board of Directors reviews on a quarterly basis
the Association's asset/liability position, including simulations of the effect
on the Association's capital of various interest rate scenarios.
Historically, the Association has emphasized the origination of fixed-rate
residential mortgage loans as a result of market conditions and consumer
preference for such loans in its primary market area. At May 31, 1996, fixed-
rate mortgage loans totalled $49.0 million, or 66.8% of gross loans receivable.
Management believes that investing in fixed-rate mortgage loans results in a
higher net interest margin
36
<PAGE>
than investment in adjustable-rate mortgage loans. However, investment in
fixed-rate mortgage loans generally results in increased interest rate risk
as such loans generally do not reprice as quickly as adjustable-rate mortgage
loans during periods of rising interest rates. Management of the Association
seeks to limit interest rate risk by maintaining a high level of capital and
through the purchase of adjustable-rate mortgage-backed securities and other
short and intermediate-term securities. At May 31, 1996, adjustable-rate
mortgage-backed securities and other securities totalled $6.8 million, or
7.4% of total assets.
NET PORTFOLIO VALUE. The Association's interest rate sensitivity is
monitored by management through the use of a model which estimates the change in
net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. An NPV Ratio, in any interest rate scenario, is defined as the
NPV in that scenario divided by the market value of assets in the same scenario.
The Sensitivity Measure is the decline in the NPV Ratio, in basis points, caused
by a 200 basis point (one basis point equals 0.01%) increase or decrease in
rates, whichever produces a larger decline. The higher an institution's
Sensitivity Measure is, the greater its exposure to interest rate risk is
considered to be. The Association utilizes a market value model prepared by the
OTS (the "OTS NPV model"), which is prepared quarterly, based on the
Association's quarterly Thrift Financial Reports filed with the OTS. The OTS
NPV model measures the Association's interest rate risk by approximating the
Association's NPV under various market interest rate scenarios which range from
a 400 basis point increase to a 400 basis point decrease in market interest
rates. The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, an institution whose sensitivity
measure exceeds 200 basis points would be required to deduct an interest rate
risk component in calculating its total capital for purpose of the risk-based
capital requirement. See "Regulation - Federal Savings Institution Regulation."
37
<PAGE>
The following table shows the NPV and projected change in the NPV of the
Association at March 31, 1996 assuming an instantaneous and sustained change in
market interest rates of 100, 200, 300 and 400 basis points, as calculated by
the OTS. The table indicates that the structure of the Association's assets and
liabilities would result in a decline in the Association's NPV in a rising rate
environment. Specifically, the table indicates that, at March 31, 1996, the
Association's NPV was $12.5 million (or 13.41% of the market value of portfolio
assets) and that, based upon the assumptions utilized, an immediate increase in
market interest rates of 200 basis points would result in a $3.8 million or 30%
decline in the Association's NPV and would result in a 361 basis point or 26.9%
decline in the Association's NPV ratio to 9.80%. In addition, if the
Association had been subject to the interest rate risk component of the OTS
capital regulations, the Association would have been required to deduct $973,000
from its risk-weighted capital at March 31, 1996 but would have continued to
exceed its risk-based capital requirement by $7.0 million. See "Regulation -
Federal Savings Institution Regulation."
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO VALUE
NET PORTFOLIO VALUE OF ASSETS
----------------------------------------- ---------------------------
CHANGE
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO % CHANGE(1)
- -------- -------- ---------- -------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 $4,630 $ (7,906) (63)% 5.50% (59.0)%
300 6,668 (5,868) (47) 7.70 (42.6)
200 8,721 (3,815) (30) 9.80 (26.9)
100 10,734 (1,802) (14) 11.75 (12.4)
Static 12,536 0 0 13.41
(100) 13,918 1,381 11 14.62 9.0
(200) 14,594 2,058 16 15.17 13.1
(300) 14,926 2,390 19 15.41 14.9
(400) 15,557 3,021 24 15.91 18.6
</TABLE>
- ---------------------------
(1) Based on the portfolio value of the Association's assets assuming no change
in interest rates.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV requires the making of
certain assumptions that may tend to oversimplify the manner in which actual
yields and costs respond to changes in market interest rates. First, the models
assume that the composition of the Association's interest sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured. Second, the models assume that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities. Third,
the models do not take into account the impact of the Association's business or
strategic plans on the structure of interest-earning assets and interest-bearing
liabilities. Accordingly, although the NPV measurement provides an indication
of the Association's interest rate risk exposure at a particular point in time,
such measurement is not intended to and does not provide a precise forecast of
the effect of changes in market interest rates on the Association's net interest
income and will differ from actual results. The results of this modeling are
monitored by management and presented to the Board of Directors quarterly.
38
<PAGE>
AVERAGE BALANCE SHEETS. The following table sets forth certain
information relating to the Association at May 31, 1996, and for the eight
months ended May 31, 1996 and May 31, 1995 and the years ended September 30,
1995, 1994 and 1993. The yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for
the periods shown. Average balances are derived from average month-end
balances. Management does not believe that the use of average monthly
balances instead of average daily balances has caused any material
differences in the information presented. Average balances of loans
receivable include loans on which the Association has discontinued accruing
interest. The yields and costs include amortized and deferred fees and costs
which are considered adjustments to yields.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
------------------------------------------------------------
AT MAY 31, 1996 MAY 31, 1996 MAY 31, 1995
----------------- ---------------------------- ----------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
------- ------ ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-bearing deposits in other banks . . . $ 3,218 5.18% $ 3,979 $ 162 6.11% $ 5,995 $ 194 5.85%
Investment securities, net(1). . . . . . . . . 1,265 4.92 1,247 55 6.62 1,124 41 5.47
Loans receivable, net (2). . . . . . . . . . . 69,637 7.63 66,780 3,402 7.64 58,604 2,980 7.63
Mortgage-backed securities, net(1) . . . . . . 14,921 7.34 16,022 798 7.47 17,975 845 7.05
------- ------- ------ ------- ------
Total interest-earning assets. . . . . . . . 89,041 7.45 88,028 4,417 7.53 83,698 4,060 7.28
------ ------
Non-interest-earning assets. . . . . . . . . . 2,656 2,360 1,360
------- ------- -------
Total assets . . . . . . . . . . . . . . . . $91,697 $90,388 $85,058
------- ------- -------
------- ------- -------
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Passbook savings accounts. . . . . . . . . . . $ 8,792 2.92 $ 8,502 168 2.96 $ 8,562 199 3.49
Money market accounts. . . . . . . . . . . . . 8,645 3.19 8,677 179 3.09 12,851 296 3.45
NOW accounts . . . . . . . . . . . . . . . . . 4,502 1.78 4,561 61 2.01 4,482 78 2.61
Certificate accounts . . . . . . . . . . . . . 57,122 5.88 56,601 2,268 6.01 48,225 1,752 5.45
------- ------- ------ ------- ------
Total interest-bearing liabilities . . . . . 79,061 5.02 78,341 2,676 5.12 74,120 2,325 4.71
------ ------
Non-interest-bearing liabilities . . . . . . . . 1,269 668 541
------- ------- -------
Total liabilities. . . . . . . . . . . . . . 80,330 79,009 74,661
Equity . . . . . . . . . . . . . . . . . . . . . 11,367 11,379 10,397
------- ------- -------
Total liabilities and equity . . . . . . . . $91,697 $90,388 $85,058
------- ------- -------
------- ------- -------
Net interest income. . . . . . . . . . . . . . . $1,741 $ 1,735
------ -------
------ -------
Net interest rate spread(3). . . . . . . . . . . 2.43% 2.41% 2.57%
---- ---- ----
---- ---- ----
Net interest margin(4) . . . . . . . . . . . . . 2.97% 3.11%
---- ----
---- ----
Ratio of interest-earning assets to
interest-bearing liabilities . . . . . . . . 112.37% 112.92%
------ ------
------ ------
</TABLE>
- ---------------
(1) Includes unamortized discounts and premiums.
(2) Amount is net of loans in process, net deferred loan origination fees and
allowance for estimated loan losses and includes non-performing loans. See
"Business of the Association - Lending Activities."
(3) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
39
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1995 1994
-------------------------------- -------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-bearing deposits in other banks. . $ 5,658 $ 294 5.20% $11,867 $ 388 3.27%
Securities, net(1). . . . . . . . . . . . . 1,154 60 5.20 1,058 44 4.16
Loans receivable, (2) . . . . . . . . . . . 59,832 4,587 7.67 52,119 4,000 7.67
Mortgage-backed securities, net(1). . . . . 17,872 1,276 7.14 13,465 992 7.37
------- ------ ------- ------
Total interest-earning assets . . . . . 84,516 6,217 7.36 78,509 5,424 6.91
------ ------
Non-interest-earning assets . . . . . . . . . 1,372 1,267
------- -------
Total assets. . . . . . . . . . . . . . $85,888 $79,776
------- -------
------- -------
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Passbook accounts . . . . . . . . . . . . . $ 8,582 287 3.34 $ 9,358 329 3.52
Money market savings accounts . . . . . . . 11,933 400 3.35 19,981 761 3.81
NOW accounts. . . . . . . . . . . . . . . . 4,470 109 2.44 4,044 116 2.87
Certificate accounts. . . . . . . . . . . . 49,770 2,805 5.64 36,332 1,746 4.81
------- ------ ------- ------
Total interest-bearing liabilities. . . 74,755 3,601 4.82 69,715 2,952 4.23
------ ------
Non-interest-bearing liabilities. . . . . . . 572 788
------- -------
Total liabilities . . . . . . . . . . . 75,327 70,503
Equity. . . . . . . . . . . . . . . . . . . . 10,561 9,273
------- -------
Total liabilities and equity. . . . . . $85,888 $79,776
------- -------
------- -------
Net interest income before provision
for estimated loan losses . . . . . . . . $2,616 $2,472
------ ------
------ ------
Net interest rate spread(3) . . . . . . . . . 2.54% 2.68%
---- ----
---- ----
Net interest margin(4). . . . . . . . . . . . 3.10% 3.15%
---- ----
---- ----
Ratio of interest-earning assets to
interest-bearing liabilities. . . . . . . . 112.20% 112.61%
------ ------
------ ------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1993
------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-bearing deposits in other banks. . $13,182 $ 332 2.52%
Securities, net(1). . . . . . . . . . . . . 1,339 69 5.15
Loans receivable, (2) . . . . . . . . . . . 47,470 4,050 8.53
Mortgage-backed securities, net(1). . . . . 10,533 931 8.84
------- ------
Total interest-earning assets . . . . . 72,524 5,382 7.42
Non-interest-earning assets . . . . . . . . . 1,301
-------
Total assets. . . . . . . . . . . . . . $73,825
-------
-------
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Passbook accounts . . . . . . . . . . . . . $ 8,060 323 4.01
Money market savings accounts . . . . . . . 15,333 645 4.21
NOW accounts. . . . . . . . . . . . . . . . 3,766 132 3.51
Certificate accounts. . . . . . . . . . . . 37,605 1,927 5.12
------- ------
Total interest-bearing liabilities. . . 64,764 3,027 4.67
------
Non-interest-bearing liabilities. . . . . . . 1,461
-------
Total liabilities . . . . . . . . . . . 66,225
Equity. . . . . . . . . . . . . . . . . . . . 7,600
-------
Total liabilities and equity. . . . . . $73,825
-------
-------
Net interest income before provision
for estimated loan losses . . . . . . . . $2,355
------
------
Net interest rate spread(3) . . . . . . . . . 2.75%
----
----
Net interest margin(4). . . . . . . . . . . . 3.25%
----
----
Ratio of interest-earning assets to
interest-bearing liabilities. . . . . . . . 111.98%
------
------
</TABLE>
(1) Includes unamortized discounts and premiums.
(2) Amount is net of loans in process, net deferred loan origination fees and
allowance for loan losses and includes non-performing loans. See "Business
of the Association - Lending Activities."
(3) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
40
<PAGE>
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Association's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
MAY 31, 1996
COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
EIGHT MONTHS ENDED COMPARED TO
MAY 31, 1995 YEAR ENDED SEPTEMBER 30, 1994
---------------------------- ------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------- ----------------- -------
VOLUME RATE NET VOLUME RATE NET
-------- ------ ------ -------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits and
other investments. . . . . . . . . . . $ (65) $ 33 $ (32) $(259) $165 $ (94)
Investment securities, net. . . . . . . . 4 10 14 5 11 16
Loans receivable, net . . . . . . . . . . 416 6 422 591 (4) 587
Mortgage-backed securities, net . . . . . (92) 45 (47) 316 (32) 284
----- ---- ----- ----- ---- ------
Total change in interest income. . . . 263 94 357 653 140 793
----- ---- ----- ----- ---- ------
INTEREST-BEARING LIABILITIES:
Passbook savings accounts . . . . . . . . (1) (30) (31) (26) (16) (42)
Money market accounts . . . . . . . . . . (96) (21) (117) (278) (83) (361)
NOW accounts. . . . . . . . . . . . . . . 1 (18) (17) 11 (18) (7)
Certificate accounts. . . . . . . . . . . 304 212 516 722 337 1,059
----- ---- ----- ----- ---- ------
Total change in interest expense . . . 208 143 351 429 220 649
----- ---- ----- ----- ---- ------
Net change in net interest income. . . . . . $ 55 $(49) $ 6 $ 224 $(80) $ 144
----- ---- ----- ----- ---- -----
----- ---- ----- ----- ---- -----
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1994
COMPARED TO
YEAR ENDED SEPTEMBER 30, 1993
----------------------------
INCREASE (DECREASE)
DUE TO
------------------
VOLUME RATE NET
-------- ------ ------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits and. . . . . . . $ (36) $ 92 $ 56
other investments
Investment securities, net . . . . . . . . (13) (12) (25)
Loans receivable, net . . . . . . . . . . 377 (427) (50)
Mortgage-backed securities, net . . . . . 232 (171) 61
----- ----- -----
Total change in interest income. . . . 560 (518) 42
----- ----- -----
INTEREST-BEARING LIABILITIES:
Passbook savings accounts . . . . . . . . 48 (42) 6
Money market accounts . . . . . . . . . . 181 (65) 116
NOW accounts. . . . . . . . . . . . . . . 9 (25) (16)
Certificate accounts. . . . . . . . . . . (63) (118) (181)
----- ----- -----
Total change in interest expense . . . 175 (250) (75)
----- ----- -----
Net change in net interest income. . . . . . $ 385 $(268) $ 117
----- ----- -----
----- ----- -----
</TABLE>
41
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE EIGHT MONTHS ENDED MAY 31, 1996 AND
MAY 31, 1995
GENERAL
Net income for the eight months ended May 31, 1996 decreased by $37,000, or
6.0%, from $619,000 for the eight months ended May 31, 1995. The decline in net
income between the two eight month periods was due primarily to a $133,000
increase in non-interest expense, which more than offset a $71,000 increase in
non-interest income. Net interest income was essentially unchanged between the
two periods. Net earnings for the year ended September 30, 1996, will be
adversely affected by a $323,000 change to be recorded as of September 30, 1996
to reflect the effect of recently enacted legislation imposing a special
assessment on all SAIF-insured deposits. See "Risk Factors - Recapitalization
of SAIF and Its Impact on SAIF Premiums."
INTEREST INCOME
Total interest income for the eight months ended May 31, 1996 increased by
$357,000, or 8.8%, to $4.4 million from $4.1 million for the eight months ended
May 31, 1995. The increase in total interest income resulted primarily from a
$4.3 million increase in the average balance of interest-earning assets, and to
a lesser extent, a 25 basis point increase in the average yield on interest-
earning assets. The increase also reflected a higher average balance of loans
receivable net, which generally produce higher yields than other types of
interest-earning assets. The average balance of loans receivable, net increased
by $8.2 million between the two periods.
INTEREST EXPENSE
Total interest expense for the eight months ended May 31, 1996 increased by
$351,000, or 15.1%, to $2.7 million from $2.3 million for the eight months ended
May 31, 1995. The increase in total interest expense was primarily attributable
to the combined effect of a $4.2 million increase in the average balance of
interest-bearing liabilities and a 41 basis point increase in the average cost
of interest-bearing liabilities. The most significant factor in the increase in
the average cost of interest-bearing liabilities was a change in the composition
of the Association's deposits as the average balance of relatively higher cost
certificate accounts increased by $8.4 million and the average balance of
relatively lower cost money market accounts decreased by $4.2 million. The
Association has conducted various promotional activities from time to time in
recent years in an effort to retain maturing certificate accounts. Management
believes that the increase in the average balance of certificate accounts
resulted primarily from such promotional activities.
NET INTEREST INCOME
Net interest income remained essentially unchanged at $1.7 million for the
eight month periods ended May 31, 1995 and May 31, 1996. The Association's net
interest rate spread decreased by 16 basis points from 2.57% for the eight
months ended May 31, 1995 to 2.41% for the eight months ended May 31, 1996. The
Association's net interest margin decreased by 14 basis points from 3.11% for
the eight months ended May 31, 1995 to 2.97% for the eight months ended May 31,
1996.
PROVISION FOR LOAN LOSSES
The Association did not make a provision for loan losses during the eight
months ended May 31, 1996 or the eight months ended May 31, 1995. The amount of
the provision for loan losses, if any, is based upon management's periodic
analysis of the adequacy of the allowance for loan losses. The
42
<PAGE>
Association has historically experienced very low levels of loan losses. Based
upon recent increases in the size of the Association's loan portfolio, and
the resultant increased risk inherent in a larger portfolio
management intends to begin making additional provisions for loan losses during
the quarter ended September 30, 1996. See "Summary of Recent Developments,"
"Business of the Association - Lending Activity - Allowance for Loan Losses."
NON-INTEREST INCOME
For the eight months ended May 31, 1996, non-interest income increased by
$71,000, or 79.9%, to $159,000 from $88,000 for the eight months ended May 31,
1995. The increase in non-interest income between the two periods primarily
resulted from a $65,000 increase in service charges and fees, which resulted
primarily from an increase in the volume of transactions between the two
periods. The Association's loan fees included in non-interest income consist of
appraisal fees, document preparation fees, recording fees and other direct
origination-related fees, which are substantially offset by origination costs.
See "Business of the Association - Lending Activity - Origination and Purchase
of Loans."
NON-INTEREST EXPENSE
Non-interest expense increased by $133,000, or 15.0%, from $885,000 for the
eight months ended May 31, 1995 to $1.0 million for the eight months ended May
31, 1996. The increase is non-interest expense primarily resulted from a
$61,000 increase in compensation and benefit expense, a $17,000 increase in data
processing and maintenance expense and a $35,000 increase in other non-interest
expense. The increase in compensation and benefit expense was primarily due to
an increase in the year-end bonus accrual of $33,000, an increase in the 401(k)
profit sharing plan accrual of $16,000 and normal inflationary increases to
salaries and benefits. Compensation and benefits expense is expected to
increase in future periods as a result of expenses related to the implementation
of the ESOP, the Stock Programs and the Stock Option Plans. See "Management of
the Association - Benefits - Employee Stock Ownership Plan and Trust, - Stock
Option Plans and - Stock Programs." Other non-interest expense is also expected
to increase following the Conversion due to increased legal, accounting and
other operating expenses resulting from operating as a public company.
INCOME TAXES
Income tax expense for the Association decreased $19,000, or 6.0%, from
$319,000 for the eight months ended May 31, 1995 to $300,000 for the eight
months ended May 31, 1996. The decrease in income tax expense between the two
periods resulted from a $57,000 decrease in income before income taxes.
COMPARISON OF FINANCIAL CONDITION AT MAY 31, 1996 AND SEPTEMBER 30, 1995
The Association's total assets increased by $3.7 million, or 4.2%, to $91.7
million at May 31, 1996 from $88.0 million at September 30, 1995. The major
component of the increase in total assets between the two periods was an
increase of $5.6 million in loans receivable, net, of which $4.6 million were
one- to four-family residential mortgage loans, which more than offset a $3.4
million decrease in mortgage-backed securities. The Association's total
liabilities increased by $3.1 million, or 4.0%, to $80.3 million at May 31, 1996
from $77.2 million at September 30, 1995. The major component of this increase
was a $2.4 million increase in deposits, due primarily to a $3.2 million
increase in certificates of deposit. Total equity increased by $568,000 between
the two periods, which reflects net income of $582,000, which was partially
offset by a $14,000 net unrealized loss on securities available for sale.
43
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND
SEPTEMBER 30, 1994
GENERAL
Net income for the year ended September 30, 1995 increased by $32,000, or
3.5%, to $944,000 from $912,000 for the year ended September 30, 1994. The
increase in net income resulted primarily from a $203,000 increase in net
interest income after provision for loan losses, which more than offset a
$110,000 decrease in non-interest income and a $58,000 increase in non-interest
expense between the two periods.
INTEREST INCOME
Total interest income for the year ended September 30, 1995 increased by
$793,000, or 14.6%, to $6.2 million from $5.4 million for the year ended
September 30, 1994. The increase in total interest income was due primarily to
a $6.0 million increase in the average balance of interest-earning assets and a
45 basis point increase in the average yield on interest-earning assets between
the two years. The increase in the average balance of interest-earning assets
reflected a $7.7 million increase in net loans receivable and a $4.4 million
increase in mortgage-backed securities, net, which more than offset a $6.2
million decrease in the average balance of interest-bearing deposits in other
banks. The increase in the average balance of net loans receivable resulted
primarily from a year-to-year decline in loan refinancing activity as the level
of principal repayments on loans fell by $8.2 million from $20.5 million for the
year ended September 30, 1994 to $12.3 million for the year ended September 30,
1995. The increase in the average balance of mortgage-backed securities
reflects the purchase of $10.0 million of mortgage-backed securities during the
year ended September 30, 1994 and $1.0 million of such securities during the
year ended September 30, 1995 as management redeployed funds invested in
relatively lower-yielding interest-earning deposits and other investments into
mortgage-backed securities.
INTEREST EXPENSE
The Association's total interest expense increased by $650,000, or 22.0%,
from $3.0 million for the year ended September 30, 1994 to $3.6 million for the
year ended September 30, 1995. The increase in total interest expense reflects
the combined effect of a $5.0 million increase in the average balance of
interest-bearing liabilities and a 59 basis point increase in the average cost
of interest-bearing liabilities. A significant factor in the increase in total
interest expense was a $13.4 million increase in the average balance of
certificate accounts, which was responsible for the increase in the
Association's cost of funds, because certificate accounts generally are a
higher-cost source of funds than other types of deposit accounts and because the
average cost of the Association's certificate accounts increased by 83 basis
points between the two years. The increase in the average balance of
certificate accounts resulted primarily from promotional activities undertaken
by the Association to retain maturing certificate accounts. The increase in the
average cost of the Association's certificate accounts was due primarily to an
increase in market interest rates paid on certificate accounts. The average
cost of the Association's other types of deposit accounts declined by varying
amounts between the two years.
NET INTEREST INCOME
Net interest income increased by $144,000, or 5.8%, from $2.5 million for
the year ended September 30, 1994 to $2.6 million for the year ended September
30, 1995. The increase reflected an increase in the average balance of
interest-earning assets that was $1.0 million larger than the increase in the
average balance of interest-bearing liabilities between the two years. The
Association's average
44
<PAGE>
interest rate spread declined by 14 basis points from 2.68% to 2.54% and net
interest margin declined by 5 basis points from 3.15% to 3.10% between the year
ended September 30, 1994 to the year ended September 30, 1995.
PROVISION FOR LOAN LOSSES
The Association did not make a provision for loan losses for the year ended
September 30, 1995 as compared to a $60,000 provision for loan losses for the
year ended September 30, 1994. The amount of the provision for loan losses, if
any, is based upon management's periodic analysis of the adequacy of the
allowance for loan losses. The Association has historically experienced very
low levels of loan losses. See "Business of the Association - Lending
Activity - Allowance for Loan Losses."
NON-INTEREST INCOME
Non-interest income decreased by $110,000, or 42.2%, from $261,000 for the
year ended September 30, 1994 to $151,000 for the year ended September 30, 1995.
The decrease in non-interest income was due primarily to a $97,000 decrease in
service charges and fee income between the two years, which reflected a decrease
in the volume of activity from the year ended September 30, 1994 to the year
ended September 30, 1995.
NON-INTEREST EXPENSE
Total non-interest expense increased by $58,000, or 4.5%, from $1.28
million for the year ended September 30, 1994 to $1.34 million for the year
ended September 30, 1995. The primary component of this increase was a $28,000
increase in compensation and benefits expense with the remaining $30,000 of the
increase spread over several categories of non-interest expense.
INCOME TAXES
The Association's income tax expense was essentially unchanged for the year
ended September 30, 1994 to the year ended September 30, 1995. The
Association's effective tax rate was 33.7% for the year ended September 30,
1995, as compared to 34.4% for the year ended September 30, 1994.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994
The Association's total assets grew by $5.4 million, or 6.5%, from $82.6
million at September 30, 1994 to $88.0 million at September 30, 1995. The
primary component in the increase in total assets was a $7.6 million increase in
one- to four-family residential mortgage loans, which more than offset a $2.1
million decrease in cash and cash equivalents. The increase in one-to four-
family residential mortgage loans reflected a level of loan originations for the
year ended September 30, 1995 which, although declining from total loan
originations for the year ended September 30, 1994, continued to exceed
principal repayments by $8.6 million. See "Business of the Association -
Lending Activities - Origination and Purchase Loans." Total liabilities
increased by $4.5 million, or 6.1%, from $72.8 million at September 30, 1994 to
$77.2 million at September 30, 1995. Almost the entire increase represented an
increase in total deposits, which, in turn, resulted from a $10.1 million
increase in certificate accounts. Promotional activities undertaken to retain
maturing certificate accounts were the primary factor in the increase in total
certificate accounts. Total equity increased by $944,000 from $9.9 million at
September 30, 1994 to $10.8 million at September 30, 1995, which represented the
Association's net income for the year ended September 30, 1995.
45
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND
SEPTEMBER 30, 1993
GENERAL
The Association's net income decreased by $59,000, or 6.0%, to $912,000 for
the year ended September 30, 1994 from $971,000 for the year ended September 30,
1993. The decrease in net income was due primarily to a $74,000 decrease in
non-interest income, coupled with a $54,000 increase in non-interest expense,
which more than offset an $83,000 increase in net interest income after
provision for loan losses between the two years.
INTEREST INCOME
Total interest income for the year ended September 30, 1994 increased by
$42,000, or 0.8%, to $5.4 million from $5.4 million for the year ended September
30, 1993. The increase in total interest income resulted from a $6.0 million
increase in the average balance of interest-earning assets, which more than
offset a 51 basis point decline in the average yield on interest-earning assets
from 7.42% to 6.91% between the two years. In particular, the average yield on
the Association's loan portfolio declined 86 basis points from 8.53% to 7.67%
and the average yield on the Association's portfolio of mortgage-backed
securities declined 147 basis points from 8.84% to 7.37% between the two years.
The Association experienced declines in the average yields earned on loans and
mortgage-backed securities between the two years despite the increase in market
interest rates during the second half of the year ended September 30, 1994
because of high levels of refinancing activity which resulted in older, higher-
yielding loans being replaced by new loans originated at relatively lower market
interest rates.
INTEREST EXPENSE
Total interest expense decreased by $76,000, or 2.5%, from $3.0 million for
the year ended September 30, 1993 to $2.9 million for the year ended September
30, 1994. The decrease in total interest expense was due to a 44 basis point
decline in the average cost of interest-bearing liabilities, which more than
offset a $5.0 million increase in the average balance of interest-bearing
liabilities between the two years.
NET INTEREST INCOME
Net interest income for the year ended September 30, 1994 increased by
$117,000, or 5.0%, to $2.5 million from $2.4 million for the year ended
September 30, 1993. The Association's average interest rate spread decreased by
7 basis points, from 2.75% to 2.68%, and the net interest margin decreased by 10
basis points, from 3.25% to 3.15% between the two years.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased by $35,000, or 140%, from
$25,000 for the year ended September 30, 1993 to $60,000 for the year ended
September 30, 1994. The amount of provision for loan losses, if any, is
based upon management's periodic analysis of the adequacy of the allowance
for loan losses. The Association adopted a revised methodology for analyzing
the adequacy of the allowance for loan losses during the year ended September
30, 1994 which placed greater emphasis upon levels of problem loans. See
"Business of the Association - Lending Activity - Delinquencies and
Classified Assets and - Allowance for Loan Losses."
46
<PAGE>
NON-INTEREST INCOME
Non-interest income decreased $74,000, or 22.0%, to $261,000 for the year
ended September 30, 1994 from $335,000 for the year ended September 30, 1993.
The primary component of the decrease in non-interest income between the two
periods was a $58,000 decrease in service charges and fees. The decrease
resulted primarily from a decrease in the service charges and fees charged to
meet competition in the Association's market area in order to generate greater
loan volume.
NON-INTEREST EXPENSE
Non-interest expense increased $54,000, or 4.4%, to $1.3 million for the
year ended September 30, 1994 from $1.2 million for the year ended September 30,
1993. The major elements of the increase in non-interest expense between the
two years were a $27,000 increase in compensation and benefits, a $23,000
increase in FDIC premium expense and a $13,000 increase in data processing and
maintenance expense, which more than offset a $27,000 decrease in occupancy and
equipment expense.
INCOME TAXES
Income tax expense increased $13,000, or 2.8%, to $478,000 for the year
ended September 30, 1994 from $465,000 for the year ended September 30, 1993.
Effective October 1, 1993, the Association adopted SFAS No. 109 "Accounting For
Income Taxes ("SFAS 109"). The adoption of SFAS 109 did not have a material
effect upon the Association's net income or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds are deposits, principal and
interest payments on loans and securities, and proceeds from the maturation of
securities. While maturities and scheduled amortization of loans and securities
are predictable sources of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Association maintains a liquidity ratio above the regulatory
requirement. This requirement, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio is currently 5%. The
Association's average regulatory liquidity ratios were 7.68%, 11.26%, 26.20%,
18.40% and 17.29% for the years ended September 30, 1995, 1994, 1993, 1992 and
1991, and 6.72% and 9.12% for the eight months ended May 31, 1996 and May 31,
1995, respectively. Management expects the Association's regulatory liquidity
ratio to increase immediately after the consummation of the Conversion because
the bulk of the net conversion proceeds will initially be invested in short-term
investment securities.
The Association's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities and
financing activities. Cash flows provided by operating activities were $1.2
million and $1.0 million for the eight months ended May 31, 1996 and May 31,
1995, respectively, and were $904,000, $968,000 and $1.0 million for the years
ended September 30, 1995, 1994 and 1993, respectively. Net cash from investing
activities consisted primarily of disbursements for loan originations and the
purchase of investments and mortgage-backed securities, offset by principal
collections on loans and proceeds from maturation of investments and paydowns on
mortgage-backed securities. Net cash from financing activities consisted
primarily of activity in deposit accounts. The net increase in deposits was
$2.4 million and $3.5 million for the eight months ended May 31, 1996 and May
31, 1995, respectively, and $4.4 million, $4.0 million and $8.3 million for
the years ended September 30, 1995, 1994 and 1993, respectively.
47
<PAGE>
At May 31, 1996, the Association exceeded all of its regulatory capital
requirements with a tangible capital level of $11.4 million, or 12.41%, of
adjusted total assets, which is above the required level of $1.4 million, or
1.50%; core capital of $11.4 million, or 12.41%, of adjusted total assets, which
is above the required level of $2.8 million, or 3.00%; and risk-based capital of
$11.5 million, or 27.01%, of risk-weighted assets, which is above the required
level of $3.4 million, or 8.00%. See "Regulatory Capital Compliance."
The Association's most liquid assets are cash and short-term investments.
The levels of these assets are dependent on the Association's operating,
financing, lending and investing activities during any given period. At May 31,
1996, cash and short-term investments totalled $5.3 million. The Association
has other sources of liquidity if a need for additional funds arises, including
securities maturing within one year and the repayment of loans. The Association
may also utilize FHLB advances or the sale of securities available for sale as a
source of funds. At May 31, 1996, the Association had no advances outstanding
from the FHLB and $775,000 of mortgage-backed securities available for sale.
At May 31, 1996, the Association had outstanding commitments to originate
mortgage loans of $2.1 million compared to $2.0 million at September 30, 1995.
The Association anticipates that it will have sufficient funds available to meet
its current loan origination commitments. See "Business of the Association -
General." Certificate accounts which are scheduled to mature in less than one
year from May 31, 1996 totalled $43.9 million. The Association expects that a
substantial portion of the maturing certificate accounts will be retained by the
Association at maturity. However, if a substantial portion of these deposits
are not retained, the Association may utilize Federal Home Loan Bank advances,
or raise interest rates on deposits to attract new accounts, which may result in
higher levels of interest expense.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollar amounts without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Association's operations. Unlike industrial companies, nearly all of the assets
and liabilities of the Association are monetary in nature. As a result,
interest rates have a greater impact on the Association's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
IMPACT OF NEW ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No.
114"), which has been amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure (SFAS No. 118"). Under
the provisions of SFAS No. 114, as amended, a loan is considered impaired when,
based on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. SFAS No. 114 requires creditors to measure impairment of a loan
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. If the measure of the impaired loan is less than the
recorded investment in the loan, a creditor shall recognize an impairment by
recording a valuation allowance with a corresponding charge to the provision for
loan losses. The Association adopted the provisions of SFAS No. 114 and SFAS
No. 118 effective October 1, 1995. The adoption of SFAS No. 114 and SFAS No.
118 did not have a material impact on the results of operations or financial
condition of the Association.
48
<PAGE>
In November 1993, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 93-6 "Employers' Accounting For Employee
Stock Ownership Plans" ("SOP 93-6"). SOP 93-6 addresses the accounting for
shares of stock issued to employees by an employee stock ownership plan
("Employee Plan"). SOP 93-6 requires that the employer record compensation
expense in an amount equal to the fair value of shares committed to be released
to employees from the Employee Plan to employees. Assuming shares of Common
Stock appreciate in value over time, the adoption of SOP 93-6 will likely
increase compensation expense relative to the Employee Plan to be established in
the Conversion, as compared with prior guidance which required the recognition
of compensation expense based on the cost of shares acquired by the Employee
Plan. However, the amount of the increase has not been determined as the
expense will be based on the fair value of the shares committed to be released
to employees, which is not yet determinable.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122 "Accounting for Mortgage Servicing Rights ("SFAS No. 122")." SFAS No.
122 requires an institution that purchases or originates mortgage loans and
sells or securitizes those loans with servicing rights retained to allocate the
total cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values. In
addition, institutions are required to assess impairment of the capitalized
mortgage servicing portfolio based on the fair value of those rights. SFAS No.
122 is effective for fiscal years beginning after December 15, 1995. Adoption
of this statement is not expected to have a material impact on the Association's
net income or financial condition.
In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). This Statement, which supersedes SFAS No. 122, provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. If a transfer does not
meet the criteria for a sale, the transfer is accounted for as a secured
borrowing with a pledge of collateral. The Statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and should be applied
prospectively. Earlier or retroactive application of this Statement is not
permitted. Adoption of this statement is not expected to have a material
impact on the Association's net income or financial condition.
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS No. 123"). This statement establishes financial accounting
standards for stock-based employee compensation plans. SFAS No. 123 permits the
Association to choose either a new fair value based method or the current APB
Opinion 25 intrinsic value based method of accounting for its stock-based
compensation arrangements. SFAS No. 123 requires pro forma disclosures of net
earnings and earnings per share computed as if the fair value based method had
been applied in financial statements of companies that continue to follow
current practice in accounting for such arrangements under Opinion 25. The
disclosure provisions of SFAS No. 123 are effective for fiscal years beginning
after December 15, 1995. Any effect that this statement will have on the
Association will be applicable upon the consummation of the Conversion.
BUSINESS OF THE ASSOCIATION
GENERAL
The Association's principal business is to operate a community-oriented
savings and loan association. The Association attracts retail deposits from the
general public in the area surrounding its office and invests those deposits,
together with funds generated from operations, primarily in fixed-rate
49
<PAGE>
one- to four-family residential mortgage loans and investment and
mortgage-backed securities. The Association invests, on a limited basis, in
multi-family mortgage, commercial real estate, construction and land and
consumer loans. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Management Strategy." The
Association's revenues are derived principally from interest on its mortgage
loans, and interest and dividends on its investment and mortgage-backed
securities. The Association's primary sources of funds are deposits and
principal and interest payments on loans and securities.
MARKET AREA AND COMPETITION
The Association's primary deposit gathering area is concentrated in Delphos
and the other communities surrounding its office, while its lending activities
primarily include areas throughout Allen, Putnam and Van Wert Counties in
Northwestern Ohio. The tri-county area includes the city of Lima, Ohio, which
has a population of approximately 45,000 and is located approximately 15 miles
southeast of Delphos in Allen County.
The Association's market area is located within 250 miles of several of the
largest metropolitan areas in the United States, including, Chicago, Detroit,
Pittsburgh, Cleveland, Cincinnati, and Indianapolis. There are approximately
150 manufacturing firms located in the tri-county area and manufacturing
accounts for one-third of the employment sector. Wholesale and retail trade is
the second largest employment sector in the tri-county area accounting for 24%
of employment. The City of Lima has experienced increases in unemployment in
recent years due to the closing of several large industrial plants. See "Risk
Factors - Concentration in Real Estate Lending in Northwestern Ohio."
The Association's primary market area is a competitive market for financial
services and the Association faces significant competition both in making loans
and in attracting deposits. The Association faces direct competition from a
number of financial institutions operating in its market area, many with a
state-wide or regional presence, and in some cases, a national presence. Many
of these financial institutions are significantly larger and have greater
financial resources than the Association. The Association's competition for
loans comes principally from savings institutions, mortgage banking companies,
commercial banks and credit unions. Its most direct competition for deposits
has historically come from savings institutions and commercial banks. In
addition, the Association faces increasing competition for deposits and other
financial products from non-bank institutions such as brokerage firms and
insurance companies in such areas as short-term money market funds, corporate
and government securities funds, mutual funds and annuities. Competition may
also increase as a result of the lifting of restrictions on the interstate
operations of financial institutions.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Association's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to four-family
residences. At May 31, 1996, the Association had gross loans receivable of
$73.4 million, of which $61.2 million were one- to four-family, residential
mortgage loans, or 83.35% of the Association's gross loans receivable. The
remainder of the portfolio consists of: $1.4 million of multi-family mortgage
loans, or 1.88% of gross loans receivable; $5.1 million of commercial real
estate loans, or 6.96% of gross loans receivable; $3.8 million of construction
and land loans, or 5.15% of gross loans receivable; and consumer loans of $2.0
million, or 2.66% of gross loans receivable. At that same date, 66.8% of the
Association's loan portfolio had fixed interest rates. The Association had no
loans held for sale at May 31, 1996.
The types of loans that the Association may originate are subject to
federal and state law and regulations. Interest rates charged by the
Association on loans are affected by the demand for such loans and the supply of
money available for lending purposes and the rates offered by competitors.
These factors are, in turn, affected by, among other things, economic
conditions, fiscal policies of the federal government, the monetary policies of
the Federal Reserve Board, and legislative tax policies.
50
<PAGE>
The following table sets forth the composition of the Association's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT MAY 31, AT SEPTEMBER 30,
------------------- ---------------------------------------------
1996 1995 1994
------------------- --------------------- --------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
--------- ------- --------- ------- --------- --------
(DOLLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family. . . . . . . . . . . . $ 61,173 83.35% $ 56,556 83.28% $ 49,424 83.32%
Multi-family . . . . . . . . . . . . . . . 1,379 1.88 1,521 2.24 1,276 2.15
Commercial real estate . . . . . . . . . . 5,109 6.96 3,901 5.74 3,706 6.25
Construction and land. . . . . . . . . . . 3,785 5.15 3,808 5.61 3,081 5.19
Consumer . . . . . . . . . . . . . . . . . . 1,951 2.66 2,128 3.13 1,833 3.09
--------- ------- --------- ------- --------- -------
Gross loans receivable . . . . . . . . . 73,397 100.00% 67,914 100.00% 59,320 100.00%
------- ------- -------
------- ------- -------
Undisbursed loan funds . . . . . . . . . . (3,620) (3,732) (2,728)
Deferred loan origination fees . . . . . . (48) (47) (49)
Allowance for estimated loan losses. . . . (92) (92) (92)
--------- --------- ---------
Loans receivable, net. . . . . . . . . . . . $ 69,637 $ 64,043 $ 56,451
--------- --------- ---------
--------- --------- ---------
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------------
1993 1992 1991
------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
--------- ------- --------- ------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family. . . . . . . . . . . . $ 41,793 82.78% $ 41,315 84.57% $ 37,607 82.61%
Multi-family . . . . . . . . . . . . . . . 771 1.53 729 1.49 244 0.54
Commercial real estate . . . . . . . . . . 3,720 7.37 3,856 7.89 3,574 7.85
Construction and land. . . . . . . . . . . 2,780 5.51 1,473 3.02 2,432 5.34
Consumer . . . . . . . . . . . . . . . . . . 1,422 2.81 1,478 3.03 1,669 3.66
--------- ------- --------- ------- --------- --------
Gross loans receivable . . . . . . . . . 50,486 100.00% 48,851 100.00% 45,526 100.00%
------- ------- -------
------- ------- -------
Undisbursed loan funds . . . . . . . . . . (2,659) (2,167) (1,872)
Deferred loan origination fees . . . . . . (48) (92) (155)
Allowance for estimated loan losses. . . . (32) (29) (29)
--------- --------- ---------
Loans receivable, net. . . . . . . . . . . . $ 47,747 $ 46,563 $ 43,470
--------- --------- ---------
--------- --------- ---------
</TABLE>
51
<PAGE>
LOAN MATURITY. The following table shows the contractual maturity of the
Association's gross loans receivable May 31, 1996. There were no loans held for
sale at May 31, 1996. The table does not include principal prepayments.
<TABLE>
<CAPTION>
AT MAY 31, 1996
------------------------------------------------------------------------
ONE- TO COMMERCIAL GROSS
FOUR- MULTI- REAL CONSTRUCTION LOANS
FAMILY FAMILY ESTATE AND LAND CONSUMER RECEIVABLE
-------- -------- ---------- ------------ -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less . . . . . . . . . . . . . . . $ 650 $ -- $ 35 $ 182 $1,361 $ 2,228
After one year:
More than one year to three years . . . . . 371 -- 16 34 138 559
More than three years to
five years. . . . . . . . . . . . . . . 1,184 10 -- 118 238 1,550
More than five years to 10 years. . . . . . 8,228 323 474 12 162 9,199
More than 10 years to 20 years. . . . . . . 33,226 569 2,910 736 52 37,493
More than 20 years. . . . . . . . . . . . . 17,514 477 1,674 2,703 -- 22,368
-------- -------- ---------- ------------ -------- -----------
Total due after
May 31, 1997. . . . . . . . . . . . . . 60,523 1,379 5,074 3,603 590 71,169
-------- -------- ---------- ------------ -------- -----------
Gross loans receivable. . . . . . . . $61,173 $1,379 $5,109 $3,785 $1,951 $73,397
-------- -------- ---------- ------------ -------- -----------
-------- -------- ---------- ------------ -------- -----------
</TABLE>
The following table sets forth at May 31, 1996, the dollar amount of
gross loans receivable contractually due after May 31, 1997, and whether such
loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER MAY 31, 1997
-------------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- -------
(IN THOUSANDS)
<S>
Real estate loans:
Residential: <C> <C> <C>
One- to four-family . . . . . $42,550 $17,973 $60,523
Multi-family. . . . . . . . . 934 445 1,379
Commercial real estate . . . . . . 624 4,450 5,074
Construction and land. . . . . . . 3,211 392 3,603
Consumer . . . . . . . . . . . . . . . 590 -- 590
------- ------- -------
Total . . . . . . . . . . . . $47,909 $23,260 $71,169
------- ------- -------
------- ------- -------
</TABLE>
52
<PAGE>
ORIGINATION AND PURCHASE OF LOANS. The Association's mortgage lending
activities are conducted through its home office. Although the Association
may originate both adjustable-rate and fixed-rate mortgage loans, a
substantial majority of the Association's loan originations have been fixed-
rate mortgage loans. The Association's ability to originate loans is
dependent upon the relative customer demand for fixed-rate or adjustable-rate
mortgage loans, which is affected by the current and expected future level of
interest rates. The Association has not emphasized the origination of
adjustable-rate mortgage loans due to the relatively low demand for such loans
in the Association's primary market area. The Association retains for its
portfolio all of the mortgage loans that it originates. At May 31, 1996,
there were no loans categorized as held for sale. In addition, the
Association also emphasizes the origination of construction loans secured
primarily by owner-occupied properties. From time to time the Association has
participated in loans originated by other institutions based upon the
Association's investment needs and market opportunities.
The following tables set forth the Association's loan originations and
principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE EIGHT MONTHS ENDED FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------- --------------------------------
MAY 31, 1996 MAY 31, 1995 1995 1994 1993
------------ ------------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance, net . . . . . . . . . . . . . $ 64,043 $ 56,451 $ 56,451 $ 47,747 $ 46,563
Loans originated:
One- to four-family . . . . . . . . . . . . 13,510 6,382 12,116 20,788 19,642
Multi-family. . . . . . . . . . . . . . . . -- 222 423 862 449
Commercial real estate. . . . . . . . . . . 1,929 543 733 862 1,390
Construction and land . . . . . . . . . . . 3,441 2,416 5,033 4,788 3,183
Consumer. . . . . . . . . . . . . . . . . . 1,508 1,767 2,608 2,068 1,560
-------- -------- -------- -------- --------
Total loans originated . . . . . . . . . 20,388 11,330 20,913 29,368 26,224
Principal prepayments. . . . . . . . . . . . . (14,908) (7,377) (12,319) (20,534) (24,589)
Transfer to REO. . . . . . . . . . . . . . . . -- -- -- -- --
Change in undisbursed loan funds(1). . . . . . 113 298 (1,004) (69) (492)
Change in unearned origination fees. . . . . . 1 (1) 2 (1) 45
Change in allowance for estimated
loan losses . . . . . . . . . . . . . . . . -- -- -- (60) (4)
-------- -------- -------- -------- --------
Ending balance, net. . . . . . . . . . . . . . . $ 69,637 $ 60,701 $ 64,043 $ 56,451 $ 47,747
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
____________________
(1) Represents change in loans in process from first day to last day of the
period.
53
<PAGE>
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The primary lending activity of
the Association has been and continues to be the origination of permanent
conventional mortgage loans secured by one- to four-family residences located
in the Association's primary market area, which the Association retains in its
portfolio. The Association's loans generally do not conform to secondary
market standards because the Association does not require title insurance or a
survey. Management believes that the Association's policy of not selling the
loans that it originates provides the Association with a competitive advantage
in the origination of loans in its primary market area. Loan originations are
obtained from the Association's loan officers and their contacts with the
local real estate industry, existing or past customers, and members of the
local communities. The Association primarily originates fixed-rate loans, but
also offers adjustable-rate mortgage ("ARM") loans. At May 31, 1996, one- to
four-family mortgage loans totalled $61.2 million, or 83.35% of total loans at
such date. Of the Association's mortgage loans secured by one- to four-family
residences, $43.2 million, or 70.6%, were fixed-rate loans.
The Association's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the appraised value of the property
securing the loan, up to 85% of the appraised value if the loan is co-signed
by a person approved by the Board of Directors and up to 90% of the appraised
value if private mortgage insurance is obtained. Mortgage loans originated by
the Association generally include due-on-sale clauses which provide the
Association with the contractual right to deem the loan immediately due and
payable in the event the borrower transfers ownership of the property without
the Association's consent. Due-on-sale clauses are an important means of
adjusting the rates on the Association's fixed-rate mortgage loan portfolio
and the Association exercises its rights under these clauses. The residential
mortgage loans originated by the Association are generally for terms to
maturity of up to 30 years.
The Association offers several adjustable rate loan programs with terms
of up to 30 years and interest rates that adjust either annually or every
three years. Of the Association's mortgage loans secured by one- to four-
family residences, $18.0 million, or 29.4%, had adjustable rates. The
Association's one year ARM loan has a maximum adjustment limitation of 1.5%
per year and a 5.0% lifetime cap on adjustments. The Association's three-year
ARM loan has a maximum adjustment limitation of 2.0% per change and a 5.0%
lifetime cap. The index for substantially all of the Association's ARM loans
is the Federal Home Loan Bank System's National Average Mortgage Rate for
Previously-Occupied Homes.
The volume and types of ARM loans originated by the Association have been
affected by such market factors as the level of interest rates, consumer
preferences, competition and the availability of funds. In recent years,
demand for ARM loans in the Association's primary market area has been weak
due to the low interest rate environment and consumer preference for fixed-
rate loans. Consequently, in recent years the Association has not originated
a significant amount of ARM loans as compared to its originations of fixed-
rate loans. The ARM loans offered by the Association do not provide for
initial deep discount interest rates or for negative amortization. Although
the Association will continue to offer ARM loans, there can be no assurance
that in the future the Association will be able to originate a sufficient
volume of ARM loans to constitute a significant portion of the Association's
loan portfolio.
MULTI-FAMILY LENDING. On a limited basis, the Association originates
multi-family mortgage loans generally secured by properties located in the
Association's primary market area. In reaching its decision on whether to
make a multi-family loan, the Association considers a number of factors
including: the net operating income of the mortgaged premises before debt
service and depreciation; the debt service ratio (the ratio of net operating
income to debt service); and the ratio of loan amount to appraised value.
Pursuant to the Association's current underwriting policies, a multi-family
mortgage loan may be made in an amount up to 80% of the appraised value of the
underlying property. In addition, the Association
54
<PAGE>
generally requires a debt service ratio of 120%. Properties securing a multi-
family loan are appraised by an independent appraiser.
When evaluating a multi-family loan, the Association also considers the
financial resources and income level of the borrower, the borrower's
experience in owning or managing similar property, and the Association's
lending experience with the borrower. The Association's underwriting policies
require that the borrower be able to demonstrate strong management skills and
the ability to maintain the property from current rental income. The borrower
is required to present evidence of the ability to repay the mortgage and a
satisfactory credit history. In making its assessment of the creditworthiness
of the borrower, the Association generally reviews the financial statements,
employment and credit history of the borrower, as well as other related
documentation.
Loans secured by multi-family residential properties generally involve a
greater degree of risk than one- to four-family residential mortgage loans.
Because payments on loans secured by multi-family properties are often
dependent on successful operation or management of the properties, repayment
of such loans may be subject to a greater extent to adverse conditions in the
real estate market or the economy. The Association seeks to minimize these
risks through its underwriting policies, which require such loans to be
qualified at origination on the basis of the property's income and debt
coverage ratio.
The Association's multi-family loan portfolio at May 31, 1996 totalled
$1.4 million or 1.88% of gross loans receivable. The Association's largest
multi-family loan at May 31, 1996, had an outstanding balance of $236,000, is
secured by eleven units and is current as to the repayment of principal and
interest.
COMMERCIAL REAL ESTATE LENDING. On a limited basis, the Association
originates and participates in commercial real estate loans that are generally
secured by properties used for business or religious purposes such as farms,
churches, nursing homes, small office buildings or retail facilities located
in its primary market area. The Association's underwriting procedures provide
that commercial real estate loans may be made in amounts up to 80% of the
appraised value of the property. The Association's underwriting standards and
procedures are similar to those applicable to its multi-family loans, whereby
the Association considers the net operating income of the property, the debt
service ratio and the borrower's expertise, credit history and profitability.
The largest commercial real estate loan in the Association's portfolio at May
31, 1996 was a $1.5 million participation in a $5.0 million mortgage and is
secured by a nursing home. The loan was current and performing in accordance
with its contractual terms at May 31, 1996. At May 31, 1996 the Association's
commercial real estate loan portfolio was $5.1 million, or 6.96% of gross
loans receivable.
Loans secured by commercial real estate properties, similar to
multi-family loans, are generally larger and involve a greater degree of risk
than one- to four-family residential mortgage loans. Because payments on
loans secured by commercial real estate properties are often dependent on
successful operation or management of the properties, repayment of such loans
may be subject to a great extent to adverse conditions in the real estate
market or the economy. The Association seeks to minimize these risks through
its underwriting standards.
CONSTRUCTION AND LAND LENDING. The Association generally originates
construction and land development loans to contractors and individuals in its
primary market area. The Association's construction loans primarily are made
to finance the construction of owner-occupied one- to four-family residential
properties and to a significantly lesser extent, real estate developments.
The Association's construction loans to individuals are primarily fixed-rate
loans with maturities of six months which, upon completion of construction,
convert to permanent loans with maturities of up to 30 years. The
55
<PAGE>
Association's policies provide that construction loans may be made in amounts
up to 80% of the appraised value of the property for construction of one- to
four-family residences. The Association requires an independent appraisal of
the property. Loan proceeds are disbursed in increments as construction
progresses and as inspections warrant. The Association requires regular
inspections to monitor the progress of construction. Land loans are
determined on an individual basis, but generally they do not exceed 75% of the
actual cost or current appraised value of the property, whichever is less.
The largest construction and land loan in the Association's portfolio at May
31, 1996 had a balance of $334,000 and is secured by a single family
residence. This loan is currently performing in accordance with its terms.
At May 31, 1996, the Association has $3.8 million of construction and land
loans totalling 5.15% of the Association's gross loans receivable.
Construction and land financing is considered to involve a higher degree
of credit risk than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development compared to the estimated cost (including
interest) of construction. If the estimate of value proves to be inaccurate,
the Association may be confronted with a project, when completed, having a
value which is insufficient to assure full repayment.
CONSUMER AND OTHER LENDING. The Association's originated consumer loans
generally consist of automobile loans, second mortgage loans, home equity
loans, mobile home loans and loans secured by deposits. At May 31, 1996, the
Association's consumer loan portfolio was $2.0 million, or 2.66% of gross
loans receivable.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors
establishes the lending policies of the Association. Loans in amounts up to
$50,000 may be approved by the Association's loan officers. Loans in excess
of $50,000 and up to $250,000 must be approved by the Loan Committee which
consists of two senior officer/directors and one outside director. Loans in
excess of $250,000 must be approved by the Board of Directors. Pursuant to
OTS regulations, loans to one borrower cannot exceed 15% of the Association's
unimpaired capital and surplus. The Association will not make loans to one
borrower that are in excess of regulatory limits.
DELINQUENCIES AND CLASSIFIED ASSETS. The Board of Directors performs a
monthly review of all delinquent loans thirty days or more past due. The
procedures taken by the Association with respect to delinquencies vary
depending on the nature of the loan and period of delinquency. When a
borrower fails to make a required payment on a loan, the Association takes a
number of steps to have the borrower cure the delinquency and restore the loan
to current status. The Association sends the borrower a written notice of
non-payment after the loan is first past due. In the event payment is not
then received, additional letters are sent and phone calls are made. If
management believes that the loan is well-secured, the Association generally
will try to work with the borrower to have the loan brought current. If the
loan is still not brought current and it becomes necessary for the Association
to take legal action, the Association will commence foreclosure proceedings
against any real property that secures the loan. If a foreclosure action is
instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the real property securing the loan is foreclosed
upon and sold at sheriff's sale.
Federal regulations and the Association's Classification of Assets Policy
require that the Association utilize an internal asset classification system
as a means of reporting problem and potential problem assets. The Association
has incorporated the OTS internal asset classifications as a part of its
credit monitoring system. The Association currently classifies problem and
potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An
asset is considered "Substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any.
56
<PAGE>
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis
of currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss allowance is not warranted. Assets which do
not currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, under current OTS policy the Association
is required to consider establishing a general valuation allowance in an
amount deemed prudent by management. The general valuation allowance, which
is a regulatory term, represents a loss allowance which has been established
to recognize the inherent credit risk associated with lending and investing
activities, but which, unlike specific allowances, has not been allocated to
particular problem assets. When an insured institution classifies one or more
assets, or portions thereof, as "Loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
has adopted an interagency policy statement on the allowance for loan and
lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation allowances.
Generally, the policy statement recommends that institutions have effective
systems and controls to identify, monitor and address asset quality problems;
that management has analyzed all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management
has established acceptable allowance evaluation processes that meet the
objectives set forth in the policy statement. As a result of the declines in
local and regional real estate market values and the significant losses
experienced by many financial institutions, there has been a greater level of
scrutiny by regulatory authorities of the loan portfolios of financial
institutions undertaken as part of the examination of institutions by the OTS
and the FDIC. While the Association believes that it has established an
adequate allowance for estimated loan losses, there can be no assurance that
regulators, in reviewing the Association's loan portfolio, will not request
the Association to materially increase its allowance for loan losses, thereby
negatively affecting the Association's financial condition and earnings.
Although management believes that an adequate allowance for loan losses has
been established, actual losses are dependent upon future events and, as such,
further additions to the level of allowances for estimated loan losses may
become necessary.
The Association's management reviews and classifies the Association's
assets quarterly and reports the results of its review to the Board of
Directors. The Association classifies assets in accordance with the
management guidelines described above. REO is classified as Substandard. At
May 31, 1996, the Association had $9,000 of assets classified as Special
Mention, $845,000 of assets classified as Substandard, and $1,000 of assets
classified as Doubtful and no amount classified as Loss.
57
<PAGE>
NON-PERFORMING ASSETS. The following table sets forth information
regarding non-accrual loans, accruing loans which are contractually past due
90 days or more and REO. The Association generally ceases accruing interest
on loans 90 days or more past due. For the eight months ended May 31, 1996
and May 31, 1995 and the years ended September 30, 1995, 1994, 1993, 1992 and
1991, respectively, the amount of interest income that would have been
recognized on nonaccrual loans if such loans had continued to perform in
accordance with their contractual terms was $6,599, $4,482, $5,780, $15,142,
$15,158, $10,302, and $7,776, none of which was recognized.
<TABLE>
<CAPTION>
AT MAY AT MAY AT SEPTEMBER 30,
31, 31, --------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----- ----- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential real estate:
One- to four-family . . . . . . . . . . $316 $ 89 $226 $169 $239 $253 $287
Multi-family. . . . . . . . . . . . . . -- -- -- -- -- -- --
Commercial real estate . . . . . . . . . . . -- 98 117 100 76 76 80
Construction and land. . . . . . . . . . . . -- -- -- -- -- -- --
Consumer. . . . . . . . . . . . . . . . -- -- 12 1 4 12 10
---- ---- ---- ---- ---- ---- ----
Total non-accrual loans . . . . . . . . 316 187 355 270 319 341 377
Loans contractually past due more
than 90 days and accruing interest. . . . -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ----
Total non-performing loans. . . . . . . 316 187 355 270 319 341 377
REO, net . . . . . . . . . . . . . . . . . . . . -- -- -- -- -- -- 114
---- ---- ---- ---- ---- ---- ----
Total non-performing
assets. . . . . . . . . . . . . . . . . $316 $187 $355 $270 $319 $341 $491
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
Allowance for loan losses as a
percent of gross loans receivable. . . . . . 0.13% 0.15% 0.14% 0.16% 0.06% 0.06% 0.05%
Allowance for loan losses as a
percent of total non-performing
loans(1) . . . . . . . . . . . . . . . . . . 29.19 49.45 26.02 34.17 10.16 8.43 7.63
Non-performing loans
as a percent of gross loans
receivable(1). . . . . . . . . . . . . . . . 0.43 0.30 0.55 0.46 0.63 0.70 0.67
Non-performing assets
as a percent of total
assets(1). . . . . . . . . . . . . . . . . . 0.35 0.21 0.40 0.33 0.41 0.50 0.76
</TABLE>
________________________
(1) Non-performing assets consist of non-performing loans and REO. Non-
performing loans consist of all accruing loans 90 days or more past due and
all non-accrual loans.
58
<PAGE>
The following table sets forth delinquencies in the Association's loan portfolio
as of the dates indicated:
<TABLE>
<CAPTION>
AT MAY 31, 1996 AT SEPTEMBER 30, 1995
---------------------------------------- ----------------------------------------
60-89 DAYS 90 DAYS OR MORE (1) 60-89 DAYS 90 DAYS OR MORE (1)
------------------- ------------------- ------------------- -------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.................. 3 $ 139 6 $ 316 2 $ 31 10 $ 226
Multi-family......................... -- -- -- -- -- -- -- --
Commercial real estate............... -- -- -- -- -- -- 2 117
Construction and land................ -- -- -- -- -- -- -- --
Consumer............................. 3 8 -- -- -- -- 1 12
-------- --------- -------- --------- -------- --------- -------- ---------
Total................................ 6 $ 147 6 $ 316 2 $ 31 13 $ 355
-------- --------- -------- --------- -------- --------- -------- ---------
-------- --------- -------- --------- -------- --------- -------- ---------
Delinquent loans to gross
loans receivable.................. .20% .43% .06% .55%
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1994 AT SEPTEMBER 30, 1993
---------------------------------------- ----------------------------------------
60-89 DAYS 90 DAYS OR MORE (1) 60-89 DAYS 90 DAYS OR MORE (1)
------------------- ------------------- ------------------- -------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.................. 4 $ 92 7 $ 169 9 $ 186 11 $ 239
Multi-family......................... -- -- -- -- -- -- -- --
Commercial real estate............... -- -- 1 100 -- -- 1 76
Construction and land................ -- -- -- -- -- -- -- --
Consumer............................. 1 1 1 1 2 4 2 4
-------- --------- -------- --------- -------- --------- -------- ---------
Total................................ 5 $ 93 9 $ 270 11 $ 190 14 $ 319
-------- --------- -------- --------- -------- --------- -------- ---------
-------- --------- -------- --------- -------- --------- -------- ---------
Delinquent loans to gross
loans receivable.................. .16% .46% .38% .63%
</TABLE>
- --------------------------
(1) Loans 90 days or more past due are included in non-accrual loans.
See "Non-Performing Assets."
59
<PAGE>
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Association's loan portfolio and the general economy.
The allowance for loan losses is maintained at an amount management considers
adequate to cover estimated losses in loans receivable which are deemed
probable and estimable. The allowance is based upon a number of factors,
including current economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Association's allowance
for loan losses. Such agencies may require the Association to make additional
provisions for loan losses based upon information available at the time of
the review. As of May 31, 1996, the Association's allowance for loan losses
was 0.13% of gross loans receivable as compared to 0.14% as of September 30,
1995. The Association had non-accrual loans of $316,000 and $250,000 at May
31, 1996 and September 30, 1995, respectively. At May 31, 1996, the
Association had no loans classified as "impaired." The Association will
continue to monitor and modify its allowances for loan losses as conditions
dictate.
The following table sets forth activity in the Association's allowance
for loan losses for the periods set forth in the table.
<TABLE>
<CAPTION>
AT OR FOR THE EIGHT
MONTHS ENDED AT OR FOR THE YEAR ENDED SEPTEMBER 30,
------------------- --------------------------------------
MAY 31, MAY 31,
1996 1995 1995 1994 1993 1992 1991
-------- -------- ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period......................... $ 92 $ 92 $ 92 $ 32 $ 29 $ 29 $ 29
Provision for loan losses.............................. -- -- -- 60 25 -- --
Charge-offs:
Real Estate:
One- to four-family.............................. -- -- -- -- 22 -- --
Multi-family..................................... -- -- -- -- -- -- --
Commercial real estate........................... -- -- -- -- -- -- --
Construction and land............................ -- -- -- -- -- -- --
Consumer............................................ -- -- -- -- -- -- --
Recoveries............................................. -- -- -- -- -- -- --
-------- -------- ------ ------ ------ ------ ------
Balance at end of period............................... $ 92 $ 92 $ 92 $ 92 $ 32 $ 29 $ 29
-------- -------- ------ ------ ------ ------ ------
-------- -------- ------ ------ ------ ------ ------
Net charge-offs to average gross loans receivable...... -- -- -- -- .04% -- --
</TABLE>
60
<PAGE>
The following tables set forth the amount of the Association's allowance for
loan losses, the percent of the allowance for loan losses to the total
allowance and the percent of gross loans to gross loans receivable in each of
the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT MAY 31, 1996
-------------------------------
PERCENT OF
GROSS LOANS
IN
PERCENT OF EACH
ALLOWANCE CATEGORY TO
TO TOTAL GROSS LOANS
AMOUNT ALLOWANCE RECEIVABLE
------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
One- to four-family......................... $ 65 70.35% 83.35%
Multi-family................................ 3 3.30 1.88
Commercial real estate...................... 6 6.31 6.96
Construction and Land....................... 2 2.25 5.15
Consumer.................................... 5 5.38 2.66
Unallocated................................. 11 12.41 --
------ ---------- -----------
Total allowance for loan losses.......... $ 92 100.00% 100.00%
------ ---------- -----------
------ ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------- ------------------------------- -------------------------------
1995 1994 1993
------------------------------- ------------------------------- -------------------------------
PERCENT OF PERCENT OF PERCENT OF
GROSS LOANS GROSS LOANS GROSS LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO
TO TOTAL GROSS LOANS TO TOTAL GROSS LOANS TO TOTAL GROSS LOANS
AMOUNT ALLOWANCE RECEIVABLE AMOUNT ALLOWANCE RECEIVABLE AMOUNT ALLOWANCE RECEIVABLE
------ ---------- ----------- ------ ---------- ----------- ------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family........... $ 63 68.21% 83.28% $ 62 67.58% 83.32% $ 23 70.24% 82.78%
Multi-family.................. 3 3.25 2.24 4 4.36 2.15 1 2.78 1.53
Commercial real estate........ 4 5.03 5.74 4 4.75 6.25 3 7.75 7.37
Construction and land......... 6 6.25 5.61 5 5.75 5.19 1 3.80 5.51
Consumer...................... 5 5.26 3.13 5 5.20 3.09 1 4.84 2.81
Unallocated................... 11 12.00 -- 12 12.36 -- 3 10.59 --
------ ---------- ----------- ------ ---------- ----------- ------ ---------- -----------
Total allowance for
loan losses................. $ 92 100.00% 100.00% $ 92 100.00% 100.00% $ 32 100.00% 100.00%
------ ---------- ----------- ------ ---------- ----------- ------ ---------- -----------
------ ---------- ----------- ------ ---------- ----------- ------ ---------- -----------
<CAPTION>
AT SEPTEMBER 30,
------------------------------- -------------------------------
1992 1991
------------------------------- -------------------------------
PERCENT OF PERCENT OF
GROSS LOANS GROSS LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO
TO TOTAL GROSS LOANS TO TOTAL GROSS LOANS
AMOUNT ALLOWANCE RECEIVABLE AMOUNT ALLOWANCE RECEIVABLE
------ ---------- ----------- ------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family 20 68.28% 84.57% 19 67.25% 82.61%
Multi-family.................. 1 2.94 1.49 1 3.75 .54
Commercial real estate........ 2 8.26 7.89 3 8.25 7.85
Construction and land......... 1 3.75 3.02 1 4.25 5.34
Consumer...................... 2 5.41 3.03 2 5.76 3.66
Unallocated................... 3 11.36 -- 3 10.74 --
------ ---------- ----------- ------ ---------- -----------
Total allowance for
loan losses................. $ 29 100.00% 100.00% $ 29 100.00% 100.00%
------ ---------- ----------- ------ ---------- -----------
------ ---------- ----------- ------ ---------- -----------
</TABLE>
61
<PAGE>
REAL ESTATE OWNED
At May 31, 1996, the Association had no REO. If the Association acquires any
REO, it is initially recorded at fair value less costs to sell and thereafter
REO is recorded at the lower of the recorded investment in the loan or the fair
value of the related assets at the date of foreclosure, less costs to sell.
Thereafter, REO is valued at the lower of the recorded investment or the fair
value of the property less costs to sell. If there is a further deterioration in
value, the Association provides for a specific valuation allowance.
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances and federal funds. Subject to
various restrictions, federally chartered savings institutions may also invest
their assets in commercial paper, investment-grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally chartered
savings institution is otherwise authorized to make directly. Additionally, the
Association must maintain minimum levels of investments that qualify as liquid
assets under OTS regulations. See "Regulation - Federal Savings Institution
Regulation - Liquidity." Historically, the Association has maintained liquid
assets above the minimum OTS requirements and at a level considered to be more
than adequate to meet its normal daily activities.
The investment policy of the Association as established by the Board of
Directors attempts to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk, and
complement the Association's lending activities. The Association's policies
generally limit investments to government and federal agency securities. The
Association's policies provide the authority to invest in U.S. Treasury and
federal agency securities meeting the Association's guidelines and in mortgage-
backed securities guaranteed by the U.S. government and agencies thereof. At May
31, 1996, the Association had investment and mortgage-backed securities with a
carrying value of $15.4 million and a market value of $15.6 million. At May 31,
1996, the Association had $775,000 in mortgage-backed securities classified as
available for sale and $14.6 million in investment and mortgage-backed
securities classified as held to maturity. $6.5 million of the Association's
mortgage-backed securities had adjustable rates at May 31, 1996.
At May 31, 1996, all of the Association's mortgage-backed securities were
insured or guaranteed by either the GNMA or FHLMC. Investments in
mortgage-backed securities involve a risk that actual prepayments will be
greater than estimated prepayments over the life of the security which may
require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby reducing or increasing,
respectively, the net yield on such securities. There is also the risk
associated with the necessity to reinvest the cash flows from such securities at
market interest rates which may be lower than the interest rates received on
such securities. In addition, the market value of such securities may be
adversely affected by changes in interest rates.
62
<PAGE>
The following table sets forth certain information regarding the carrying
and fair values of the Association's investment securities and mortgage-backed
securities at the dates indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------------
AT MAY 31,
1996 1995 1994 1993
-------------------- -------------------- -------------------- -------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities:
Available for sale:
GNMA certificates............ $ 775 $ 775 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total available for sale... $ 775 $ 775 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Held to maturity:
FHLB debt securities......... $ 500 $ 500 $ 500 $ 505 $ 500 $ 503 $ 500 $ 488
GNMA certificates............ 13,917 14,040 17,133 17,529 17,404 16,803 10,339 11,053
FHLMC certificates........... 229 239 287 300 351 361 536 551
--------- --------- --------- --------- --------- --------- --------- ---------
Total held to maturity..... 14,646 14,779 17,920 18,334 18,255 17,667 11,375 12,092
--------- --------- --------- --------- --------- --------- --------- ---------
FHLB stock................... 764 764 726 726 570 570 543 543
--------- --------- --------- --------- --------- --------- --------- ---------
Total securities............. $ 16,185 $ 16,318 $ 18,646 $ 19,060 $ 18,825 $ 18,237 $ 11,918 $ 12,635
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
63
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Association's
investment securities and mortgage-backed securities as of May 31, 1996.
<TABLE>
<CAPTION>
AT MAY 31, 1996
---------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
------------------ ------------------ ------------------ ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities:
Held to maturity:
FHLB debt securities...... $500 4.65% -- -- -- -- -- -- $ 500 4.65%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total debt securities $500 4.65% -- -- -- -- -- -- $ 500 4.65
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Mortgage-backed securities:
Available for sale:
GNMA...................... $ 775 6.46% $ 775 6.46%
-------- --------
Total available
for sale............... 775 6.46 775 6.46
Held to maturity:
GNMA...................... -- -- $ 7 8.00% $ 22 8.19% 13,888 7.33% 13,917 7.33%
FHLMC..................... -- -- -- -- 187 8.30 42 12.31 229 9.04
-------- -------- -------- -------- --------
Total held to maturity.. -- -- 7 8.00 209 8.29 13,930 7.35 14,146 7.36
Total mortgage-backed
securities........... -- -- $ 7 8.00% $ 209 8.29% $14,705 7.30% $14,921 7.31%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
64
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments and cash flows
generated from operations are the primary sources of the Association's funds
for use in lending, investing and for other general purposes. The
Association has historically not used FHLB advances or other borrowings as a
source of funds.
DEPOSITS. The Association offers a variety of deposit accounts with a
range of interest rates and terms. The Association's deposits consist of
savings and club accounts, NOW accounts, money market accounts and
certificates of deposit. For the eight months ended May 31, 1996,
certificates of deposit constituted 72.2% of total average deposits. The
term of the certificates of deposit offered by the Association vary from six
months to five years and the offering rates are established by the
Association on a weekly basis. Once a certificate account is established, no
additional amounts are permitted to be deposited in that account, with the
exception of Individual Retirement Account certificates. Specific terms of
an individual account vary according to the type of account, the minimum
balance required, the time period funds must remain on deposit and the
interest rate, among other factors. The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition. At May 31, 1996, the Association
had $43.9 million of certificate accounts maturing in less than one year.
The Association's deposits are obtained predominantly from the area in which
its banking office is located. The Association relies primarily on a
willingness to pay market-competitive interest rates to attract and retain
these deposits. Accordingly, rates offered by competing financial
institutions significantly affect the Association's ability to attract and
retain deposits. See Note 7 to the Financial Statements for a discussion of
the types of deposit accounts offered by the Association.
The following table presents the deposit activity of the Association for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE EIGHT MONTHS FOR THE YEAR ENDED SEPTEMBER 30,
-------------------- --------------------------------
MAY 31, MAY 31,
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance......................... $76,664 $72,255 $72,255 $68,241 $59,973
Net deposits (withdrawals)................ 217 1,573 809 1,057 5,210
Interest credited on deposit accounts..... 2,216 1,913 3,600 2,957 3,058
Ending balance............................ $79,097 $75,741 $76,664 $72,255 $68,241
</TABLE>
At May 31, 1996, the Association had approximately $4.1 million in
certificate accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- --------------------------------------------------------------------------- ------------- -----------------
(DOLLARS
IN THOUSANDS)
<S> <C> <C>
Three months or less....................................................... $ 692 5.83%
Over three through six months.............................................. 1,010 6.40
Over six through 12 months................................................. 1,728 5.88
Over 12 months............................................................. 629 5.50
-------------
Total...................................................................... $4,059 5.94%
-------------
-------------
</TABLE>
65
<PAGE>
The following table sets forth the distribution of the Association's deposit
accounts for the periods indicated.
<TABLE>
<CAPTION>
FOR THE EIGHT MONTHS ENDED FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------- ----------------------------------------------------------
MAY 31, 1996 1995 1994 1993
-------------------------- ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings and club accounts............... $ 8,792 11.11% $ 8,303 10.83% $ 8,832 12.22% $9,297 13.62%
Money market accounts................... 8,645 10.93 9,493 12.38 15,387 21.30 20,713 30.35
NOW accounts............................ 4,502 5.69 4,718 6.15 4,148 5.74 3,773 5.53
Non-interest bearing accounts........... 36 0.05 185 0.24 39 0.06 38 0.06
-------- -------- -------- -------- -------- -------- -------- --------
Total................................ 21,975 27.78 22,699 29.60 28,406 39.32 33,821 49.56
Certificate accounts:
3.00% to 3.99%....................... 15 .02 14 .02 6,636 9.18 11,783 17.27
4.00% to 4.99%....................... 3,626 4.58 3,595 4.69 7,084 9.80 1,873 2.74
5.00% to 5.99%....................... 29,420 37.20 16,711 21.80 22,842 31.61 15,304 22.43
6.00% to 6.99%....................... 19,878 25.13 29,403 38.35 6,903 9.55 3,414 5.00
7.00% to 7.99%....................... 4,150 5.25 4,205 5.49 275 0.38 1,190 1.74
8.00% to 8.99%....................... 33 0.04 37 0.05 109 0.16 856 1.26
-------- -------- -------- -------- -------- -------- -------- --------
Total certificate accounts......... 57,122 72.22 53,965 70.40 43,849 60.68 34,420 50.44
-------- -------- -------- -------- -------- -------- -------- --------
Total deposits....................... $79,097 100.00% $76,664 100.00% $72,255 100.00% $68,241 100.00%
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
66
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at May 31, 1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM MAY 31, 1996 AT SEPTEMBER 30,
------------------------------------------------------------------------------- --------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO MORE THAN
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS FIVE YEARS TOTAL 1995 1994 1993
--------- --------- ----------- ---------- ---------- ---------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 3.99%.......... $ 15 $ -- $ -- $ -- $ -- $ -- $ 15 $ 14 $ 6,636 $11,783
4.00 to 4.99%....... 3,626 -- -- -- -- -- 3,626 3,595 7,084 1,873
5.00 to 5.99%....... 17,779 7,024 4,342 25 250 -- 29,420 16,711 22,842 15,304
6.00 to 6.99%....... 18,460 796 15 509 98 -- 19,878 29,403 6,903 3,414
7.00 to 7.99%....... 4,029 64 52 5 -- -- 4,150 4,205 275 1,190
8.00 to 8.99%....... -- -- -- -- -- 33 33 37 109 856
--------- --------- ----------- ---------- ---------- ---------- ------- -------- ------- -------
Total............. $43,909 $7,884 $4,409 $539 $348 $ 33 $57,122 $53,965 $43,849 $34,420
--------- --------- ----------- ---------- ---------- ---------- ------- -------- ------- -------
--------- --------- ----------- ---------- ---------- ---------- ------- -------- ------- -------
</TABLE>
67
<PAGE>
SUBSIDIARY ACTIVITIES
The Association has one wholly-owned subsidiary, Delphos Service
Corporation, which currently does not conduct any activities.
PROPERTIES
The Association conducts its business through a single banking office
located at 114 East 3rd Street in Delphos, Ohio. The Company believes that
the current facilities are adequate to meet the present and immediately
foreseeable needs of the Association and the Company. The Association's
office was constructed in 1955 and was most recently remodelled in 1992. The
Association's office had a net book value of $601,000 at May 31, 1996.
LEGAL PROCEEDINGS
At May 31, 1996, the Association was not involved in any pending legal
proceedings. However, from time to time, the Association is involved in
legal proceedings occurring in the ordinary course of business.
PERSONNEL
As of May 31, 1996, the Association had 19 full-time employees and 4
part-time employees. The employees are not represented by a collective
bargaining unit and the Association considers its relationship with its
employees to be good. See "The Board of Directors and Management of the
Association - Benefits" for a description of certain compensation and
benefit programs offered to the Association's employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Association will report their income on a
calendar year basis using the accrual method of accounting and will be
subject to federal income taxation in the same manner as other corporations
with some exceptions, including particularly the Association's reserve for
bad debts discussed below. The following discussion of tax matters is
intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Association or the Company.
The statute of limitations has closed all years for Federal purposes through
the 1992 tax year and for Ohio purposes through the 1993 tax year.
BAD DEBT RESERVE. Historically, savings institutions such as the
Association which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrifts") were
permitted to establish a reserve for bad debts and to make annual additions
thereto, which may have been deducted in arriving at their taxable income.
The Association's deductions with respect to "qualifying real property
loans," which are generally loans secured by certain interest in real
property, were computed using an amount based on the Association's actual
loss experience, or a percentage equal to 8% of the Association's taxable
income, computed with certain modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve. Due to the Association's
loss experience, the Association generally recognized a bad debt deduction
equal to 8% of taxable income.
68
<PAGE>
In August, 1996, legislation repealing the current thrift bad debt rules
were passed by Congress. See "Risk Factors - Financial Institution Regulation
and Possible Legislation." The new rules eliminate the 8% of taxable income
method for deducting additions to the tax bad debt reserves for all thrifts for
tax years beginning after December 31, 1995. These rules also require that all
thrift institutions recapture all or a portion of their bad debt reserves added
since the base year (last taxable year beginning before January 1, 1988). The
Association has previously recorded a deferred tax liability equal to the bad
debt recapture and as such, the new rules will have no effect on net income or
federal income tax expense.
For tax years beginning after December 31, 1995, the Association is
permitted to maintain a tax reserve equal to the greater of the base year
reserve of the reserve calculated using the experience method available to small
(average assets less than $500 million) commercial banks as of the year of the
change. Any excess of the reserve as of the year of the change over the
allowable reserves must be recaptured into taxable income evenly over a period
of six years beginning in 1996 taxable year subject to the suspension rule
described below. As of December 31, 1995, the Association has an excess amount
subject to recapture equal to $634,000.
The experience method allows an institution to maintain a bad debt reserve
equal to the ratio of the net charge-offs for the last six years divided by
total loans for those years multiplied by the total loans outstanding at the end
of the current year. However, this method permits the institution to maintain a
minimum reserve balance equal to its reserve balance at the end of its base
year, adjusted for declines in the loan portfolio for the base year. Although
deductions are allowed for the calculated addition to the bad debt reserve, net
recoveries are not taken into taxable income.
As a practical matter, converted institutions that are permitted to use the
experience method for deducting bad debts will be entitled to deduct net charge-
offs under the new method if their loss experience in prior years was relatively
low and a large base year reserve was accumulated under the percentage of
taxable income method previously used. This results from the base year reserve
being well in excess of the experience reserve and when net charge-offs are
applied to the base year reserve balance, a corresponding deduction is permitted
for the addition to restore the reserve to the base year level. The Association
anticipates that future bad debt deductions will be equal to net charge-offs.
The new rules allow an institution to suspend the bad debt reserve
recapture for the 1996 and 1997 tax years if the institution's lending activity
for those years is equal to or greater than the institutions average mortgage
lending activity for the six taxable years preceding 1996 adjusted for
inflation. For this purpose, only home purchase and home improvement loans are
included and the institution can elect to have the tax years with the highest
and lowest lending activity removed from the average calculation. If an
institution is permitted to postpone the reserve recapture, it must begin its
six year recapture no later than the 1998 tax year. The unrecaptured base year
reserves will not be subject to recapture as long as the institution continues
to carry on the business of banking. In addition, the balance of the pre-1988
bad debt reserves continue to be subject to provision of present law referred to
below that require recapture in the case of certain excess distributions to
shareholders.
DISTRIBUTIONS. To the extent that the Association makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Association's taxable income. Non-dividend distributions include
distributions in excess of the Association's current and accumulated earnings
and profits, distributions in redemption of stock, and distributions in partial
or complete liquidation. However, dividends paid out of the Association's
current or accumulated earnings and profits,
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as calculated for federal income tax purposes, will not be considered to result
in a distribution from the Association's bad debt reserve. Thus, any dividends
to the Company that would reduce amounts appropriated to the Association's bad
debt reserve and deducted for federal income tax purposes would create a tax
liability for the Association. The amount of additional taxable income created
from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the Association makes a "non-dividend distribution,"
then approximately one and one-half times the amount so used would be includable
in gross income for federal income tax purposes, assuming a 34% corporate income
tax rate (exclusive of state and local taxes). See "Regulation" and "Dividend
Policy" for limits on the payment of dividends of the Association. The
Association does not intend to pay dividends that would result in a recapture of
any portion of its bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction using
the percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Association currently has none. AMTI is increased
by an amount equal to 75% of the amount by which the Association's adjusted
current earnings exceeds its AMTI (determined without regard to the reduction
for net operating losses). The Association does not expect to be subject to the
AMTI.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association own more
than 20% of the stock of a corporation distributing a dividend then 80% of any
dividends received may be deducted.
STATE AND LOCAL TAXATION
STATE OF OHIO. 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 Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 or
(ii) 0.582% times taxable net worth.
In computing its tax under the net worth method, the Company may exclude
100% of its investment in the capital stock and indebtedness of the Association
after the Conversion, as reflected on the balance sheet of the Company, 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, the Company may be entitled to various other deductions in
computing taxable net worth that are not generally available to operating
companies.
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A special litter tax is also applicable to all corporations, including the
Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to 0.11% of the first $50,000 of computed Ohio taxable income and
0.22% 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 0.014% times
taxable net worth.
DELAWARE TAXATION. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
REGULATION
GENERAL
The Association is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the FDIC, as the deposit
insurer. The Association is a member of the FHLB System. The Association's
deposit accounts are insured up to applicable limits by the SAIF managed by the
FDIC. The Association must file reports with the OTS and the FDIC concerning
its activities and financial condition in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS and the FDIC to test the Association's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Association and their
operations. Assuming that the holding company form of organization is utilized,
the Company, as a savings and loan holding company, will also be required to
file certain reports with, and otherwise comply with the rules and regulations
of the OTS and of the Securities and Exchange Commission (the "SEC") under the
federal securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Association, its operations or the Association's
Conversion. Congress currently has under consideration various proposals to
eliminate the federal thrift charter and abolish the OTS. The outcome of such
legislation is uncertain. Therefore, the Association is unable to determine the
extent to which legislation, if enacted, would affect its business. See "Risk
Factors - Financial Institution Regulation and Possible Legislation."
Certain of the regulatory requirements applicable to the Association and to
the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings associations set
forth in this Prospectus do not purport to be complete descriptions of such
statutes and regulations and their effects on the Association and the Company
and is qualified in its entirety by reference to such statutes and regulations.
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FEDERAL SAVINGS INSTITUTION REGULATION
BUSINESS ACTIVITIES. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal associations
may engage. In particular, many types of lending authority for federal
associations, e.g., commercial, non-residential real property loans and consumer
loans, are limited to a specified percentage of the institution's capital or
assets.
LOANS-TO-ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Association's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At May 31, 1996, the Association's limit on loans-to-
one borrower was $2.7 million. At May 31, 1996, the Association's largest
aggregate amount of loans-to-one borrower consisted of $1.5 million.
QTL TEST. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings association is required to maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of May 31, 1996,
the Association maintained 97.68% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. For a discussion of the impact of
certain proposed legislation, "See Risk Factors -- Financial Institution
Regulation and Possible Legislation."
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice to, but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net earnings for the previous
four quarters. Any additional capital distributions would require prior OTS
approval. In the event the Association's capital fell below its capital
requirements or the OTS notified it that it was in need of more than normal
supervision, the Association's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
LIQUIDITY. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage (currently 5%) of its net withdrawable deposit accounts
plus short-term borrowings. OTS regulations also require each savings
institution to maintain an average daily balance of short-term liquid assets at
a specified percentage (currently 1%) of the total of its net withdrawable
deposit accounts and borrowings payable in one year
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or less. Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Association's average liquidity ratio for the eight months
ended May 31, 1996 was 6.72%, which exceeded the applicable requirements. The
Association has never been subject to monetary penalties for failure to meet its
liquidity requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset/Liability Management" and "-
Liquidity and Capital Reserves."
ASSESSMENTS. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the Association's
latest quarterly Thrift Financial Report. The assessments paid by the
Association for the year ended September 30, 1995 totalled $28,000.
BRANCHING. OTS regulations permit federally chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations. For
a discussion of the impact of proposed legislation, see "Risk Factors -
Financial Institution Regulation and Possible Legislation."
TRANSACTIONS WITH RELATED PARTIES. The Association's authority to engage
in transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholder's equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs") and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards institutions generally must deduct investments in
and loans to subsidiaries
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engaged in activities not permissible for a national bank. In addition, the OTS
prompt corrective action regulation provides that a savings institution that has
a leverage capital ratio of less than 4% (3% for institutions receiving the
highest CAMEL examination rating) will be deemed to be "undercapitalized" and
may be subject to certain restrictions. See "- Prompt Corrective Regulatory
Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half
of the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director
of the OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has postponed the date that the component will
first be deducted from an institution's total capital to provide it with an
opportunity to review the interest rate risk proposals issued by the other
federal banking agencies.
At May 31, 1996, the Association met each of its capital requirements, in
each case on a fully phased-in basis. See "Regulatory Capital Compliance" for a
table which sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, the Association's historical
amounts and percentages at May 31, 1996, and pro forma amounts and percentages
based upon the issuance of the shares within the Estimated Price Range and
assuming that a portion of the net proceeds are retained by the Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of
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less than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than
4.0% is considered to be undercapitalized. A savings institution that has a
total risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of
a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized,
(2) adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Assessment rates for SAIF member institutions as of September 30,
1996 ranged from 23 basis points to 31 basis points. The FDIC is authorized to
raise the assessment rates in certain circumstances. The FDIC has exercised
this authority several times in the past and may raise insurance premiums in the
future. If such action is taken by the FDIC, it could have an adverse effect on
the earnings of the Association. The Association's assessment rate for the
years ended September 30, 1995, 1994 and 1993 was .23% of assessable deposits.
See "Risk Factors - Recapitalization of SAIF and Its Impact on SAIF Premiums."
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for
member institutions. The Association, as a member of the FHLB, is required to
acquire and hold shares of capital stock in the FHLB in an amount at least equal
to 1% of the aggregate principal amount of its unpaid residential mortgage loans
and similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Association was in
compliance with this requirement with an investment in FHLB stock at May 31,
1996. FHLB advances must be secured by specified types of collateral and all
long-term advances may only be obtained for the purpose of providing funds for
residential housing finance. At May 31, 1996, the Association had no borrowings
from the FHLB.
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The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended September 30, 1995, 1994 and
1993, dividends from the FHLB to the Association amounted to approximately
$39,000, $27,000 and $23,000, respectively. If dividends were reduced, the
Association's net interest income would likely also be reduced. Further, there
can be no assurance that the impact of recent legislation on the FHLBs will not
also cause a decrease in the value of the FHLB stock held by the Association.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $52.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $52.0 million, the reserve requirement is $1.6
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $52.0
million. The first $4.3 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Association is in compliance with the foregoing requirements.
Because required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve Board, the effect of this reserve requirement
is to reduce the Association's interest-earning assets. FHLB System members are
also authorized to borrow from the Federal Reserve "discount window," but
Federal Reserve Board regulations require institutions to exhaust all FHLB
sources before borrowing from a Federal Reserve Bank.
HOLDING COMPANY REGULATION
The Company, if utilized, will be a non-diversified unitary savings and
loan holding company within the meaning of the HOLA. As such, the Company will
be required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. The Association must notify the OTS 30 days before
declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Association continues to be a QTL. See
"- Federal Savings Institution Regulation - QTL Test" for a discussion of the
QTL requirements. Upon any non-supervisory acquisition by the Company of
another savings association, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities of
a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the BHC Act, subject to the prior approval of the OTS,
and to other activities authorized by OTS regulation. Recently proposed
legislation would treat all savings and loan holding companies as bank holding
companies and limit the activities of such companies to those permissible for
bank holding companies. See "Risk Factors - Financial Institution Regulation
and Possible Legislation."
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The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS; and from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of a depository institution that is not
insured by the FDIC. In evaluating applications by holding companies to acquire
savings institutions, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant to
the Conversion. Upon completion of the Conversion, the Company's Common Stock
will be registered with the SEC under the Exchange Act. The Company will then
be subject to the information, proxy solicitation, insider trading restrictions
and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of the Company may
be resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
THE BOARD OF DIRECTORS AND
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company is divided into three classes, each
of which contains approximately one-third of the Board. The directors shall be
elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Ms. Nancy C. Rumschlag, has a term of office expiring at the first
annual meeting of stockholders; a second class, consisting of Messrs. John F.
Helmkamp and Joseph R. Reinemeyer, has a term of office expiring at the second
annual meeting of stockholders; and a third class, consisting of Messrs. P.
Douglas Harter and Robert L. Dillhoff, has a term of office expiring at the
third annual meeting
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of stockholders. Their names and biographical information are set forth under
"The Board of Directors and Management of the Association - Directors."
The following individuals are officers of the Company and hold the offices
set forth below opposite their names.
NAME POSITIONS HELD WITH COMPANY
-------------------- -------------------------------------
Joseph R. Reinemeyer President and Chief Executive Officer
Nancy C. Rumschlag Vice President
Gary G. Ricker Corporate Secretary and Treasurer
The officers of the Company are elected annually and hold office until
their respective successors have been elected and qualified or until death,
resignation or removal by the Board of Directors. Since the formation of the
Company, none of the executive officers, directors or other personnel has
received remuneration from the Company. Information concerning the principal
occupations, employment and compensation of the directors and officers of the
Company during the past five years is set forth under "The Board of Directors
and Management of the Association - Biographical Information."
THE BOARD OF DIRECTORS AND
MANAGEMENT OF THE ASSOCIATION
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Association.
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE DIRECTOR TERM
NAME AGE(1) ASSOCIATION(2) SINCE EXPIRES
- ----------------------- ------ ---------------------------------- -------- -------
<S> <C> <C> <C> <C>
Joseph R. Reinemeyer 47 Director, Chairman of the Board, 1977 1998
President and Chief Executive
Officer
John F. Helmkamp 82 Director 1936 1998
Nancy C. Rumschlag 46 Director and Vice President 1987 1997
P. Douglas Harter 49 Director 1969 1999
Robert L. Dillhoff 49 Director 1991 1999
</TABLE>
- ------------------------
(1) As of May 31, 1996.
(2) All directors of the Association are also directors of the Company.
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EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officer of the Association who is not also a director.
NAME AGE(1) POSITION HELD WITH THE ASSOCIATION
----------------- ------ ----------------------------------------
Gary G. Ricker 42 Secretary and Treasurer
- ------------------------
(1) As of May 31, 1996.
Each of the executive officers of the Association will retain his/her
office in the converted Association until the annual meeting of the Board of
Directors of the Association, held immediately after the first annual meeting of
stockholders subsequent to Conversion, and until their successors are elected
and qualified or until they are removed or replaced. Officers are re-elected by
the Board of Directors annually.
BIOGRAPHICAL INFORMATION
DIRECTORS
JOSEPH R. REINEMEYER is President, Chief Executive Officer and
Chairman of the Board. From 1982, through July, 1996, Mr. Reinemeyer served as
Executive Vice President and Managing Officer of the Association. Mr.
Reinemeyer was an employee of the Association from 1975 to 1982, during which
time he held various positions. Mr. Reinemeyer has been a Director of the
Association since 1977 and is a member of the Loan Committee.
JOHN F. HELMKAMP is a Director of the Association. Mr. Helmkamp
was elected to the Board of Directors in 1936 and served as President and
Chairman of the Board from 1976 through July, 1996. Mr. Helmkamp retired
from day-to-day management of the Association's affairs after Mr. Reinemeyer
became Managing Officer in 1982. Mr. Helmkamp is a member of the Loan
Committee on a rotational basis.
NANCY C. RUMSCHLAG has served as a Director of the Association since
1987 and has been Vice President of the Association since 1991. Ms. Rumschlag
serves as a member of the Loan Committee. Prior to joining the Association, Ms.
Rumschlag managed the H&R Block office located in Delphos, Ohio.
P. DOUGLAS HARTER has served on the Board of Directors of the
Association since 1969. He is also a member of the Loan Committee on a
rotational basis. Mr. Harter is an associate of Harter and Son Funeral Home,
located in Delphos, Ohio.
ROBERT L. DILLHOFF was elected a Director of the Association in 1991
and serves on the Loan Committee on a rotational basis. Mr. Dillhoff is
District Highway Management Administrator for the Ohio Department of
Transportation.
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EXECUTIVE OFFICER WHO IS NOT A DIRECTOR
GARY G. RICKER joined the Association in 1987 as Secretary-Treasurer.
Mr. Ricker also is a loan officer for the Association.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE ASSOCIATION AND COMPANY
The Board of Directors of the Association meets on a monthly basis and may
have additional special meetings from time to time. During the year ended
December 31, 1995, the Board of Directors met 14 times. Each director attended
all of the Board meetings held during this period.
The Board of Directors of the Association has established the Association's
three-member Loan Committee, which consists of Mr. Reinemeyer and Ms. Rumschlag
and, on a rotational basis, either Mr. Helmkamp, Mr. Harter or Mr. Dillhoff.
The purpose of this committee is to approve or reject loans, review workout
solutions of any problem loans and approve the classification of assets and the
establishment of adequate valuation allowances. This Committee meets on a
weekly basis.
Upon consummation of the Conversion, the Company intends to establish an
Audit Committee and a Compensation Committee. The Company has also established
a Pricing Committee consisting of the entire Board of Directors.
DIRECTORS' COMPENSATION
FEE ARRANGEMENTS. All outside Directors of the Association are currently
paid an annual retainer of $5,000 and receive a fee of $400 for each regular
monthly Board meeting held. Each director also receives a fee of $400 for each
Special Board meeting held. There were two Special Board meetings for the year
ended December 31, 1995. Outside Director members of the Loan Committee receive
a fee of $100 for each regular meeting attended. From time to time, members of
the Board will perform inspections of real property for which the Board member
receives a fee that ranges from $20 to $30, depending upon the location of the
inspected property. All of the outside directors have received an annual bonus
equal to the average bonus paid to the officers and employees of the Association
for that year as calculated pursuant to the profit-sharing component of the
Association's 401(k) Plan. The Board of Directors has determined that the
outside directors will not receive such a bonus in future years. See "Benefits
- - 401(k) Plan".
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<PAGE>
EXECUTIVE COMPENSATION
CASH COMPENSATION. The following table sets forth the cash compensation
paid by the Association for services rendered in all capacities during the year
ended September 30, 1995, to the chief executive officer. No executive officer
of the Association received compensation in excess of $100,000 during the year
ended September 30, 1995.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ------------------------- -------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK AWARDS OPTIONS PAYOUTS COMPENSATION
POSITIONS YEAR SALARY($)(1) BONUS($) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph R. Reinemeyer 1995 $52,569 $7,670 $ 8,029 -- -- -- $4,404
Executive Vice President
(chief executive officer)(7)
</TABLE>
- ------------------------
(1) Under Annual Compensation, the column titled "Salary" includes base salary
only.
(2) "Other Annual Compensation" includes meeting, valuation and inspection fees
received as a Director of the Association and remuneration for unused "sick
leave." For 1995, there were no (a) perquisites over the lesser of $50,000
or 10% of the individual's total salary and bonus for the year;
(b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term incentive
plans prior to settlement or maturation; (d) tax payment reimbursements; or
(e) preferential discounts on stock.
(3) Does not include awards pursuant to the Stock Programs, which may be
granted in conjunction with a meeting of stockholders of the Company, as
such awards were not earned, vested or granted in fiscal 1995. For a
discussion of the terms of the Stock Programs, see "- Benefits - Stock
Programs." For 1995, the Association had no restricted stock plans in
existence.
(4) Does not include options, which may be granted in conjunction with a
meeting of stockholders of the Company, as such options were not earned or
granted in 1995. For a discussion of the terms of the grants and vesting
of options, see "- Benefits - Stock Option Plans."
(5) For 1995, there were no long-term incentive plans in existence.
(6) Includes amounts contributed by the Association pursuant to the
Association's 401(k) Plan. SEE "Benefits - 401(k) Plan."
(7) Mr. Reinemeyer became President of the Association on August 1, 1996.
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<PAGE>
EMPLOYMENT AGREEMENTS
Upon completion of the Conversion, the Association and the Company
intend to enter into employment agreements with Mr. Reinemeyer, (the
"Executive"). These agreements are subject to the review and approval of the
OTS and may be amended as a result of such OTS review. These employment
agreements are intended to ensure that the Association and the Company will
be able to maintain a stable and competent management base after the
Conversion. The continued success of the Association and the Company depends
to a significant degree on the skills and competence of Mr. Reinemeyer.
The proposed employment agreements provide for a three-year term for Mr.
Reinemeyer. The Association employment agreements provide that, commencing on
the first anniversary date and continuing each anniversary date thereafter, the
Board of Directors may extend the agreement for an additional year so that the
remaining term shall be three years, unless written notice of non-renewal is
given by the Board of Directors after conducting a performance evaluation of the
Executive. The terms of the Company employment agreements shall be extended on
a daily basis unless written notice of non-renewal is given by the Board of the
Company. The agreements provide that the Executive's base salary will be
reviewed annually. The current base salary for Mr. Reinemeyer as President and
Chief Executive Officer of the Company and President and Chief Executive Officer
of the Association is $70,000. In addition to the base salary, the agreements
provide for, among other things, participation in stock benefits plans and other
fringe benefits applicable to executive personnel. The agreements provide for
termination by the Association or the Company for cause as defined in the
agreements at any time. In the event the Association or the Company chooses to
terminate the Executive's employment for reasons other than for cause, or in the
event of the Executive's resignation from the Association and the Company upon:
(i) failure to re-elect the Executive to his current offices; (ii) a material
change in the Executive's functions, duties or responsibilities; (iii) a
relocation of the Executive's principal place of employment by more than 25
miles; (iv) liquidation or dissolution of the Association or the Company; or
(v) a breach of the agreement by the Association or the Company, the Executive
or, in the event of death, his beneficiary would be entitled to receive an
amount equal to the remaining base salary payments due to the Executive and the
contributions that would have been made on the Executive's behalf to any
employee benefit plans of the Association or the Company during the remaining
term of the agreement. The Association and the Company would also continue and
pay for the Executive's life, health and disability coverage for the remaining
term of the Agreement. Upon any termination of the Executive, the Executive is
subject to a one year non-competition agreement.
Under the agreements, if voluntary or involuntary termination follows a
change in control of the Association or the Company, the Executive or, in the
event of the Executive's death, his beneficiary, would be entitled to a
severance payment equal to the greater of: (i) the payments due for the
remaining terms of the agreement; or (ii) three times the average of the five
preceding taxable years' annual compensation. The Association and the
Company would also continue the Executive's life, health, and disability
coverage for thirty-six months. Notwithstanding that both agreements provide
for a severance payment in the event of a change in control, the Executive
would only be entitled to receive a severance payment under one agreement.
Payments to the Executive under the Association's agreement will be
guaranteed by the Company in the event that payments or benefits are not paid by
the Association. Payment under the Company's agreement would be made by the
Company. All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the Agreements
shall be paid by the Association or Company, respectively, if the Executive is
successful on the merits pursuant to a legal judgment, arbitration or
settlement. The employment agreements also provide that the Association and
Company shall indemnify the Executive to the fullest extent allowable under
federal and Delaware
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<PAGE>
law, respectively. In the event of a change in control of the Association or
Company, the total amount of payments due under the Agreements, based solely on
the current salary of Mr. Reinemeyer and excluding any benefits under any
employee benefit plan which may be payable, would be approximately $210,000 in
the aggregate.
INSURANCE PLANS
All full-time employees, after one month of employment with the
Association, are covered as a group for comprehensive hospitalization, including
major medical, long-term disability, accidental death and dismemberment
insurance and group term life insurance.
BENEFITS
401(k) PLAN. The Association maintains a tax-qualified salary reduction
plan under Section 401(k) of the Code (the "401(k) Plan"). The 401(k) Plan,
which was established in 1994, provides participants with retirement benefits
and may also provide benefits upon death, disability or termination of
employment with the Association. An employee who works at least 1,000 scheduled
hours per year is eligible to participate in the 401(k) Plan following the
completion of one year of service and attainment of age 21. A participant is
always 100% vested in his or her contributions. A participant must reach five
years of vesting service (total time employed) before attaining a vested
interest in the employer contribution. After five years of vesting service, the
employee is 100% vested in the employer contribution.
The funds included in the 401(k) Plan are administered by an independent
trustee. The 401(k) Plan provides participants with five investment choices.
Participants may make salary reduction contributions to the 401(k) Plan up to
the lesser of 6% of annual base salary or the legally permissible limit
(currently $9,240). The Association matches 50% of the amount contributed by
the employee. All participants receive a quarterly detailed statement
including information regarding market value of the participant's investments
and all contributions made on his or her behalf. Any withdrawals prior to
age 59 1/2 are subject to a 10% tax penalty. Participants may borrow against
the vested portion of their accounts. The Board of Directors may at any time
discontinue the Association's contributions to employee accounts. The 401(k)
Plan has a profit-sharing component in addition to the matched employee
contribution. The amount of the Association's annual profit sharing
contribution is based on a return on assets ("ROA") sliding scale ranging
from 0.49 to 1.75. If the Association's ROA is 0.49 or less, then no
employer contribution is made to the accounts of eligible employees. If the
Association's ROA is 1.75 or greater, then eligible employees receive a
contribution equal to 25% of their base salary. The amount of the
Association's contribution will vary when Association's ROA is between 0.50
and 1.74.
For the years ended September 30, 1995 and 1994, the Association made total
contributions of $31,000 and $26,000, respectively, to the 401(k) Plan. For the
year ended September 30, 1995, the Association contributed $4,404 to the 401(k)
Plan on behalf of Mr. Reinemeyer.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Association has established
for eligible employees an ESOP and related trust to become effective upon
Conversion. The trustee for the ESOP trust will be independent of the
Association and the Company. Full-time employees employed with the Association
as of January 1, 1996 and full-time employees of the Company or the Association
employed after such date, who have attained the age of 21 and have completed one
(1) year of service with the Association (1,000 hours within a twelve-month
period) will become participants. The ESOP intends to purchase 8% of the Common
Stock issued in the Conversion. As part of the Conversion and in order to fund
the ESOP's purchase of the Common Stock to be issued in the Conversion, the ESOP
intends to borrow funds from the Company equal to 100% of the aggregate purchase
price of the Common Stock.
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<PAGE>
The loan will be repaid principally from the Company's or the Association's
contribution's to the ESOP over a period of 17 years and the collateral for the
loan will be the Common Stock purchased by the ESOP. Subject to receipt of any
necessary regulatory approvals or opinions, the Association may make
contributions to the ESOP for repayment of the loan since the participants are
all employees of the Association, or to reimburse the Company for contributions
made by it. Contributions to the ESOP will be discretionary; however, the
Company or the Association intend to make annual contributions to the ESOP in an
aggregate amount at least equal to the principal and interest requirement on the
debt. The interest rate for the loan is expected to be 8.25%.
Shares purchased by the ESOP will initially be pledged as collateral for
the loan, and will be held in a suspense account until released for allocation
among participants as the loan is repaid. The pledged shares will be released
annually from the suspense account in an amount proportional to the repayment of
the ESOP loan for each plan year. The released shares will be allocated among
the accounts of participants on the basis of the participant's compensation for
the year of allocation. Participants generally become 100% vested in their ESOP
account after five years of credited service or if their service was terminated
due to death, retirement, permanent disability or a change in control. Prior to
the completion of five years of credited service, a participant who terminates
employment for reasons other than death, retirement, disability, or change in
control of the Association or Company will not receive any benefit. Forfeitures
will be reallocated among remaining participating employees, in the same
proportion as contributions. Benefits may be payable upon death, retirement,
early retirement, disability or separation from service.
In connection with the establishment of the ESOP, a Committee of the Board
of Directors was appointed to administer the ESOP (the "ESOP Committee"). An
unrelated corporate trustee for the ESOP will be appointed prior to the
Conversion and continuing thereafter. The ESOP Committee may instruct the
trustee regarding investment of funds contributed to the ESOP. The ESOP
trustee, subject to its fiduciary duty, must vote all allocated shares held in
the ESOP in accordance with the instructions of the participating employees.
Under the ESOP, unallocated shares will be voted in a manner calculated to most
accurately reflect the instructions it has received from participants regarding
the allocated stock provided that such vote is in accordance with the provisions
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
STOCK OPTION PLANS. Following the Conversion, the Board of Directors of
the Company intends to adopt stock-based benefit plans which would provide
for the granting of stock options to eligible officers, key employees and
non-employee directors of the Company and the Association. Stock options are
intended to be granted under either a separate stock option plan for officers
and employees (the "Incentive Option Plan") and a separate option plan for
non-employee directors (the "Directors' Option Plan") (collectively, the
"Option Plans") or under a single Master Stock-Based Benefit Plan which would
incorporate the benefits and features of the Incentive Option Plan and
Directors' Option Plan. At a meeting of stockholders of the Company
following the Conversion, which under applicable OTS regulations, may be held
no earlier than six months after the completion of the Conversion, the Board
of Directors intends to present the Option Plans or the Master Stock-Based
Benefit Plan to stockholders for approval and has reserved an amount equal to
10% of the shares of Common Stock issued in the Conversion or 178,250 shares
(based upon the issuance of 1,782,500 shares), for issuance under the Option
Plans or the Master Stock-Based Benefit Plan. OTS regulations provide that,
with respect to stock-based benefit plans adopted within one year after the
completion of the Conversion, no individual officer or employee of the
Association may receive more than 25% of the options granted under the Option
Plans or Master Stock-Based Benefit Plan and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate of the options
granted.
84
<PAGE>
The stock option benefits provided under the Incentive Option Plan or
Master Stock-Based Benefit Plan will be designed to attract and retain
qualified personnel in key positions, provide officers and key employees with
a propriety interest in the Company as an incentive to contribute to the
success of the Company and reward such employees for outstanding performance.
All employees of the Company and its subsidiaries will be eligible to
participate in such plans. The Incentive Option Plan or Master Stock-Based
Benefit Plan will provide for the grant of: (i) options to purchase the
Company's Common Stock intended to qualify as incentive stock options under
Section 422 of the Code ("Incentive Stock Options"); (ii) options that do not
so qualify ("Non-Statutory Stock Options"); and (iii) Limited Rights
(discussed below) which will be exercisable only upon a change in control of
the Association or the Company. Unless sooner terminated, the Incentive
Option Plan or Master Stock-Based Benefit Plan will be in effect for a period
of ten years from the earlier of adoption by the Board of Directors or
approval by the Company's Stockholders. Subject to stockholder approval, the
Company intends to grant options with Limited Rights under the Incentive
Option Plan or Master Stock-Based Benefit Plan at an exercise price equal to
the fair market value of the underlying Common Stock on the date of grant.
Upon exercise of "Limited Rights" in the event of a change in control, the
employee will be entitled to receive a lump sum cash payment equal to the
difference between the exercise price of the related option and the fair
market value of the shares of common stock subject to the option on the date
of exercise of the right in lieu of purchasing the stock underlying the
option. It is anticipated that all options granted to officers and employees
contemporaneously with stockholder approval of such plans will be intended to
be Incentive Stock Options to the extent permitted under Section 422 of the
Code.
Under the Incentive Option Plan or Master Stock-Based Benefit Plan, it is
expected that the Compensation Committee of the Company's Board of Directors
will determine which officers and employees will be granted options and Limited
Rights, whether such options will be incentive or non-statutory stock options,
the number of shares subject to each option, the exercise price of each
non-statutory stock option, whether such options may be exercised by delivering
other shares of Common Stock and when such options become exercisable. It is
expected that the per share exercise price of an incentive stock option will be
required to be at least equal to the fair market value of a share of Common
Stock on the date the option is granted.
If the Incentive Option Plan or Master Stock-Based Benefit Plan is
adopted in the form described above, an employee will not be deemed to have
received taxable income upon grant or exercise of any Incentive Stock Option,
provided that such shares received through the exercise of such option are
not disposed of by the employee for at least one year after the date the
stock is received in connection with the option exercise and two years after
the date of grant of the option. No compensation deduction would be able to
be taken by the Company as a result of the grant or exercise of Incentive
Stock Options, provided such shares are not disposed of before the expiration
of the period described above (a "disqualifying disposition"). In the case
of a Non-Statutory Stock Option and in the case of a disqualifying
disposition of an Incentive Stock Option, an employee will be deemed to
receive ordinary income upon exercise of the stock option in an amount equal
to the amount by which the exercise price is exceeded by the fair market
value of the Common Stock purchased by exercising the option on the date of
exercise. The amount of any ordinary income deemed to be received by an
optionee upon the exercise of a Non-Statutory Stock Option or due to a
disqualifying disposition of an Incentive Stock Option would be a deductible
expense for tax purposes for the Company. In the case of Limited Rights,
upon exercise, the option holder would have to include the amount paid to him
or her upon exercise in his gross income for federal income tax purposes in
the year in which the payment is made and the Company would be entitled to a
deduction for federal income tax purposes of the amount paid.
If the Incentive Option Plan or Master Stock-Based Benefit Plan is adopted
in the form described above, stock options would become vested and exercisable
in the manner specified by the Company, and,
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if such plans are adopted within one year following the completion of the
Conversion, subject to applicable OTS regulations, which require that options
begin vesting no earlier than one year from the date of shareholder approval
of the Incentive Option Plan or Master Stock-Based Benefit Plan and
thereafter vest at a rate of no more than 20% per year. Options granted in
connection with the Incentive Option Plan or Master Stock-Based Benefit Plan
could be exercisable for three months following the date on which the
employee ceases to perform services for the Association or the Company,
except that in the event of death or disability, options accelerate and
become fully vested and may be exercisable for up to one year thereafter or
such longer period as determined by the Company. However, any Incentive
Stock Options exercised more than three months following the date the
employee ceases to perform services as an employee shall be treated as a
Non-Statutory Stock Option as described above. In the event of retirement,
any unvested stock options shall be terminated and remain unearned unless the
optionee continues to perform services on behalf of the Association, the
Company or an affiliate, in which case unvested options would continue to
vest in accordance with their original vesting schedule. If the Incentive
Option Plan or Master Stock-Based and Benefit Plan is adopted in the form
described above, in the event of death, disability or normal retirement, the
Company, if requested by the optionee, could elect, in exchange for vested
options, to pay the optionee, or beneficiary in the event of death, the
amount by which the fair market value of the Common Stock exceeds the
exercise price of the options on the date of the employee's termination of
employment.
Under the Directors' Option Plan or Master Stock-Based Benefit Plan
contemplated, the exercise price per share of each option granted may be equal
to the fair market value of the shares of Common Stock on the date the option is
granted. All Options granted to outside directors under the Directors' Option
Plan would be Non-Statutory Stock Options and, pursuant to applicable OTS
regulations, would vest and become exercisable commencing one year after the
date of shareholder approval of the Directors Option Plan at the rate of 20% per
year, and would expire upon the earlier of ten years following the date of grant
or one year following the date the optionee ceases to be a director or
consulting director. In the event of the death or disability of a participant,
all previously granted options would immediately vest and become fully
exercisable.
STOCK PROGRAMS. Following the Conversion, the Company or the
Association intends to establish performance based Stock Programs as a method
of providing non-employee directors, officers and key employees of the
Association and Company with a proprietary interest in the Company in a
manner designed to encourage such persons to remain with the Association or
the Company. The benefits intended to be granted under the Stock Programs
may be provided for under either a separate plan for officers and employees
and a separate plan for outside directors or under the Master Stock-Based
Benefit Plan which would incorporate the benefits and features of such
separate Stock Program plans and the previously discussed Stock Option Plans.
The Company intends to present the Stock Programs or Master Stock-Based
Benefit Plan for stockholder approval at a meeting of stockholders, which
pursuant to applicable OTS regulations, may be held no earlier than six
months after the completion of the Conversion.
Subject to stockholder approval, the Association or the Company expects to
contribute funds to the Stock Programs or Master Stock-Based Benefit Plan to
enable such plans to acquire, in the aggregate, an amount equal to 4% of the
shares of common Stock issued in the Conversion, or 71,300 shares (based upon
the issuance of 1,782,500 shares). These shares would be acquired through open
market purchases by a trustee for the plan or from authorized but unissued
shares. Although no specific award determinations have been made, the Company
anticipates that, if stockholder approval is obtained, it would provide awards
to its directors and employees to the extent permitted by applicable
regulations. OTS
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regulations provide that, with respect to any such stock-based benefit plans
adopted within one year following the completion of the Conversion, no
individual employee may receive more than 25% of the shares of any plan and
non-employee directors may not receive more than 5% of any plan individually
or 30% in the aggregate for all directors.
The Compensation Committee of the Company's Board of Directors would
administer the Stock Programs or Master Stock-Based Benefit Plan described
above. The Stock Programs or Master Stock-Based Benefit Plan are expected to
be self-administered for grants or allocations made to non-employee
directors, which would not be performance-based. Under the Stock Programs or
Master Stock-Based Benefit Plan, awards would be granted in the form of
shares of Common Stock held by such plans. Awards will be non-transferable
and non-assignable. Allocations and grants to officers and employees under
the Stock Programs or Master Stock-Based Benefit Plan may be made in the form
of base grants and allocations based on performance goals established by the
Compensation Committee. In establishing such goals, the Committee may
utilize the annual financial results of the Company and the Association,
actual performance of the Company and the Association as compared to targeted
goals such as the ratio of the Company and the Association's net worth to
total assets, the Company's and the Association's return on average assets,
or such other performance standard as determined by the Committee with the
approval of the Board of Directors. Performance allocations would be granted
upon the achievement of performance goals and base grants and performance
allocations would vest in annual installments established by the Committee.
Pursuant to applicable OTS regulations, base grants and allocations granted
under a plan adopted within one year following the completion of the
Conversion may commence vesting one year after the date of shareholder
approval of the plan and thereafter at the rate of 20% per year.
In the event of death, grants would be 100% vested. In the event of
disability, grants would be 100% vested upon termination of employment of an
officer or employee, or upon termination of service as a director. In the event
of retirement, the participant continues to perform services on behalf of the
Association, the Company or an affiliate or, in the case of a retiring director,
continues to perform services, as a consulting director, unvested grants would
continue to vest in accordance with their original vesting schedule until the
recipient ceases to perform such services at which time any unvested grants
would lapse.
When shares become vested in accordance with the Stock Programs or Master
Stock-Based Benefit Plan described above, the participants would recognize
income equal to the fair market value of the Common Stock at that time. The
amount of income recognized by the participants would be a deductible expense
for tax purposes for the Association and the Company. When shares become vested
and are actually distributed in accordance with the Stock Programs or Master
Stock-Based Benefit Plan, the participants would receive amounts equal to any
accrued dividends with respect thereto. Prior to vesting, shares subject to
grants and shares allocated subject to the achievement of performance and high
performance goals will be voted by the trustee of the Stock Programs or Master
Stock-Based Benefit Plan. Vested shares are distributed to recipients as
soon as practicable following the day on which they are vested.
In the event that additional authorized but unissued shares are acquired by
the Stock Programs or Master Stock-Based Benefit Plan after the Conversion, the
interests of existing shareholders would be diluted. See "Pro Forma Data."
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TRANSACTIONS WITH CERTAIN RELATED PERSONS
Applicable Federal law requires that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In
addition, loans made to a director or executive officer in excess of the greater
of $25,000 or 5% of the Association's capital and surplus (up to a maximum of
$500,000) must be approved in advance by a majority of the disinterested members
of the Board of Directors.
The Association currently makes loans to executive officers and directors
on the same terms and conditions offered to the general public. The
Association's policy provides that all loans made by the Association to its
executive officers and directors be made in the ordinary course of business, on
substantially the same terms, including collateral, as those prevailing at the
time for comparable transactions with other persons and may not involve more
than the normal risk of collectibility or present other unfavorable features.
The Association makes loans to its other employees which are made on
substantially the same terms and conditions offered to the general public except
that employees are eligible to receive a one time 25 basis point discount on the
interest rate offered to the general public. All loans outstanding at May 31,
1996 to a director or executive officer of the Association were made by the
Association in the ordinary course of business, with no favorable terms and such
loans do not involve more than the normal risk of collectibility or present
other unfavorable features.
The Company intends that all transactions in the future between the Company
and its executive officers, directors, holders of 10% or more of the shares of
any class of its common stock and affiliates thereof, will contain terms no less
favorable to the Company than could have been obtained by it in arm's-length
negotiations with unaffiliated persons and will be approved by a majority of
independent outside directors of the Company not having any interest in the
transaction.
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SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Association's executive officers and directors propose to purchase, assuming
shares of Common Stock are issued at the minimum and maximum of the Estimated
Price Range and that sufficient shares will be available to satisfy their
subscriptions. The table also sets forth the total expected beneficial
ownership of Common Stock as to all directors and executive officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED PRICE OF THE ESTIMATED PRICE
RANGE(1) RANGE(1)
------------------------------ ------------------------------
AS A PERCENT AS A PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME OF SHARES OFFERED OF SHARES OFFERED
- --------------------------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C>
John F. Helmkamp 10,000 0.76% 10,000 0.56%
Joseph R. Reinemeyer 10,000 0.76 10,000 0.56
Nancy C. Rumschlag 13,175 1.00 15,000 0.84
P. Douglas Harter 13,175 1.00 17,825 1.00
Robert L. Dillhoff 11,000 0.83 11,000 0.62
Gary G. Ricker 4,000 0.30 4,000 0.22
------ ----- ------ -----
All Directors and Executive
Officers as a group
(6 persons) ................ 61,350 4.65% 67,875 3.81%
------ ----- ------ -----
------ ----- ------ -----
</TABLE>
- -------------------
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8.0% of the shares issued in the Conversion.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE ASSOCIATION AND THE OTS HAVE APPROVED THE
PLAN OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE ASSOCIATION
ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS.
SUCH OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT
OF THE PLAN BY SUCH AGENCY.
GENERAL
On June 11, 1996, the Association's Board of Directors unanimously adopted,
subject to approval by the OTS, the Plan pursuant to which the Association will
be converted from a federally chartered mutual savings and loan association to a
federally chartered capital stock savings bank. It is currently intended that
all of the outstanding capital stock of the Association will be held by the
Company, which is incorporated under Delaware law. The Plan has been approved
by the OTS, subject to, among other things, approval of the Plan by the
Association's members. A special meeting of members has been called for this
purpose to be held on November 14, 1996.
The Company filed an application with the OTS to become a savings and loan
holding company and to acquire all of the Common Stock of the Association to be
issued in the Conversion. The Company plans to use 50% of the net proceeds from
the sale of the Common Stock to purchase all of the then to be issued and
outstanding capital stock of the Association. The Conversion will be effected
only upon completion of the sale of all of the shares of Common Stock of the
Company to be issued pursuant to the Plan.
The Plan provides that the Board of Directors of the Association may, at
any time prior to the issuance of the Common Stock and for any reason, decide
not to use a holding company form. In the event such a decision is made, the
Association will withdraw the Company's registration statement from the SEC and
take steps necessary to complete the Conversion without the Company, including
filing any necessary documents with the OTS. In such event, and provided there
is no regulatory action, directive or other consideration upon which basis the
Association determines not to complete the Conversion, if permitted by the OTS,
the Association will issue and sell the common stock of the Association and
subscribers will be notified of the elimination of a holding company and
resolicited (I.E., be permitted to affirm their orders, in which case they will
need to affirmatively reconfirm their subscriptions prior to the expiration of
the resolicitation offering or their funds will be promptly refunded with
interest at the Association's passbook rate of interest; or be permitted to
modify or rescind their subscriptions), and notified of the time period within
which the subscriber must affirmatively notify the Association of his intention
to affirm, modify or rescind his subscription. The following description of the
Plan assumes that a holding company form of organization will be used in the
Conversion. In the event that a holding company form of organization is not
used, all other pertinent terms of the Plan as described below will apply to the
conversion of the Association from the mutual to stock form of organization and
the sale of the Association's common stock.
The Plan provides generally that (i) the Association will convert from a
mutual savings and loan association to a capital stock savings bank and (ii) the
Company will offer shares of Common Stock for sale in the Subscription Offering
to the Association's Eligible Account Holders, the ESOP, Supplemental Eligible
Account Holders, and Other Members. Concurrently, shares will be offered in a
Community Offering to certain members of the general public, with preference
given to natural persons residing in postal zip code 45833, which generally
encompasses the City of Delphos in the State of Ohio, to whom
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a copy of the Prospectus and an order form have been delivered, subject to the
prior rights of holders of subscription rights. It is anticipated that all
shares not subscribed for in the Subscription and Community Offerings will be
offered for sale by the Company in the Syndicated Community Offering. The
Association has the right to accept or reject, in whole or in part, any orders
to purchase shares of the Common Stock received in the Community Offering or in
the Syndicated Community Offering. See "- Community Offering" and "- Syndicated
Community Offering."
The aggregate price of the shares of Common Stock to be issued in the
Conversion, currently estimated to be between $13.2 million and $17.8 million,
will be determined based upon an independent appraisal of the estimated
pro forma market value of the Common Stock of the Company given effect to the
Conversion. All shares of Common Stock to be issued and sold in the Conversion
will be sold at the same price. The independent appraisal will be affirmed or,
if necessary, updated at the completion of the Subscription and Community
Offerings, if all shares are subscribed for, or at the completion of the
Syndicated Community Offering. The appraisal has been performed by Keller &
Company, Inc., a consulting firm experienced in the valuation and appraisal of
savings institutions. See "- Stock Pricing" for additional information as to
the determination of the estimated pro forma market value of the Common Stock.
The following is a brief summary of pertinent aspects of the Conversion.
The summary is qualified in its entirety by reference to the provisions of the
Plan. A copy of the Plan is available for inspection at the Association's main
office and at the Central Region and Washington, D.C. offices of the OTS. The
Plan is also filed as an Exhibit to the Registration Statement of which this
Prospectus is a part, copies of which may be obtained from the SEC. See
"Additional Information."
PURPOSES OF CONVERSION
The Association, as a federally chartered mutual savings and loan
association, does not have shareholders and has no authority to issue capital
stock. By converting to the capital stock form of organization, the Association
will be structured in the form used by commercial banks, other business entities
and a growing number of savings institutions. The Conversion will enhance the
Association's ability to expand its current operations, acquire other financial
institutions or branch offices, provide affordable home financing opportunities
to the communities it serves, increase its equity capital base and access
capital markets, or diversify into other financial services to the extent
allowable by applicable law and regulation.
In particular, the increase in the Association's capital as a result of the
Conversion will enhance the ability of the Association to meet the needs of the
communities it serves by, among other things, permitting the Association to
increase its one- to four-family residential mortgage lending, subject to the
demand for such loans, competitive considerations and other relevant factors.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management Strategy" and "Business of the Association - Market Area
and Competition." As discussed above, the net proceeds from the sale of the
Common Stock will also permit the Association to increase its presence in the
communities it serves through the acquisition or establishment of branch offices
or the acquisition of smaller financial institutions, although the Association
has no current understandings or agreements for the acquisition of any specific
financial institutions or the acquisition or establishment of any branch
offices.
The holding company form of organization will provide additional
flexibility to diversify the Association's business activities through existing
or newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock institutions, as well as other companies. Although there are
no current arrangements, understandings or agreements regarding any such
opportunities, the Company will
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be in a position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any such opportunities that
may arise.
The potential impact of the Conversion upon the Association's capital base
is significant. The Association had GAAP capital of $11.4 million, or 12.4% of
assets at May 31, 1996. Assuming that $17.5 million (based on the maximum of
the estimated pro forma market value of the Common Stock) of gross proceeds are
realized from the sale of Common Stock (see "Pro Forma Data" for the basis of
this assumption) and assuming that 50% of the net proceeds are used by the
Company to purchase the capital stock of the Association, the Association's GAAP
capital would increase to $18.9 million or a ratio of GAAP capital to total
assets, on a pro forma basis, of 20.6% after the Conversion. The investment of
the net proceeds from the sale of the Common Stock will provide the Association
with additional income to further increase its capital position. The additional
capital may also assist the Association in offering new programs and expanded
services to its customers.
After completion of the Conversion, the unissued common and preferred stock
authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and any required regulatory approvals of
an offering, to raise additional equity capital through further sales of
securities, and to issue securities in connection with possible acquisitions.
At the present time, the Company has no plans with respect to additional
offerings of securities, other than the issuance of additional shares upon
exercise of stock options under the Stock Option Plans or Master Stock-Based
Benefit Plan or the possible issuance of authorized but unissued shares to the
Stock Programs under the Stock Option Plans or Master Stock-Based Benefit Plan.
Following the Conversion, the Company will also be able to use stock-related
incentive programs to attract and retain executive and other personnel for
itself and its subsidiaries. See "The Board of Directors and Management of the
Association - Benefits."
EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual savings institution has both a deposit
account in the institution and a pro rata ownership interest in the net worth of
the institution based upon the balance in his account, which interest may only
be realized in the event of a liquidation of the institution. However, this
ownership interest is tied to the depositor's account and has no tangible market
value separate from such deposit account. Any depositor who opens a deposit
account obtains a pro rata ownership interest in the net worth of the
institution without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net worth
of the institution, which is lost to the extent that the balance in the account
is reduced. Consequently, mutual savings institution depositors normally have
no way to realize the value of their ownership interest, which has realizable
value only in the unlikely event that the mutual savings institution is
liquidated. In such event, the depositors of record at that time, as owners,
would share pro rata in any residual surplus and reserves after other claims,
including claims of depositors to the amounts of their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY. Certificates are issued to evidence ownership of the
capital stock. The stock certificates are transferable and, therefore, the
stock may be sold or traded if a purchaser is available with no effect on any
deposit account the seller may hold in the institution.
CONTINUITY. While the Conversion is being accomplished, the normal
business of the Association of accepting deposits and making loans will continue
without interruption. The Association will continue
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to be subject to regulation by the OTS and the FDIC. After the Conversion, the
Association will continue to provide services for depositors and borrowers under
current policies by its present management and staff.
The Directors serving the Association at the time of Conversion will serve
as Directors of the Association after the Conversion. The Directors of the
Company will consist of individuals currently serving on the Board of Directors
of the Association. All officers of the Association at the time of Conversion
will retain their positions after Conversion.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the
Association at the time of Conversion will automatically continue as a depositor
after the Conversion, and each such deposit account will remain the same with
respect to deposit balance, interest rate and other terms. Each such account
will continue to be insured by the FDIC to the same extent as before the
Conversion (I.E., up to $100,000 per depositor). Depositors will continue to
hold their existing certificates, passbooks and other evidences of their
accounts.
EFFECT ON LOANS. No loan outstanding from the Association will be affected
by the Conversion, and the amount, interest rate, maturity and security for each
loan will remain as they were contractually fixed prior to the Conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors and certain
borrowers of the Association are members of, and have voting rights in, the
Association as to all matters requiring membership action. Upon Conversion,
depositors and borrowers will cease to be members and will no longer be entitled
to vote at meetings of the Association. Upon Conversion, all voting rights in
the Association will be vested in the Company as the sole stockholder of the
Association. Exclusive voting rights with respect to the Company will be vested
in the holders of Common Stock. Depositors and borrowers of the Association
will not have voting rights after the Conversion except to the extent that they
become stockholders of the Company through the purchase of Common Stock.
TAX EFFECTS. The Association has received an opinion of counsel with
regard to federal income taxation and an opinion from Crowe, Chizek and Company
LLP ("Crowe, Chizek") with regard to Ohio taxation which indicate that the
adoption and implementation of the Plan of Conversion set forth herein will not
be taxable for federal or Ohio tax purposes to the Association, its Eligible
Account Holders, or its Supplemental Eligible Account Holders or the Company,
except as discussed below. See "- Tax Aspects."
EFFECT ON LIQUIDATION RIGHTS. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the extent
of deposit balances) would be paid first. Thereafter, if there were any assets
remaining, depositors would be entitled to such remaining assets, pro rata,
based upon the deposit balances in their deposit accounts immediately prior to
liquidation. In the unlikely event that the Association were to liquidate after
Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain depositors (see
"- Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Association's capital stock. Pursuant to the rules
and regulations of the OTS, a post-Conversion merger, consolidation, sale of
bulk assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
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STOCK PRICING
The Plan of Conversion requires that the purchase price of the Common Stock
must be based on the pro forma market value of the Common Stock giving effect to
the Conversion, as determined on the basis of an independent valuation. The
Association and the Company have retained Keller to make such valuation. For
its services in making such appraisal, Keller will receive a fee of $17,000,
including expenses. The Association and the Company have agreed to indemnify
Keller and its employees and affiliates against certain losses arising out of
its services as appraiser, except where Keller liability results from its
negligence or fault.
An appraisal has been made by Keller in reliance upon the information
contained in this Prospectus, including the Consolidated Financial Statements.
Keller also considered the following factors, among others: the present and
projected operating results and financial condition of the Company and the
Association and the economic and demographic conditions in the Association's
existing marketing area; 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 similarly situated
publicly-traded savings institutions; the aggregate size of the offering of the
Common Stock; the impact of Conversion on the Association's net worth and
earnings potential; the proposed dividend policy of the Company and the
Association; and the trading market for securities of comparable institutions
and general conditions in the market for such securities.
On the basis of the foregoing, Keller has advised the Company and the
Association that, in its opinion, dated August 9, 1996, the estimated pro forma
market value of the Common Stock ranged from a minimum of $13.2 million to a
maximum of $17.8 million with a midpoint of $15.5 million. Based upon the
Valuation Range, the Board of Directors has established the Estimated Price
Range of $13.2 million to $17.8 million, with a midpoint of $15.5 million, and
the Company expects to issue between 1,317,500 and 1,782,500 shares of Common
Stock at the Purchase Price of $10.00 per share. The Board of Directors of the
Company and the Association have reviewed the appraisal of Keller and in
determining the reasonableness and adequacy of such appraisal consistent with
OTS regulations and policies, have reviewed the methodology and reasonableness
of the assumptions utilized by Keller in the preparation of such appraisal.
SUCH VALUATION, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH SHARES.
KELLER DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL STATEMENTS AND
OTHER INFORMATION PROVIDED BY THE ASSOCIATION, NOR DID KELLER VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE ASSOCIATION. THE VALUATION
CONSIDERS THE ASSOCIATION 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 SHARES IN THE CONVERSION WILL THEREAFTER BE
ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE PURCHASE PRICE. SEE "RISK
FACTORS -- ABSENCE OF MARKET FOR COMMON STOCK"
Following commencement of the Subscription and Community Offerings, the
maximum of the Estimated Price Range may be increased up to 15% and the number
of shares of Common Stock to be issued in the Conversion may be increased to
2,049,875 shares due to regulatory considerations, changes in market conditions
or general financial and economic conditions, without the resolicitation of
subscribers. See "- Subscription Offering and Subscription Rights," "-
Community Offering" and "- Limitations on Common Stock Purchases" as to the
method of distribution and allocation of additional shares that may
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be issued in the event of an increase in the Estimated Price Range to fill
unfilled orders in the Subscription and Community Offerings.
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, Keller confirms to the Association and the OTS that, to the best
of its knowledge, nothing of a material nature has occurred which, taking into
account all relevant factors including those which would be involved in a change
in the maximum subscription price, would cause Keller to conclude that the value
of the Common Stock at the price so determined is incompatible with its estimate
of the pro forma market value of the Common Stock at the conclusion of the
Subscription and Community Offerings.
If, based on Keller's estimate, the pro forma market value of the Common
Stock as of such date is not more than 15% above the maximum and not less than
the minimum of the Estimated Price Range, then (1) with the approval of the OTS,
the number of shares of Common Stock to be issued in the Conversion may be
increased or decreased, pro rata to the increase or decrease in value, without
resolicitation of subscriptions, to no more than 2,049,875 shares or no less
than 1,317,500 shares; and (2) all shares purchased in the Subscription and
Community Offerings will be purchased for the Purchase Price of $10.00 per
share. If the number of shares issued in the Conversion is increased due to an
increase of up to 15% in the Estimated Price Range to reflect regulatory
considerations, changes in market conditions or general financial and economic
conditions, persons who subscribed for the maximum number of shares will not be
given the opportunity to subscribe for an adjusted maximum number of shares,
except for the ESOP which will be able to subscribe for such adjusted amount.
See "- Limitations on Common Stock Purchases."
If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Association and the Company, after consulting with
the OTS, may terminate the Plan and return all funds promptly with interest at
the Association's passbook rate of interest on payments made by cash, check,
bank draft or money order, cancel withdrawal authorizations, extend or hold a
new Subscription and Community Offering, establish a new Estimated Price Range,
commence a resolicitation of subscribers or take such other actions as permitted
by the OTS in order to complete the Conversion. In the event that a
resolicitation is commenced, unless an affirmative response is received within a
reasonable period of time, all funds will be promptly returned to investors as
described above. A resolicitation, if any, following the conclusion of the
Subscription and Community Offerings would not exceed 45 days unless further
extended by the OTS for periods of up to 90 days not to extend beyond
November 14, 1998.
If all shares of Common Stock are not sold through the Subscription and
Community Offerings, then the Association and the Company expect to offer the
remaining shares in a Syndicated Community Offering which would occur as soon as
practicable following the close of the Subscription and Community Offerings but
may commence during the Subscription and Community Offerings subject to prior
rights of subscribers. All shares of Common Stock will be sold at the same
price per share in the Syndicated Community Offering as in the Subscription and
Community Offerings. See "-Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, Keller confirms to the Association, the Company and the OTS that,
to the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, including those which would be
involved in a cancellation of the Syndicated Community Offering, would cause
Keller to conclude that the aggregate value of the Common Stock at the Purchase
Price is incompatible with its estimate of the pro forma market value of the
Common Stock of the Company at the time of the Syndicated Community Offering.
Any change which would result in an aggregate purchase price which
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is below or more than 15% above the Estimated Price Range would be subject to
OTS approval. If such confirmation is not received, the Association may extend
the Conversion, extend, reopen or commence new Subscription and Community
Offerings or Syndicated Community Offering, establish a new Estimated Price
Range and commence a resolicitation of all subscribers with the approval of the
OTS or take such other actions as permitted by the OTS in order to complete the
Conversion, or terminate the Plan and cancel the Subscription and Community
Offerings and/or the Syndicated Community Offering. In the event market or
financial conditions change so as to cause the aggregate purchase price of the
shares to be below the minimum of the Estimated Price Range or more than 15%
above the maximum of such range, and the Company and the Association determine
to continue the Conversion, subscribers will be resolicited (i.e., be permitted
to continue their orders, in which case they will need to affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering or their subscription funds will be promptly refunded with interest at
the Association's passbook rate of interest, or be permitted to decrease or
cancel their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. A resolicitation, if any, following the conclusion of the
Subscription and Community Offerings would not exceed 45 days, or if following
the Syndicated Community Offering, 90 days, unless further extended by the OTS
for periods up to 90 days not to extend beyond November 14, 1998. If such
resolicitation is not effected, the Association will return all funds promptly
with interest at the Association's passbook rate of interest on payments made by
check, bank draft or money order.
Copies of the appraisal report of Keller, including any amendments thereto,
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of the Association and the other locations specified under "Additional
Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of
the Subscription and Community Offerings, the total number of shares to be
issued in the Conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the Purchase Price per share is not below the minimum or more than 15% above the
maximum of the Estimated Price Range, and the total number of shares to be
issued in the Conversion is not less than 1,317,500 or greater than 1,782,500
(or 2,049,875 if the Estimated Price Range is increased by 15%).
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Price Range or more than 15% above the maximum of such range, if the Plan is not
terminated by the Company and the Association after consultation with the OTS,
purchasers will be resolicited (I.E., permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded, or be permitted to modify or rescind their
subscriptions). Any change in the Estimated Price Range must be approved by the
OTS. If the number of shares issued in the Conversion is increased due to an
increase of up to 15% in the Estimated Price Range to reflect changes in market
or financial condition, persons who subscribed for the maximum number of shares
will not be given the opportunity to subscribe for an adjusted maximum number of
shares, except for the ESOP which will be able to subscribe for such adjusted
amount. See "- Limitations on Common Stock Purchases."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and pro forma net earnings and
stockholders' equity on a per share basis while increasing the Company's
pro forma net earnings and stockholders' equity on an aggregate basis. A
decrease in the number of
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shares to be issued in the Conversion would increase both a subscriber's
ownership interest and pro forma net earnings and stockholders' equity on a per
share basis while decreasing the Company's pro forma net earnings and
stockholder's equity on an aggregate basis. For a presentation of the effects
of such changes, see "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to
the following persons in the following order of descending priority: (1)
holders of deposit accounts with a balance of $50 or more as of December 31,
1994 ("Eligible Account Holders"); (2) the ESOP; (3) holders of deposit
accounts with a balance of $50 or more as of September 30, 1996
("Supplemental Eligible Account Holders"); and (4) members of the
Association, consisting of depositors of the Association as of September 30,
1996, the Voting Record Date, and borrowers with loans outstanding as of May
20, 1996 which continue to be outstanding as of the Voting Record Date other
than those members which qualify as Eligible Account Holders and Supplemental
Eligible Account Holders ("Other Members"). All subscriptions received will
be subject to the availability of Common Stock after satisfaction of all
subscriptions of all persons having prior rights in the Subscription Offering
and to the maximum and minimum purchase limitations set forth in the Plan of
Conversion and as described below under "- Limitations on Common Stock
Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment therefor, first priority, non-transferable subscription
rights to subscribe in the Subscription Offering for up to the greater of the
amount permitted to be purchased in the Community Offering, currently 0.5%
(8,912 shares based on the issuance of 1,782,500 shares) of the Common Stock
offered, one-tenth of one percent (.10%) of the total offering of shares of
Common Stock or fifteen times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the Eligible
Account Holder's qualifying deposit and the denominator is the total amount of
qualifying deposits of all Eligible Account Holders, in each case on the
Eligibility Record Date, subject to the overall maximum purchase limitation and
exclusive of an increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%. See "- Limitations on Common Stock
Purchases."
In the event that Eligible Account Holders exercise subscription rights for
a number of shares of Common Stock in excess of the total number of such shares
eligible for subscription, the shares of Common Stock shall be allocated among
the subscribing Eligible Account Holders so as to permit each subscribing
Eligible Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his or her total allocation of Common Stock equal to the
lesser of 100 shares or the number of shares subscribed for by the Eligible
Account Holder. Any shares remaining after that allocation will be allocated
among the subscribing Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the qualifying deposit of each
Eligible Account Holder whose subscription remains unsatisfied bears to the
total amount of the qualifying deposits of all Eligible Account Holders whose
subscriptions remain unsatisfied exclusive of any increase in the shares issued
pursuant to an increase in the Estimated Price Range of up to 15%. If the
amount so allocated exceeds the amount subscribed for by any one or more
remaining Eligible Account Holders, the excess shall be reallocated (one or more
times as necessary) among those remaining Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in
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fewer shares being allocated than if all accounts had been disclosed. The
subscription rights of Eligible Account Holders who are also directors or
officers of the Association or their associates will be subordinated to the
subscription rights of other Eligible Account Holders to the extent attributable
to increased deposits in the year preceding December 31, 1994.
PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by Eligible
Account Holders, the ESOP will receive, without payment therefor, second
priority, non-transferable subscription rights to purchase, in the aggregate, up
to 10% of Common Stock issued in the Conversion, including any increase in the
number of shares of Common Stock to be issued in the Conversion after the date
hereof as a result of an increase of up to 15% in the maximum of the Estimated
Price Range and provided further that any such increase in the number of shares
to be issued in the Conversion will first be allocated to satisfy the ESOP's
subscription. See "- Limitations on Common Stock Purchases." The ESOP intends
to purchase 8.0% of the shares to be issued in the Conversion, or 105,000 shares
and 143,000 shares, based on the issuance of 1,317,500 shares and 1,782,500
shares, respectively. Subscriptions by the ESOP will not be aggregated with
shares of Common Stock purchased directly by or which are otherwise attributable
to any other participants in the Subscription and Community Offerings, including
subscriptions of any of the Association's directors, officers, employees or
associates thereof. See "The Board of Directors and Management of the
Association - Benefits - Employee Stock Ownership Plan and Trust."
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
non-transferable subscription rights to subscribe for in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering, currently 0.5% (8,912 shares based on the issuance of
1,782,500 shares) of the Common Stock offered, one-tenth of one percent (.10%)
of the total offering of shares of Common Stock or fifteen times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares of Common Stock to be issued by a fraction of which the numerator is
the amount of the Supplemental Eligible Account Holder's qualifying deposit and
the denominator is the total amount of qualifying deposits of all Supplemental
Eligible Account Holders, in each case on the Supplemental Eligibility Record
Date, subject to the overall maximum purchase limitation and exclusive of an
increase in the shares issued pursuant to an increase in the Estimated Price
Range of up to 15%. See "- Limitations on Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Common Stock in excess of the
total number of such shares eligible for subscription, the shares of Common
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Common Stock equal to the lesser of 100 shares or the
number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the qualifying deposit of each
Supplemental Eligible Account Holder whose subscription remains unsatisfied
bears to the total amount of the qualifying deposits of all Supplemental
Eligible Account Holders whose subscriptions remain unsatisfied exclusive of any
increase in the shares issued pursuant to an increase in the Estimated Price
Range of up to 15%. If the amount so allocated exceeds the amount subscribed
for by any one or more remaining Supplemental Eligible Account Holders, the
excess shall be reallocated (one or more times as necessary) among those
remaining Supplemental Eligible Account Holders whose subscriptions are still
not satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied.
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To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his subscription order form all accounts in which he has an
ownership interest. Failure to list an account could result in less shares
being allocated than if all accounts had been disclosed. The subscription
rights received by Eligible Account Holders will be applied in partial
satisfaction to the subscription rights to be received as a Supplemental
Eligible Account Holder.
PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the ESOP and the Supplemental Eligible Account Holders, each Other Member will
receive, without payment therefor, fourth priority non-transferable subscription
rights to subscribe for Common Stock in the Subscription Offering up to the
greater of the amount permitted to be purchased in the Community Offering,
currently 0.5% (8,912 shares based on the issuance of 1,782,500 shares) of the
Common Stock offered, or one-tenth of one percent (.10%) of the total offering
of shares of Common Stock, subject to the overall maximum purchase limitation
and exclusive of an increase in shares issued pursuant to an increase in the
Estimated Price Range of up to 15%.
In the event that Other Members exercise subscription rights for a number
of shares of Common Stock which, when added to the shares of Common Stock
subscribed for by the Eligible Account Holders, the ESOP and the Supplemental
Eligible Account Holders is in excess of the total number of such shares being
issued, the subscriptions of such Other Members will be allocated among the
subscribing Other Members so as to permit each subscribing Other Member, to the
extent possible, to purchase a number of shares sufficient to make his or her
total allocation of Common Stock equal to the lesser of 100 shares or the number
of shares subscribed for by the Other Member. Any shares remaining after that
allocation will be allocated among the subscribing Other Members whose
subscriptions remain unsatisfied pro rata in the same proportion that the number
of votes of a subscribing Other Member on the Voting Record Date bears to the
total votes on the Voting Record Date of all subscribing Other Members whose
subscriptions remain unsatisfied. If the amount so allocated exceeds the amount
subscribed for by any one or more remaining Other Members, the excess shall be
reallocated (one or more times as necessary) among those remaining Other Members
whose subscriptions are still not fully satisfied on the same principle until
all available shares have been allocated or all subscriptions satisfied.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire on November 12, 1996, unless extended for up to 45 days by the
Association or such additional periods with the approval of the OTS.
Subscription rights which have not been exercised prior to the Expiration Date
will become void.
The Association will not execute orders until all shares of Common Stock
have been subscribed for or otherwise sold. If all shares have not been
subscribed for or sold within 45 days after the Expiration Date, unless such
period is extended with the consent of the OTS, all funds delivered to the
Association pursuant to the Subscription Offering will be returned promptly to
the subscribers with interest and all withdrawal authorizations will be
cancelled. If an extension beyond the 45-day period following the Expiration
Date is granted, the Association will resolicit subscribers by notifying
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions and, unless an affirmative response is received,
have their funds returned promptly with interest. Such extensions may not go
beyond November 14, 1998.
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COMMUNITY OFFERING
Concurrent with the Subscription Offering, to the extent that shares remain
available for purchase after satisfaction of all subscriptions of the Eligible
Account Holders, the ESOP, the Supplemental Eligible Account Holders and Other
Members, the Association has determined to offer shares pursuant to the Plan to
certain members of the general public. Any such shares available will be
available for purchase by the general public, with preference given to natural
persons (such natural persons referred to as "Preferred Subscribers") residing
in postal zip code 45833, which generally encompasses the city of Delphos in the
State of Ohio to whom a Prospectus and order form have been delivered, subject
to the right of the Company to accept or reject any such orders, in whole or in
part, in their sole discretion. Such persons, together with associates of and
persons acting in concert with such persons, may purchase up to 0.5% (8,912
shares based on the issuance of 1,782,500 shares) of the Common Stock offered,
subject to the maximum purchase limitation and exclusive of shares issued
pursuant to an increase in the Estimated Price Range by up to 15%. See
"- Limitations on Common Stock Purchases." This amount may be increased to up
to a maximum of 5% or decreased to less than 0.5% at the sole discretion of the
Company and the Association. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON
STOCK IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE
ASSOCIATION AND THE COMPANY, IN ITS SOLE DISCRETION, TO ACCEPT OR REJECT ANY
SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS
SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of Preferred Subscribers after completion of the Subscription
and Community Offerings, such stock will be allocated first to each Preferred
Subscriber whose order is accepted by the Association, in an amount equal to the
lesser of 100 shares or the number of shares subscribed for by each such
Preferred Subscriber, if possible. Thereafter, unallocated shares will be
allocated among the Preferred Subscribers whose orders remain unsatisfied on a
100 shares per order basis until all such orders have been filled or the
remaining shares have been allocated. If there are any shares remaining, shares
will be allocated to other persons of the general public who purchase in the
Community Offering applying the same allocation described above for Preferred
Subscribers.
PERSONS IN NON-QUALIFIED STATES OR FOREIGN COUNTRIES. The Company and the
Association will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons entitled to subscribe for stock
pursuant to the Plan reside. However, the Association and the Company are not
required to offer stock in the Subscription Offering to any person who resides
in a foreign country or resides in a state of the United States with respect to
which (i) a small number of persons otherwise eligible to subscribe for shares
of Common Stock reside, or (ii) the Company or the Association determines that
compliance with the securities laws of such state would be impracticable for
reasons of cost or otherwise, including but not limited to a request that the
Company and the Association or their officers, directors or trustees register as
a broker, dealer, salesman or selling agent, under the securities laws of such
state, or a request to register or otherwise qualify the subscription rights or
Common Stock for sale or submit any filing with respect thereto in such state.
Where the number of persons eligible to subscribe for shares in one state is
small, the Association and the Company will base their decision as to whether or
not to offer the Common Stock in such state on a number of factors, including
the size of accounts held by account holders in the state, the cost of
registering or qualifying the shares or the need to register the Company, its
officers, directors or employees as brokers, dealers or salesmen.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Association and the Company have engaged Webb as a financial and
marketing advisor to advise the Company and the Association with respect to the
Subscription and Community Offerings. Webb is a registered broker-dealer and is
a member of the National Association of Securities Dealers, Inc. ("NASD"). Webb
will assist the Company and the Association in the Conversion by, among other
things: (i) developing marketing materials; (ii) targeting potential investors
in the Subscription Offering and other
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investors eligible to participate in the Community Offering; (iii) soliciting
potential investors by phone or in person; (iv) training management and staff
to perform tasks in connection with the Conversion; (v) managing and setting
up the Conversion Center; (vi) managing the subscription campaign; and (vii)
the solicitation of proxies.
The Association will pay Webb a management advisory and proxy
solicitation fee equal to 1.5% of the dollar value of all stock sold in the
Subscription and Community Offerings. Such amount is exclusive of any shares
sold to the ESOP, directors, officers and employees and members of their
immediate families. Such fees will be paid upon completion of the Conversion.
Webb shall not be reimbursed for its expenses, including its legal fees.
Webb has not prepared any report or opinion constituting a recommendation or
advice to the Company or the Association or to persons who subscribe in the
Offerings, nor has it prepared an opinion as to the fairness to the Company
or the Association of the Purchase Price or the terms of the Offerings. Webb
expresses no opinion as to the prices at which Common Stock to be issued in
the Offerings may trade. The Association has agreed to indemnify Webb
against certain liabilities including certain liabilities under the
Securities Act and certain misrepresentations or breaches by the Company or
the Association relating to the agreement with Webb.
In the event any shares of Common Stock are unsold after completion of the
Subscription and Community Offerings, at the request of the Company and the
Association, Webb, will seek to form a syndicate of registered broker-dealers to
assist in the sale of such Common Stock on a best efforts basis, subject to the
terms and conditions set forth in the selected dealers agreement. Webb will
endeavor to distribute the Common Stock among dealers in a fashion which best
meets the distribution objectives of the Association and the Plan of Conversion.
Webb will be paid a fee not to exceed 5.5% of the aggregate Purchase Price of
the shares of Common Stock sold by them. Webb will pass onto selected broker-
dealers, who assist in the Syndicated Community Offering, an amount competitive
with gross underwriting discounts charged at such time for comparable amounts of
stock sold at a comparable price per share in a similar market environment.
Fees with respect to purchases affected with the assistance of a selected
broker/dealer other than Webb shall be transmitted by Webb to such
broker/dealer. Total marketing fees to Webb are expected to be $172,673 and
$235,744 at the minimum and maximum of the Estimated Price Range, respectively.
See "Pro Forma Data" for the assumptions used to arrive at these estimates.
Crowe, Chizek will perform conversion and records management services for
the Association in the Conversion and will receive a fee for this service of
$8,000, plus reimbursement of reasonable out-of-pocket expenses not to exceed
$1,000.
Directors and executive officers of the Company and Association may
participate in the solicitation of offers to purchase Common Stock. Other
employees of the Association may participate in the Offering in ministerial
capacities or providing clerical work in effecting a sales transaction.
Other questions of prospective purchasers will be directed to executive
officers or registered representatives. Such other employees have been
instructed not to solicit offers to purchase Common Stock or provide advice
regarding the purchase of Common Stock. The Company will rely on Rule 3a4-1
under the Exchange Act, and sales of Common Stock will be conducted within
the requirements of Rule 3a4-1, so as to permit officers, directors and
employees to participate in the sale of Common Stock. No officer, director or
employee of the Company or the 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 Stock.
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PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and acknowledgement form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock order forms and acknowledgement forms will
only be distributed with a Prospectus.
To purchase shares in the Subscription and Community Offerings, an
executed stock order form and acknowledgement form with the required payment
for each share subscribed for or appropriate authorization for withdrawal
from a deposit account maintained at the Association (which may be given by
completing the appropriate blanks in the stock order form), must be received
by the Association at its office by 5:00 p.m., Delphos, Ohio Time, on
the Expiration Date. Stock order forms which are not received by such time
or are executed defectively or are received without full payment (or
appropriate withdrawal instructions) are not required to be accepted. In
addition, the Association is not obligated to accept orders submitted on
photocopied or facsimilied stock order forms and will not accept stock order
forms unaccompanied by an executed acknowledgement form. The Company and the
Association have the right to waive or permit the correction of incomplete or
improperly executed forms, but do not represent that they will do so. Once
received, an executed stock order form may not be modified, amended or
rescinded without the consent of the Association unless the Conversion has
not been completed within 45 days after the end of the Subscription and
Community Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December 31,
1994) and/or the Supplemental Eligibility Record Date (September 30, 1996)
and/or the Voting Record Date (September 30, 1996) must list all accounts on
the stock order form giving all names in each account, the account number and
the approximate deposit balance as of the record date.
Payment for subscriptions may be made: (i) in cash if delivered in person
at the office of the Association; (ii) by check, bank draft or money
order; or (iii) by authorization of withdrawal from deposit accounts maintained
with the Association. No wire transfers will be accepted. Interest will be
paid on payments made by cash, check, bank draft or money order at the
Association's passbook rate of interest from the date payment is received until
the completion or termination of the Conversion. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the Conversion. Such funds
will be otherwise unavailable to the depositor until completion or termination
of the Conversion.
If a subscriber authorizes the Association to withdraw the amount of the
purchase price from his deposit account, the Association will do so as of the
effective date of the Conversion. The Association will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum
balance requirement at the time that the funds actually are transferred under
the authorization, the certificate will be cancelled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at
the Association's passbook rate.
The ESOP and other employee plans will not be required to pay for the
shares subscribed for at the time it subscribes, but rather, may pay for such
shares of Common Stock subscribed for at the Purchase Price upon consummation of
the Conversion.
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Owners of self-directed Individual Retirement Accounts ("IRAs") may use the
assets of such IRAs to purchase shares of Common Stock in the Subscription and
Community Offerings, provided that such IRAs are not maintained at the
Association. Persons with self-directed IRAs maintained at the Association must
have their accounts transferred to an unaffiliated institution or broker to
purchase shares of Common Stock in the Subscription and Community Offerings. In
addition, the provisions of ERISA and IRS regulations require that officers,
directors and ten percent shareholders who use self-directed IRA funds to
purchase shares of Common Stock in the Subscription and Community Offerings make
such purchases for the exclusive benefit of the IRAs.
Certificates representing shares of Common Stock purchased will be mailed
to purchasers at the last address of such persons appearing on the records of
the Association, or to such other address as may be specified in properly
completed stock order forms, as soon as practicable following consummation of
the sale of all shares of Common Stock. Any certificates returned as
undeliverable will be disposed of in accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the OTS conversion regulations
prohibit any person with subscription rights, including the Eligible Account
Holders, the ESOP, the Supplemental Eligible Account Holders and Other Members
of the Association, from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they
are granted and only for his account. Each person exercising such subscription
rights will be required to certify that he is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale or
transfer of such shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
such subscription rights or shares of Common Stock prior to the completion of
the Conversion.
THE ASSOCIATION AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible,
all shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered
broker-dealers to be formed and managed by Webb, with the participation and
assistance of Crowe, Chizek acting as agents of the Company to assist the
Company and the Association in the sale of the Common Stock. The Company and
the Association have the right to reject orders in whole or in part in their
sole discretion in the Syndicated Community Offering. Neither Webb nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community Offering, however,
Webb has agreed to use its best efforts in the sale of shares in the
Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "- Stock Pricing." Subject
to overall purchase limitations, no person, together with any associate or group
of persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than 0.5% of the total number of shares offered in
the Conversion, exclusive of an increase in shares issued pursuant to an
increase in the Estimated Price Range
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of up to 15%; provided, however, that
shares of Common Stock purchased in the Community Offering by any persons,
together with associates of or persons acting in concert with such persons, will
be aggregated with purchases in the Syndicated Community Offering and be subject
to an overall maximum purchase limitation of 1.0% of the shares offered,
exclusive of an increase in shares issued pursuant to an increase in the
Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Association's passbook rate of interest from the date
such payment is actually received by the Association until completion or
termination of the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If an order form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Association for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Association for deposit in a segregated
account. Although purchasers' funds are not required to be in their accounts
with selected dealers until the debit date in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company with
the approval of the OTS. Such extensions may not be beyond November 14,
1998. See "- Stock Pricing" above for a discussion of rights of subscribers, if
any, in the event an extension is granted.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently 0.5% (8,912 shares
based on the issuance of 1,782,500 shares) of the Common Stock
offered, one-tenth of one percent (.10%) of the total offering of
shares
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of Common Stock, or fifteen times the product (rounded down to
the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the qualifying deposit of the Eligible
Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders in each case on the
Eligibility Record Date subject to the overall maximum purchase
limitation described in (8) below and exclusive of an increase in the
total number of shares issued due to an increase in the Estimated
Price Range of up to 15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10% of the
shares of Common Stock issued in the Conversion, including shares
issued in the event of an increase in the Estimated Price Range of
15%, and intends to purchase 8% of the shares of Common Stock issued
in the Conversion;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of the amount
permitted to be purchased in the Community Offering, currently 0.5%
(8,912 shares based on the issuance of 1,782,500 shares) of the Common
Stock offered, one-tenth of one percent (.10%) of the total offering
of shares of Common Stock, or fifteen times the product (rounded down
to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the qualifying deposit of the Supplemental
Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders, in
each case on the Supplemental Eligibility Record Date, subject to the
overall maximum purchase limitation described in (8) below and
exclusive of an increase in the total number of shares issued due to
an increase in the Estimated Price Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the Subscription
Offering up to the greater of the amount permitted to be purchased in
the Community Offering, currently 0.5% (8,912 shares based on the
issuance of 1,782,500 shares) of the Common Stock offered, or
one-tenth of one percent (.10%) of the total offering of shares of
Common Stock subject to the overall maximum purchase limitation
described in (8) below and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price
Range of up to 15%;
(6) Persons purchasing shares of Common Stock in the Community Offering,
together with associates of and groups of persons acting in concert
with such persons, may purchase in the Community Offering up to 0.5%
(8,912 shares based on the issuance of 1,782,500
shares) of the Common Stock offered in the Conversion, subject to the
overall maximum purchase limitation described in (8) below and
exclusive of an increase in the total number of shares issued due to
an increase in the Estimated Price Range of up to 15%;
(7) Persons purchasing shares of Common Stock in the Syndicated Community
Offering, together with associates of and persons acting in concert
with such persons, may purchase in the Syndicated Offering up to 0.5%
(8,912 shares based on the issuance of 1,782,500 shares) of Common
Stock offered in the Conversion subject to the overall maximum
purchase limitation in (8) below and exclusive of an increase in the
total number of shares issued due to an increase in the Estimated
Price Range of up to 15% and, provided further that shares of Common
Stock purchased in the Community Offering by any persons, together
with associates of and persons acting in concert with such persons,
will be
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aggregated with purchases in the Syndicated Community Offering
in applying the 0.5% purchase limitation;
(8) Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members may purchase stock in the Community Offering and
Syndicated Community Offering subject to the purchase limitations
described in (6) and (7) above, provided that, except for the ESOP,
the maximum number of shares of Common Stock subscribed for or
purchased in all categories by any person, together with associates of
and groups of persons acting in concert with such persons, shall not
exceed the overall maximum purchase limitation of 1.0% (17,825 shares
based on the issuance of 1,782,500 shares) of the shares of Common
Stock offered in the Conversion, exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price
Range of up to 15%; and
(9) No more than 34.9% of the total number of shares offered for sale in
the Conversion may be purchased by directors and officers of the
Association and their associates in the aggregate, excluding purchases
by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Association, both the individual amount permitted to be subscribed for and
the overall maximum purchase limitation may be increased to up to a maximum of
5% at the sole discretion of the Company and the Association. If such amount is
increased, subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Association may be, given the
opportunity to increase their subscriptions up to the then applicable limit. In
addition, the Boards of Directors of the Company and the Association may, in
their sole discretion, increase the overall maximum purchase limitation referred
to above up to 9.99%, provided that orders for shares exceeding 5% of the shares
being offered in the Subscription and Community Offerings shall not exceed, in
the aggregate, 10% of the shares being offered in the Subscription and Community
Offerings. Requests to purchase additional shares of Common Stock under this
provision will be determined by the Boards of Directors and, if approved,
allocated on a pro rata basis giving priority in accordance with the priority
rights set forth herein.
The overall maximum purchase limitation may not be reduced to less than
1% but the individual amount permitted to be subscribed for may be reduced by
the Association to less than 0.5%, subject to paragraphs (2), (4) and (5)
above without the further approval of members or resolicitation of
subscribers. An individual Eligible Account Holder, Supplemental Eligible
Account Holder or Other Member may not purchase individually in the
Subscription Offering the overall maximum purchase limitation of 1.0% of the
shares offered, but may make such purchase, together with associates of and
persons acting in concert with such person, by also purchasing in other
available categories, subject to availability of shares and the maximum
overall purchase limitation for purchases in the Conversion.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order of priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the Adjusted Maximum number of shares; (ii) in the event
that there is an oversubscription by Eligible Account Holders, to fill
unsatisfied subscriptions of Eligible Account Holders exclusive of the Adjusted
Maximum; (iii) in the event that there is an oversubscription by Supplemental
Eligible Account Holders, to fill unsatisfied subscriptions of Supplemental
Eligible Account Holders, exclusive of the Adjusted Maximum; (iv) in the event
that there is an oversubscription by Other Members, to fill unsatisfied
subscriptions of Other Members exclusive of the Adjusted Maximum; and (v) to
fill
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unsatisfied subscriptions in the Community Offering to the extent possible
exclusive of the Adjusted Maximum and with preference to Preferred Subscribers.
The term "associate" of a person is defined to mean: (i) any corporation
(other than the Association or a majority-owned subsidiary of the Association)
of which such person is an officer, partner or 10% stockholder; (ii) any trust
or other estate in which such person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity; provided, however, such
term shall not include any employee stock benefit plan of the Association in
which such person has a substantial beneficial interest or serves as a trustee
or in a similar fiduciary capacity; and (iii) any relative or spouse of such
person, or any relative of such spouse, who either has the same home as such
person or who is a director or officer of the Association. Directors are not
treated as associates of each other solely because of their Board membership.
For a further discussion of limitations on purchases of a converting
institution's stock at the time of Conversion and subsequent to Conversion, see
"-Certain Restrictions on Purchase or Transfer of Shares After Conversion," "The
Board of Directors and Management of the Association - Subscriptions by
Executive Officers and Directors," and "Restrictions on Acquisition of the
Company and the Association."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Association in its
present mutual form, each depositor would receive his pro rata share of any
assets of the Association remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). Each depositor's pro rata share of such remaining assets would be in
the same proportion as the value of his deposit account was to the total value
of all deposit accounts in the Association at the time of liquidation. After
the Conversion, each depositor, in the event of a complete liquidation, would
have a claim as a creditor of the same general priority as the claims of all
other general creditors of the Association. However, except as described below,
his claim would be solely in the amount of the balance in his deposit account
plus accrued interest. He would not have an interest in the value or assets of
the Association above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal
to the surplus and reserves of the Association as of the date of its latest
balance sheet contained in the final Prospectus used in connection with the
Conversion. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he were to continue to maintain his deposit account at the
Association, would be entitled, on a complete liquidation of the Association
after the Conversion, to an interest in the liquidation account prior to any
payment to the stockholders of the Association. Each Eligible Account Holder
and Supplemental Eligible Account Holder would have an initial interest in
such liquidation account for each deposit account, including regular
accounts, transaction accounts such as NOW accounts, money market deposit
accounts, and certificates of deposit, with a balance of $50 or more held in
the Association on December 31, 1994 and September 30, 1996, respectively
("Qualifying Deposit"). Each Eligible Account Holder and Supplemental
Eligible Account Holder will have a pro rata interest in the total
liquidation account for each of his deposit accounts based on the proportion
that the balance of each such deposit account on the Eligibility Record Date
or Supplemental Eligibility Record Date, respectively, bore to the total
amount of all deposit accounts of all Eligible Account Holders and
Supplemental Eligible Account Holders in the Association. For deposit
accounts in existence at both dates separate subaccounts shall be determined
on the basis of the Qualifying Deposits in such deposit accounts on such
record date.
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If, however, on any annual closing date of the Association, commencing
after December 31, 1994, and September 30, 1996, the amount in any deposit
account is less than the amount in such deposit account on December 31, 1994
and September 30, 1996 or any other annual closing date, then the interest in
the liquidation account relating to such deposit account would be reduced
from time to time by the proportion of any such reduction, and such interest
will cease to exist if such deposit account is closed. In addition, no
interest in the liquidation account would ever be increased despite any
subsequent increase in the related deposit account. Any assets remaining
after the above liquidation rights of Eligible Account Holders and
Supplemental Eligible Account Holders are satisfied would be distributed to
the Company as the sole stockholder of the Association.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt by
the Association of either a favorable ruling from the IRS or an opinion of
counsel with respect to federal income taxation, and an opinion of an
independent accountant with respect to Ohio income and franchise taxation, to
the effect that the Conversion will not be a taxable transaction to the Company,
the Association, Eligible Account Holders, Supplemental Eligible Account Holders
or Other Members except as noted below.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Association has received an opinion of its
counsel, Muldoon, Murphy & Faucette, that for federal income tax purposes:
(i) the Association's change in form from mutual to stock ownership will
constitute a reorganization under section 368(a)(1)(F) of the Code and
neither the Association nor the Company will recognize any gain or loss as a
result of the Conversion; (ii) no gain or loss will be recognized to the
Association or the Company upon the purchase of the Association's capital
stock by the Company or to the Company upon the purchase of its Common Stock
in the Conversion; (iii) no gain or loss will be recognized by Eligible
Account Holders or Supplemental Eligible Account Holders upon the issuance to
them of deposit accounts in the Association in its stock form and their
interests in the liquidation account in exchange for their deposit accounts
in the Association; (iv) the tax basis of the depositors' deposit accounts in
the Association immediately after the Conversion will be the same as the
basis of their deposit accounts immediately prior to the Conversion; (v) the
tax basis of each Eligible Account Holder's and Supplemental Eligible Account
Holder's interest in the liquidation account will be zero; (vi) no gain or
loss will be recognized by Eligible Account Holders or Supplemental Eligible
Account Holders upon the distribution to them of non-transferable
subscription rights to purchase shares of the Common Stock, provided that the
amount to be paid for the Common Stock is equal to the fair market value of
such stock; and (vii) the tax basis to the stockholders of the Common Stock
of the Company purchased in the Conversion will be the amount paid therefore
and the holding period for the shares of Common Stock purchased by such
persons will begin on the date on which their subscription rights are
exercised. Crowe, Chizek has opined that the Conversion will not be a
taxable transaction to the Company, the Association, Eligible Account Holders
or Supplemental Eligible Account Holders for Ohio income and/or franchise tax
purposes. Certain portions of both the federal and the state and local tax
opinions are based upon the assumption that the subscription rights issued in
connection with the Conversion will have no value. The Company and the
Association have received an opinion issued by Keller stating that pursuant
to Keller's valuation, Keller is of the opinion that subscription rights
issued in connection with the Conversion will have no value. The opinion of
Keller and the federal and state tax opinions, respectively, referred to
herein are filed as exhibits to the Registration Statement. See "Additional
Information".
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS or the Ohio Department of
Taxation ("ODOT") and the IRS or ODOT could disagree with conclusions reached
therein. Keller has stated in its opinion that, pursuant to its valuation,
Keller is of the opinion that the subscription rights do not have any value,
based on the fact that such rights are
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acquired by the recipients without cost,
are non-transferable and of short duration, and afford the recipients the right
only to purchase the Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the unsubscribed
shares of Common Stock. Such valuation is not binding on the IRS or ODOT. If
the subscription rights granted to Eligible Account Holders or Supplemental
Eligible Account Holders are deemed to have an ascertainable value, receipt of
such rights could be taxable to those Eligible Account Holders or Supplemental
Eligible Account Holders who receive and/or exercise the subscription rights in
an amount equal to such value and the Association could recognize gain on such
distribution. Eligible Account Holders and Supplemental Eligible Account
Holders are encouraged to consult with their own tax advisor as to the tax
consequences in the event that such subscription rights are deemed to have an
ascertainable value.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by the
Association will be final. The Plan provides that the Association's Board of
Directors shall have the discretion to interpret and apply the provisions of the
Plan to particular circumstances and that such interpretation or application
shall be final. Any and all interpretations, applications and determinations
will be made by the Board of Directors on the basis of such information and
assistance as was then reasonably available for such purpose.
The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended at any time by a two-thirds
vote of the Association's Board of Directors prior to solicitation of proxies
from members to vote on the Plan. After submission of the proxy materials to
the members, the Plan may be amended by a two-thirds vote of the Board of
Directors at any time prior to the Special Meeting with the concurrence of the
OTS. The Plan may be amended at any time after the approval of members with the
approval of the OTS and no further approval of the members will be necessary
unless otherwise required by the OTS. By adoption of the Plan, the
Association's members will be deemed to have authorized amendment of the Plan
under the circumstances described above.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion
by a director or an executive officer of the Association will be subject to a
restriction that the shares not be sold for a period of one year following
the Conversion, except in the event of the death of such director or
executive officer. Each certificate for restricted shares will bear a legend
giving notice of this restriction on transfer, and instructions will be
issued to the effect that any transfer within such time period of any
certificate or record ownership of such shares other than as provided above
is a violation of the restriction. Any shares of Common Stock issued at a
later date as a stock dividend, stock split, or otherwise, with respect to
such restricted stock will be subject to the same restrictions. The
directors and executive officers of the Association will also be subject to
the insider trading rules promulgated pursuant to the Exchange Act and any
other applicable requirements of the federal securities laws.
Purchases of outstanding shares of Common Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Association after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Company's outstanding
Common Stock or to the purchase of stock pursuant to the Incentive Stock Option
Plan, the Stock Option Plan for Outside Directors or the Master Stock-Based
Benefit Plan to be established after the Conversion.
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Unless approved by the OTS, the Company, pursuant to OTS regulations, will
be prohibited from repurchasing any shares of the Common Stock for three years
except: (i) for an offer to all stockholders on a pro rata basis; or (ii) for
the repurchase of qualifying shares of a director. Notwithstanding the
foregoing, and except as provided below, beginning one year following completion
of the Conversion, the Company may repurchase its Common Stock so long as:
(i) the repurchases within the following two years are part of an open-market
program not involving greater than 5% of its outstanding capital stock during a
twelve-month period; (ii) the repurchases do not cause the Association to become
undercapitalized; and (iii) the Company provides to the Regional Director of the
OTS no later than 10 days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken and
such program is not disapproved by the Regional Director. Under current OTS
policies, repurchases may be allowed in the first year following Conversion and
in amounts greater than 5% in the second and third years following Conversion
provided there are valid and compelling business reasons for such repurchases
and the OTS does not object to such repurchases.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE ASSOCIATION
GENERAL
The Association's Plan of Conversion provides for the Conversion of the
Association from the mutual to the stock form of organization and, in connection
therewith, a new Federal Stock Charter and Bylaws to be adopted by members of
the Association. The Plan also provides for the concurrent formation of a
holding company, which form of organization may or may not be utilized at the
option of the Board of Directors of the Association. See "The Conversion -
General." In the event that the holding company form of organization is
utilized, as described below, certain provisions in the Company's Certificate of
Incorporation and Bylaws and in its management remuneration entered into in
connection with the Conversion, together with provisions of Delaware corporate
law, may have anti-takeover effects. In the event that the holding company form
of organization is not utilized, the Association's Stock Charter and Bylaws and
management remuneration entered into in connection with the Conversion may have
anti-takeover effects as described below. In addition, regulatory restrictions
may make it difficult for persons or companies to acquire control of either the
Company or the Association.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of the provisions
of the Company's Certificate of Incorporation and Bylaws which might be deemed
to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem 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, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following
description of certain of the provisions of the Certificate of Incorporation and
Bylaws of the Company is necessarily general and reference should be made in
each case to such Certificate of Incorporation and Bylaws, which are
incorporated herein by reference. See "Additional Information" as to how to
obtain a copy of these documents.
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LIMITATION ON VOTING RIGHTS. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act, and includes shares beneficially owned by such person or any of
his affiliates (as defined in the Certificate of Incorporation), shares which
such person or his affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the ESOP or directors, officers and employees of
the Association or Company or shares that are subject to a revocable proxy and
that are not otherwise beneficially owned, or deemed by the Company to be
beneficially owned, by such person and his affiliates. The Certificate of
Incorporation also contains provisions authorizing the Board of Directors to
construe and apply the Limit and to demand that any person reasonably believed
to beneficially own Common Stock in excess of the Limit (or hold of record
Common Stock beneficially owned in excess of the Limit) to provide the Company
with certain information. No assurance can be given that a court applying
Delaware law would enforce such provisions of the Certificate of Incorporation.
The Certificate of Incorporation of the Company further provides that this
provision limiting voting rights may only be amended upon the vote of 80% of the
outstanding shares of voting stock (after giving effect to the limitation on
voting rights).
BOARD OF DIRECTORS. The Board of Directors of the Company is divided
into three classes, each of which shall contain approximately one-third of
the whole number of members of the Board. Each class shall serve a staggered
term, with approximately one-third of the total number of directors being
elected each year. The Company's Certificate of Incorporation and Bylaws
provide that the size of the Board shall be determined by a majority of the
directors. The Certificate of Incorporation and the Bylaws provide that any
vacancy occurring in the Board, including a vacancy created by an increase in
the number of directors or resulting from death, resignation, retirement,
disqualification, removal from office or other cause, may be filled for the
remainder of the unexpired term exclusively by a majority vote of the
directors then in office. The classified Board is intended to provide for
continuity of the Board of Directors and to make it more difficult and time
consuming for a stockholder group to fully use its voting power to gain
control of the Board of Directors without the consent of the incumbent Board
of Directors of the Company. The Certificate of Incorporation of the Company
provides that a director may be removed from the Board of Directors prior to
the expiration of his term only for cause, upon the vote of 80% of the
outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a majority
of the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be
called only by the Board of Directors of the Company. The Certificate of
Incorporation also provides that any action required or permitted to be taken by
the stockholders of the Company may be taken only at an annual or special
meeting and prohibits stockholder action by written consent in lieu of a
meeting.
AUTHORIZED SHARES. The Certificate of Incorporation authorizes the
issuance of 4,000,000 shares of Common Stock and 1,000,000 shares of Preferred
Stock. The shares of Common Stock and Preferred Stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these
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additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control
of the Company. The Board of Directors also has sole authority to determine
the terms of any one or more series of Preferred Stock, including voting
rights, conversion rates, and liquidation preferences. As a result of the
ability to fix voting rights for a series of Preferred Stock, the Board has
the power, to the extent consistent with its fiduciary duty, to issue a
series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its
position. The Company's Board of Directors currently has no plans for the
issuance of additional shares, other than the issuance of additional shares
pursuant to the terms of the Stock Programs and upon exercise of stock
options to be issued pursuant to the terms of the Incentive Stock Option Plan
and the Stock Option Plan for Outside Directors, all of which are to be
established and presented to stockholders at the first annual meeting after
the Conversion.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH
PRINCIPAL STOCKHOLDERS. The Certificate of Incorporation requires the
approval of the holders of 80% of the Company's outstanding shares of voting
stock to approve certain "Business Combinations," as defined therein, and
related transactions. Under Delaware law, absent this provision, Business
Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only a majority of the
outstanding shares of Common Stock of the Company and any other affected
class of stock. Under the Certificate of Incorporation, 80% approval of
shareholders is required in connection with any transaction involving an
Interested Stockholder (as defined below) except (i) in cases where the
proposed transaction has been approved in advance by a majority of those
members of the Company's Board of Directors who are unaffiliated with the
Interested Stockholder and were directors prior to the time when the
Interested Stockholder became an Interested Stockholder or (ii) if the
proposed transaction meets certain conditions set forth therein which are
designed to afford the shareholders a fair price in consideration for their
shares in which case, if a stockholder vote is required, approval of only a
majority of the outstanding shares of voting stock would be sufficient. The
term "Interested Stockholder" is defined to include any individual,
corporation, partnership or other entity (other than the Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10%
or more of the outstanding shares of voting stock of the Company. This
provision of the Certificate of Incorporation applies to any "Business
Combination," which is defined to include: (i) any merger or consolidation of
the Company or any of its subsidiaries with or into any Interested
Stockholder or Affiliate (as defined in the Certificate of Incorporation) of
an Interested Stockholder; (ii) any sale, lease, exchange, mortgage,
transfer, or other disposition to or with any Interested Stockholder or
Affiliate of 25% or more of the assets of the Company or combined assets of
the Company and its subsidiary; (iii) the issuance or transfer to any
Interested Stockholder or its Affiliate by the Company (or any subsidiary) of
any securities of the Company in exchange for any assets, cash or securities
the value of which equals or exceeds 25% of the fair market value of the
Common Stock of the Company; (iv) the adoption of any plan for the
liquidation or dissolution of the Company proposed by or on behalf of any
Interested Stockholder or Affiliate thereof; and (v) any reclassification of
securities, recapitalization, merger or consolidation of the Company which
has the effect of increasing the proportionate share of Common Stock or any
class of equity or convertible securities of the Company owned directly or
indirectly by an Interested Stockholder or Affiliate thereof. The directors
and executive officers of the Association are purchasing in the aggregate
approximately 3.81% of the shares of the Common Stock at the maximum of the
Estimated Price Range. In addition, the ESOP intends to purchase 8% of the
Common Stock sold in the Conversion. Additionally, if at a meeting of
stockholders following the Conversion stockholder approval of the proposed
Stock Programs and Stock Options Plans is received, the Company expects to
acquire 4% of the Common Stock issued in the Conversion on behalf of the
Stock Programs and expects to issue an amount equal to 10% of the Common
Stock issued in the Conversion under the Stock Option Plans to directors and
executive officers. As a result, assuming the Stock
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Programs and Stock Option Plans are approved by Stockholders, directors,
executive officers and employees have the potential to control the voting of
approximately 25.81% of the Company's Common Stock, thereby enabling them to
prevent the approval of the transactions requiring the approval of at least 80%
of the Company's outstanding shares of voting stock described hereinabove.
EVALUATION OF OFFERS. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein) to: (i) make a tender or exchange
offer for any equity security of the Company; (ii) merge or consolidate the
Company with another corporation or entity; or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company, the Association and the stockholders of the
Company, give due consideration to all relevant factors, including, without
limitation, the social and economic effects of acceptance of such offer on the
Company's customers and the Association's present and future account holders,
borrowers and employees; on the communities in which the Company and the
Association operate or are located; and on the ability of the Company to fulfill
its corporate objectives as a savings and loan holding company and on the
ability of the Association to fulfill the objectives of a federally chartered
stock savings association under applicable statutes and regulations. No
assurance can be given that a court applying Delaware law would enforce the
foregoing provision of the Certificate of Incorporation. By having these
standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then market
price of any equity security of the Company.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of
its voting stock; provided, however, that an affirmative vote of at least 80%
of the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision
limiting voting rights, the provisions relating to approval of certain
business combinations, calling special meetings, the number and
classification of directors, director and officer indemnification by the
Company and amendment of the Company's Bylaws and Certificate of
Incorporation. The Company's Bylaws may be amended by its Board of
Directors, or by a vote of 80% of the total votes eligible to be voted at a
duly constituted meeting of stockholders.
CERTAIN BYLAW PROVISIONS. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the employment agreements with officers, the Severance Plan, the
Stock Programs, the Incentive Stock Option Plan and the Stock Option Plan for
Outside Directors or the Master Stock-Based Benefit Plan to be established may
also discourage takeover attempts by increasing
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the costs to be incurred by the Association and the Company in the event of a
takeover. See "The Board of Directors and Management of the Association -
Employment Agreements" and "- Benefits - Stock Option Plans."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of the Company and
that otherwise is in the best interest of all stockholders.
DELAWARE CORPORATE LAW
The state of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by certain employee stock plans; (iii) any business
combination with an Interested Stockholder that is approved by the Board of
Directors and by a two-thirds vote of the outstanding voting stock not owned by
the Interested Stockholder; and (iv) certain business combinations that are
proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the Board of Directors. A corporation may exempt itself from the requirements
of the statute by adopting an amendment to its Certificate of Incorporation or
Bylaws electing not to be governed by Section 203. At the present time, the
Board of Directors does not intend to propose any such amendment.
RESTRICTIONS IN THE ASSOCIATION'S NEW CHARTER AND BYLAWS
Although the Board of Directors of the Association is not aware of any
effort that might be made to obtain control of the Association after the
Conversion, the Board of Directors believes that it is appropriate to adopt
certain provisions permitted by federal regulations to protect the interests of
the converted Association and its stockholders from any hostile takeover. Such
provisions may, indirectly,
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inhibit a change in control of the Company, as the
Association's sole stockholder. See "Risk Factors - Certain Anti-Takeover
Provisions."
The Association's Federal Stock Charter will contain a provision whereby
the acquisition of or offer to acquire beneficial ownership of more than 10%
of the issued and outstanding shares of any class of equity securities of the
Association by any person (I.E., any individual, corporation, group acting in
concert, trust, partnership, joint stock company or similar organization),
either directly or through an affiliate thereof, will be prohibited for a
period of five years following the date of completion of the Conversion. Any
stock in excess of 10% acquired in violation of the Federal Stock Charter
provision will not be counted as outstanding for voting purposes. This
limitation shall not apply to any transaction in which the Association forms
a holding company without a change in the respective beneficial ownership
interests of its stockholders other than pursuant to the exercise of any
dissenter or appraisal rights. In the event that holders of revocable
proxies for more than 10% of the shares of the Common Stock of the Company
seek, among other things, to elect one-third or more of the Company's Board
of Directors, to cause the Company's stockholders to approve the acquisition
or corporate reorganization of the Company or to exert a continuing influence
on a material aspect of the business operations of the Company, which actions
could indirectly result in a change in control of the Association, the Board
of Directors of the Association will be able to assert this provision of the
Association's Federal Stock Charter against such holders. Although the Board
of Directors of the Association is not currently able to determine when and
if it would assert this provision of the Association's Federal Stock Charter,
the Board of Directors, in exercising its fiduciary duty, may assert this
provision if it were deemed to be in the best interests of the Association,
the Company and its stockholders. It is unclear, however, whether this
provision, if asserted, would be successful against such persons in a proxy
contest which could result in a change in control of the Association
indirectly through a change in control of the Company. Finally, for five
years, stockholders will not be permitted to call a special meeting of
stockholders relating to a change of control of the Association or a charter
amendment or to cumulate their votes in the election of directors.
Furthermore, the staggered terms of the Board of Directors could have an
anti-takeover effect by making it more difficult for a majority of shares to
force an immediate change in the Board of Directors since only one-third of
the Board is elected each year. The purpose of these provisions is to assure
stability and continuity of management of the Association in the years
immediately following the Conversion.
Although the Association has no arrangements, understandings or plans at
the present time for the issuance or use of the shares of undesignated
preferred stock (the "Preferred Stock") proposed to be authorized, the Board of
Directors believes that the availability of such shares will provide the
Association with increased flexibility in structuring possible future financings
and acquisitions and in meeting other corporate needs which may arise. In the
event of a proposed merger, tender offer or other attempt to gain control of the
Association of which management does not approve, it might be possible for the
Board of Directors to authorize the issuance of one or more series of Preferred
Stock with rights and preferences which could impede the completion of such a
transaction. An effect of the possible issuance of such Preferred Stock,
therefore, may be to deter a future takeover attempt. The Board of Directors
does not intend to issue any Preferred Stock except on terms which the Board
deems to be in the best interest of the Association and its then existing
stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of the
Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion,
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<PAGE>
from offering, or making an announcement of an offer or intent to make an
offer, to purchase such subscription rights or Common Stock.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Association
or the Company; or (iii) offers which are not opposed by the Board of Directors
of the Association and which receive the prior approval of the OTS. Such
prohibition is also applicable to the acquisition of the stock of the Company.
Such acquisition may be disapproved by the OTS if it is found, among other
things, that the proposed acquisition (a) would frustrate the purposes of the
provisions of the regulations regarding conversions; (b) would be manipulative
or deceptive; (c) would subvert the fairness of the conversion; (d) would be
likely to result in injury to the savings institution; (e) would not be
consistent with economical home financing; (f) would otherwise violate law or
regulation; or (g) would not contribute to the prudent deployment of the savings
institution's conversion proceeds. In the event that any person, directly or
indirectly, violates this regulation, the securities beneficially owned by such
person in excess of 10% shall not be counted as shares entitled to vote and
shall not be voted by any person or counted as voting shares in connection with
any matters submitted to a vote of stockholders. The definition of beneficial
ownership for this regulation extends to persons holding revocable or
irrevocable proxies for the Company's stock under circumstances that give rise
to a conclusive or rebuttable determination of control under the OTS
regulations.
In addition, any proposal to acquire 10% of any class of equity security
of the Company generally would be subject to approval by the OTS under the
Change in Bank Control Act. The OTS requires all persons seeking control of
a savings institution, and, therefore, indirectly its holding company, to
obtain regulatory approval prior to offering to obtain control. Federal law
generally provides that no "person," acting directly or indirectly or through
or in concert with one or more other persons, may acquire directly or
indirectly "control," as that term is defined in OTS regulations, of a
federally-insured savings institution without giving at least 60 days'
written notice to the OTS and providing the OTS an opportunity to disapprove
the proposed acquisition. Such acquisitions of control may be disapproved if
it is determined, among other things, that: (i) the acquisition would
substantially lessen competition; (ii) the financial condition of the
acquiring person might jeopardize the financial stability of the savings
institution or prejudice the interests of its depositors; or (iii) the
competency, experience or integrity of the acquiring person or the proposed
management personnel indicates that it would not be in the interest of the
depositors or the public to permit the acquisition of control by such person.
Such change in control restrictions on the acquisition of holding company
stock are not limited to three years after conversion but will apply for as
long as the regulations are in effect. Persons holding revocable or
irrevocable proxies may be deemed to be beneficial owners of such securities
under OTS regulations and therefore prohibited from voting all or the portion
of such proxies in excess of the 10% aggregate beneficial ownership limit.
Such regulatory restrictions may prevent or inhibit proxy contests for
control of the Company or the Association which have not received prior
regulatory approval.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 4,000,000 shares of Common Stock having
a par value of $.01 per share and 1,000,000 shares of preferred stock having a
par value of $.01 per share (the "Preferred Stock"). The Company currently
expects to issue 1,782,500 shares of Common Stock (or 2,049,875 in
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<PAGE>
the event of an increase of 15% in the Estimated Price Range) and no shares
of Preferred Stock in the Conversion. Except as discussed above in
"Restriction on Acquisition of the Company and the Association," each share
of the Company's Common Stock will have the same relative rights as, and will
be identical in all respects with, each other share of Common Stock. Upon
payment of the Purchase Price for the Common Stock, in accordance with the
Plan, all such stock will be duly authorized, fully paid and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE
FDIC.
COMMON STOCK
DIVIDENDS. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation." The
holders of Common Stock of the Company will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor. If the Company issues
Preferred Stock, the holders thereof may have a priority over the holders of the
Common Stock with respect to dividends.
VOTING RIGHTS. Upon Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect
the Company's Board of Directors and act on such other matters as are
required to be presented to them under Delaware law or the Company's
Certificate of Incorporation or as are otherwise presented to them by the
Board of Directors. Except as discussed in "Restrictions on Acquisition of
the Company and the Association," each holder of Common Stock will be
entitled to one vote per share and will not have any right to cumulate votes
in the election of directors. If the Company issues Preferred Stock, holders
of the Preferred Stock may also possess voting rights. Certain matters
require an 80% shareholder vote. See "Restrictions on Acquisition of the
Company and the Association."
As a federal mutual savings association, corporate powers and control of
the Association are vested in its Board of Directors, who elect the officers of
the Association and who fill any vacancies on the Board of Directors as it
exists upon Conversion. Subsequent to Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Association,
which will be the Company, and voted at the direction of the Company's Board of
Directors. Consequently, the holders of the Common Stock will not have direct
control of the Association.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Association, the Company, as holder of the Association's capital stock,
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of the Association (including all deposit accounts and
accrued interest thereon) and after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders (see "The Conversion - Liquidation Rights"), all assets of the
Association available for distribution. In the event of liquidation,
dissolution or winding up of the Company, the holders of its Common Stock would
be entitled to receive, after payment or provision for payment of all its debts
and liabilities, all of the assets of the Company available for distribution.
If Preferred Stock is issued, the holders thereof may have a priority over the
holders of the Common Stock in the event of liquidation or dissolution.
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PREEMPTIVE RIGHTS. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
DESCRIPTION OF CAPITAL STOCK OF THE ASSOCIATION
GENERAL
The Federal Stock Charter of the Association, to be effective upon the
Conversion, authorizes the issuance of capital stock consisting of 4,000,000
shares of common stock, par value $1.00 per share, and 1,000,000 shares of
preferred stock, par value $1.00 per share, which preferred stock may be
issued in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of Common
Stock of the Association will have the same relative rights as, and will be
identical in all respects with, each other share of common stock. After the
Conversion, the Board of Directors will be authorized to approve the issuance
of Common Stock up to the amount authorized by the Federal Stock Charter
without the approval of the Association's stockholders. Assuming that the
holding company form of organization is utilized, all of the issued and
outstanding common stock of the Association will be held by the Company as
the Association's sole stockholder. THE CAPITAL STOCK OF THE ASSOCIATION
WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN
INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
DIVIDENDS. The holders of the Association's common stock will be entitled
to receive and to share equally in such dividends as may be declared by the
Board of Directors of the Association out of funds legally available therefor.
See "Dividend Policy" for certain restrictions on the payment of dividends and
"Federal and State Taxation - Federal Taxation" for a discussion of the
consequences of the payment of cash dividends from income appropriated to bad
debt reserves.
VOTING RIGHTS. Immediately after the Conversion, the holders of the
Association's common stock will possess exclusive voting rights in the
Association. Each holder of shares of common stock will be entitled to one vote
for each share held, subject to the right of shareholders to cumulate their
votes for the election of directors. During the five-year period after the
effective date of the Conversion, cumulation of votes will not be permitted.
See "Restrictions on Acquisition of the Company and the Association -
Anti-Takeover Effects of the Company's Certificate of Incorporation and Bylaws
and Management Remuneration Adopted in Conversion."
LIQUIDATION. In the event of any liquidation, dissolution, or winding up
of the Association, the holders of common stock will be entitled to receive,
after payment of all debts and liabilities of the Association (including all
deposit accounts and accrued interest thereon), and distribution of the balance
in the special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders,
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all assets of the Association available for distribution in cash or in kind.
If additional preferred stock is issued subsequent to the Conversion, the
holders thereof may also have priority over the holders of common stock in
the event of liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the common stock of the
Association will not be entitled to preemptive rights with respect to any shares
of the Association which may be issued. The common stock will not be subject to
redemption. Upon receipt by the Association of the full specified purchase
price therefor, the common stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Fifth Third Bank.
EXPERTS
The consolidated financial statements of the Association and its
subsidiaries as of September 30, 1995 and 1994 and for each of the years in the
three-year period ended September 30, 1995, have been included herein in
reliance upon the report of Lentol, Violet, Kienitz & Company, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
Keller & Company, Inc. has consented to the publication herein of the
summary of its report to the Association and Company setting forth its opinion
as to the estimated pro forma market value of the Common Stock upon Conversion
and its valuation with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Association and the Company by
Muldoon, Murphy & Faucette, Washington, D.C., special counsel to the Association
and the Company. Muldoon, Murphy & Faucette will rely as to certain matters of
Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell. The State of
Ohio tax consequences of the Conversion will be passed upon for the Association
and the Company by Crowe, Chizek and Company LLP.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information and all
exhibits to the Registration Statement, can be examined without charge at the
public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of such material can be obtained from the SEC
at prescribed rates. The statements contained in this Prospectus as to the
contents of any contract or other document field as an exhibit to the
registration statement are, of necessity, brief descriptions thereof and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
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<PAGE>
The Association has filed an application for conversion with the OTS with
respect to the Conversion. Pursuant to the rules and regulations of the OTS,
this Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Office of the Regional Director of the
OTS located at 200 West Madison Street, Suite 1300, Chicago, Illinois 60606.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion. In
the event that the Association amends the Plan to eliminate the concurrent
formation of the Company as part of the Conversion, the Association will
register its stock with the OTS under Section 12(g) of the Exchange Act and,
upon such registration, the Association and the holders of its stock will become
subject to the same obligations and restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the Company
and the Federal Stock Charter and Bylaws of the Association are available
without charge from the Association.
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CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
Delphos, Ohio
FINANCIAL STATEMENTS
CONTENTS
REPORT OF INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . F-2
FINANCIAL STATEMENTS
Statements of Financial Condition. . . . . . . . . . . . . . . . . . F-3
Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . 35
Statements of Retained Earnings. . . . . . . . . . . . . . . . . . . F-4
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . F-7
All schedules are omitted because the required information is not applicable or
is included in the financial statements and related notes.
The financial statements of the Holding Company have been omitted because the
Holding Company has not issued any stock, has no assets, no liabilities and has
not conducted any business other than of an organizational nature.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Citizens Federal Savings
and Loan Association
Delphos, Ohio
We have audited the accompanying statements of financial condition of Citizens
Federal Savings and Loan Association (the Association), Delphos, Ohio, as of
September 30, 1995 and 1994, and the related statements of income, retained
earnings, and cash flows for each of the three fiscal years in the period ended
September 30, 1995. These financial statements are the responsibility of the
Association's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Citizens Federal Savings and
Loan Association as of September 30, 1995 and 1994, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended September 30, 1995, in conformity with generally accepted accounting
principles.
/s/ Lentol, Violent, Kienitz & Company
Lentol, Violet, Kienitz & Company
Lima, Ohio
November 15, 1995,
except for Note 1, as to
which the date is July 2, 1996.
F-2
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF FINANCIAL CONDITION
May 31, 1996 (unaudited) and September 30, 1995 and 1994
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
May 31, September 30,
------------ ---------------------------
1996 1995 1994
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions $ 1,611,972 $ 334,045 $ 325,567
Interest-bearing deposits in other banks 3,218,190 3,923,027 6,004,927
------------ ------------ ------------
Total cash and cash equivalents 4,830,162 4,257,072 6,330,494
Investment securities held to maturity
(estimated fair value of $500,000 in 1996,
$505,313 in 1995 and $503,281 in 1994)
(Note 2) 500,000 500,000 500,000
Mortgage-backed securities available
for sale (Notes 2 and 3) 775,139
Mortgage-backed securities held to
maturity (estimated fair value of
$14,278,886 in 1996, $17,828,745 in 1995,
and $17,163,593 in 1994) (Note 3) 14,146,029 17,420,613 17,754,714
Loans receivable, net (Note 4) 69,636,864 64,042,689 56,451,440
FHLB stock, at cost 764,400 725,600 569,800
Accrued interest receivable (Note 5) 263,578 254,738 170,021
Premises and equipment 709,887 724,708 756,883
Other assets 70,490 97,070 79,646
------------ ------------ ------------
Total assets $ 91,696,549 $ 88,022,490 $ 82,612,998
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES
Deposits (Note 7) $ 79,097,288 $ 76,664,442 $ 72,255,026
Escrow accounts 275,077 208,686 184,046
Accrued interest payable 481,359 23,536 27,903
Accrued expenses and other liabilities 476,199 326,940 291,342
------------ ------------ ------------
Total liabilities 80,329,923 77,223,604 72,758,317
Commitments and contingencies
(Notes 10 and 13)
RETAINED EARNINGS
Retained earnings - substantially
restricted (Notes 9 and 12) 11,381,128 10,798,886 9,854,681
Unrealized loss on securities available
for sale, net of tax (14,502)
------------ ------------ ------------
Total retained earnings 11,366,626 10,798,886 9,854,681
------------ ------------ ------------
Total liabilities and retained earnings $ 91,696,549 $ 88,022,490 $ 82,612,998
------------ ------------ ------------
------------ ------------ ------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF RETAINED EARNINGS
Eight Months ended May 31, 1996 (unaudited) and
Years ended September 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Unrealized loss
on Securities Total
Available for Sale, Retained
Retained earnings Net of Tax Earnings
----------------- ---------- --------
<S> <C> <C> <C>
Balance, October 1, 1992 $7,972,086 $7,972,086
Net income 970,551 970,551
------------- -------------
Balance, September 30, 1993 8,942,637 8,942,637
Net income 912,044 912,044
------------- -------------
Balance, September 30, 1994 9,854,681 9,854,681
Net income 944,205 944,205
------------- -------------
Balance, September 30, 1995 10,798,886 10,798,886
Unrealized loss on available for sale
securities (unaudited) $ (14,502) (14,502)
Net income for the eight months ended
May 31, 1996 (unaudited) 582,242 582,242
------------- ------------- -------------
Balance, May 31, 1996 (unaudited) $ 11,381,128 $ (14,502) $ 11,366,626
------------- ------------- -------------
------------- ------------- -------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS
Eight Months ended May 31, 1996 and 1995 (unaudited) and
Years ended September 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
EIGHT MONTHS
ENDED MAY 31, YEARS ENDED SEPTEMBER 30,
-------------------------------- -----------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 582,242 $ 619,465 $ 944,205 $ 912,044 $ 970,551
Adjustments to reconcile net
income to net cash provided by
operating activities:
Amortization of deferred loan
origination fees 1,326 1,381 (7,237) (24,848) (44,572)
Premiums and discounts on loans
and mortgage-backed and related
securities (14,154) (11,034) (21,904) (16,669) (9,988)
Provision for loan losses 60,000 25,000
Stock dividends from FHLB (38,800) (27,400) (39,100) (26,800) (27,600)
Gain on sale of securities (8,259)
Depreciation and amortization of
premises and equipment 25,800 25,514 51,570 49,147 48,037
Deferred taxes 14,044 34,646 27,340 47,654 77,637
Net gain on sale of assets 7,678
Increase (decrease) in:
Accrued interest receivable (8,840) (41,865) (81,280) (30,142) 9,208
Other assets 26,580 (42,592) (17,424) (6,028) (6,976)
Interest payable 457,823 407,185 (4,367) (7,136) (34,627)
Accrued expenses and
other liabilities 142,686 52,704 52,656 10,332 (8,581)
------------ ------------ ------------ ------------- ------------
Net cash from operating
activities 1,180,448 1,018,004 904,459 967,554 1,005,767
------------ ------------ ------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Mortgage-backed securities
available for sale
Proceeds from sales 763,370
Proceeds from paydowns 41,213
Investment and mortgage-backed
securities held to maturity
Purchases (990,000) (990,000) (9,962,011) (3,946,978)
Proceeds from calls, maturities
and paydowns 1,695,302 785,227 1,285,001 3,055,928 3,250,010
Purchases of FHLB stock (116,700) (116,700)
Loan originations net of principal
payment on loans (5,595,501) (4,250,953) (7,570,243) (8,696,265) (1,064,803)
Purchases of premises and equipment (10,979) (10,782) (19,995) (45,609) (184,204)
------------ ------------ ------------ ------------- ------------
Net cash used in investing
activities (3,106,595) (4,583,208) (7,411,937) (15,647,957) (1,945,975)
------------ ------------ ------------ ------------- ------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
F-5
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS (CONTINUED)
Eight Months ended May 31, 1996 and 1995 (unaudited) and
Years ended September 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Eight Months
Ended MAY 31, Years Ended September 30,
-------------------------------- -----------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts $ 2,432,846 $ 3,486,138 $ 4,409,416 $ 4,014,187 $ 8,268,149
Net increase in mortgage escrow
funds 66,391 79,824 24,640 27,718 13,076
------------ ------------ ------------ ------------ ------------
Net cash from financing activities 2,499,237 3,565,962 4,434,056 4,041,905 8,281,225
------------ ------------ ------------ ------------ ------------
Net increase/(decrease) in cash and
cash equivalents 573,090 758 (2,073,422) (10,638,498) 7,341,017
Cash and cash equivalents at
beginning of period 4,257,072 6,330,494 6,330,494 16,968,992 9,627,975
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at
end of period $ 4,830,162 $ 6,331,252 $ 4,257,072 $ 6,330,494 $ 16,968,992
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Supplemental disclosures
Cash paid for:
Interest on deposits $ 2,218,236 $ 1,917,762 $ 3,605,857 $ 2,958,799 $ 3,061,874
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Income taxes $ 174,741 $ 190,454 $ 442,954 $ 436,500 $ 404,752
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Noncash transactions:
Transfer of mortgage-backed
securities to available for sale $ 1,607,975
------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: Citizens Federal Savings and Loan Association is a federally-
chartered mutual thrift association located in Delphos, Ohio. The Association
originates and holds primarily residential and consumer loans to customers
throughout the Allen and Van Wert County area in Northwest Ohio. The
Association's primary deposit products are interest-bearing checking accounts
and certificates of deposit. There are no branch operations.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, deposits with financial institutions and
overnight deposits. The Association reports net cash flows for customer loan
and deposit transactions. Cash equivalents of $4,444,674 at May 31, 1996, and
$3,941,959 and $6,029,927 at September 30, 1995 and 1994, respectively, consist
of funds due from banks. The Association considers all highly liquid debt
instruments with original maturities when purchased of three months or less to
be cash equivalents.
SECURITIES: Effective October 1, 1994, the Association adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." This accounting guidance
requires the Corporation to classify debt and marketable equity securities as
held to maturity, trading or available for sale. Prior to the adoption of SFAS
No. 115, the Association classified securities at amortized cost.
Securities classified as held to maturity are those that management has the
positive intent and ability to hold to maturity. Securities held to maturity
are stated at cost, adjusted for amortization of premiums and accretion of
discounts.
Securities classified as available for sale are those that management intends
to sell or that could be sold for liquidity, investment management, or similar
reasons, even if there is not a present intention for such a sale. Securities
available for sale are carried at fair value with unrealized gains and losses
included as a separate component of member's equity, net of tax. Gains or
losses on dispositions are based on net proceeds and the adjusted carrying
amount of securities sold, using the specific identification method.
- -------------------------------------------------------------------------------
(Continued)
F-7
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
At May 31, 1996, and September 31, 1995, the Association had no outstanding
commitments to sell loans or securities.
LOANS RECEIVABLE: Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses, and net deferred loan origination fees.
The allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Association's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the collateral, and current economic conditions.
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 unpaid, and income is subsequently recognized only to
the extent that cash payments are received until, in management' judgment, the
borrower's ability to make periodic interest and principal payments is back to
normal, in which case the loan is returned to accrual status.
On October 1, 1995, the Association adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." Under these
standards, loans considered to be impaired, as identified according to internal
loan review standards, are reduced to the present value of expected future cash
flows or to the fair value of collateral by allocating a portion of the
allowance for loan losses to such loans. If these allocations cause the
allowance for loan losses to require an increase, such an increase will be
reported as a provision for loan losses charged to operations. SFAS no. 118
allows a creditor to use existing methods for income recognition on an impaired
loan. The effect of adopting these standards did not materially affect the
allowance for loan losses at October 1, 1995 or at May 31, 1996.
Management analyzes loans on an individual basis and classifies a loan as
impaired when an analysis of the borrower's operating results and financial
condition indicates that underlying cash flows are not adequate to meet its
debt service requirements. Often this is associated with a delay or shortfall
in payments of 30 days or more. Smaller balance homogeneous loans are
evaluated for impairment in total. Such loans include residential first
mortgage loans secured by one to four family residences, residential
construction loans, home equity, and other consumer loans, with balances less
than $200 thousand. Loans are generally moved to non-accrual status when 90
days or more past due. These loans may also be considered impaired.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The nature of the disclosures for impaired loans is considered generally
comparable to prior nonaccrual loans and non-performing and past due asset
disclosures. The adoption of SFAS No. 114 had no impact on the comparability
of the May 31, 1996 allowance for loan losses to prior periods.
- -------------------------------------------------------------------------------
(Continued)
F-8
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOAN FEES AND COSTS: Loan fees and costs are deferred, and are recognized as
an adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for estimated prepayments based on the
Association's historical prepayment experience.
REAL ESTATE HELD FOR INVESTMENT AND FORECLOSED REAL ESTATE: Real estate
properties acquired through, or in lieu of, loan foreclosure are initially
recorded at fair value at the date of foreclosure. Real estate properties held
for investment are carried at the lower of cost, including cost of improvements
and amenities incurred subsequent to acquisition, or net realizable value.
Costs related to development and improvement of property are capitalized,
whereas costs related to the holding of property are expensed. The portion of
interest costs related to the development of real estate is capitalized.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its estimated net realizable value. At May 31, 1996 and
September 30, 1995, the Association held no real estate for investment or
foreclosed real estate.
INCOME TAXES: Beginning October 1, 1993, the Association adopted SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires the liability method in
accounting for income taxes. The liability method provides that deferred tax
assets and liabilities are recorded based on the difference between the tax
basis of assets and liabilities and their carrying amounts for financial
reporting purposes, referred to as "temporary differences." Previously, the
Association computed deferred taxes for the tax effects of timing differences
between financial reporting and tax return income.
PREMISES AND EQUIPMENT: Land is carried at cost. Buildings, furniture and
fixtures, and equipment are carried at cost, less accumulated depreciation.
Buildings, furniture and fixtures, and equipment are depreciated using
straight-line and accelerated methods over the estimated useful lives of the
respective assets, which range from five to forty years.
BASIS OF PRESENTATION: In connection with the Association's initial public
offering, the Association retroactively restated its financial statements for
all periods presented to reflect certain immaterial amounts to conform with
accounting methods in future periods.
INTERIM FINANCIAL INFORMATION: The unaudited statement of financial condition
as of May 31, 1996 and the related unaudited statements of income, members'
equity and cash flows for the eight months ended May 31, 1996 and 1995 have
been prepared in a manner consistent with the audited financial information
presented. Management believes that all adjustments, which were all of a
normal and recurring nature, have been recorded to the best of its knowledge
and that the unaudited financial information fairly presents the financial
position and results of operations and cash flows of the Association in
accordance with generally accepted accounting principles.
- -------------------------------------------------------------------------------
(Continued)
F-9
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES
The carrying value and estimated fair values of investment securities
held-to-maturity at May 31, 1996 (unaudited) are summarized as follows:
ESTIMATED
CARRYING FAIR
VALUE VALUE
-------- --------
FHLB debt securities $500,000 $500,000
-------- --------
-------- --------
At May 31, 1996, the Association held one FHLB variable rate bond with an
expected maturity date of October 1, 1996.
There were no sales of investment securities during the eight months ended May
31, 1996 and 1995.
The carrying values and estimated fair values of investment securities
held-to-maturity at September 30 are summarized as follows:
--------1995--------- --------1994---------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
FHLB debt securities $500,000 $505,313 $500,000 $503,281
-------- -------- -------- --------
-------- -------- -------- --------
At September 30, 1995, the Association held one FHLB variable rate bond with an
expected maturity date of October 1, 1996.
There were no sales of investment securities or transfers between
classifications during the years ended September 30, 1995 and 1994.
- -------------------------------------------------------------------------------
(Continued)
F-10
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 3 - MORTGAGE-BACKED SECURITIES
The carrying values and estimated fair values of mortgage-backed securities are
summarized as follows:
<TABLE>
<CAPTION>
MAY 31, 1996 (UNAUDITED)
---------------------------------------------------------------------------------
Net Estimated
Principal Unamortized Unearned Amortized Fair
Balance Premiums Discounts Balance Value
------- -------- --------- ------- -----
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY
GNMA certificates $14,036,034 $ 2,941 $ (121,932) $ 13,917,043 $ 14,039,708
FHLMC certificates 229,318 (332) 228,986 239,178
----------- ---------- ------------ ------------ ------------
$14,265,352 $ 2,941 $ (122,264) $ 14,146,029 $ 14,278,886
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
AVAILABLE FOR SALE
GNMA certificates $ 797,582 $ (470) $ 797,112 $ 775,139
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
<CAPTION>
SEPTEMBER 30, 1995
---------------------------------------------------------------------------------
Net Estimated
Principal Unamortized Unearned Amortized Fair
Balance Premiums Discounts Balance Value
------- -------- --------- ------- -----
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY
GNMA certificates $17,266,599 $ 3,416 $ (136,791) $ 17,133,224 $ 17,529,325
FHLMC certificates 287,960 (571) 287,389 299,420
----------- ---------- ------------ ------------ ------------
$17,554,559 $ 3,416 $ (137,362) $ 17,420,613 $ 17,828,745
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
<CAPTION>
SEPTEMBER 30, 1994
---------------------------------------------------------------------------------
Net Estimated
Principal Unamortized Unearned Amortized Fair
Balance Premiums Discounts Balance Value
------- -------- --------- ------- -----
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY
GNMA certificates $17,547,960 $ 4,364 $ (147,969) $ 17,404,355 $ 16,802,452
FHLMC certificates 351,407 (1,048) 350,359 361,141
----------- ---------- ------------ ------------ ------------
$17,899,367 $ 4,364 $ (149,017) $ 17,754,714 $ 17,163,593
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-11
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 3 - MORTGAGE-BACKED SECURITIES (Continued)
Unrealized gains and losses on mortgage-backed securities are summarized as
follows:
<TABLE>
<CAPTION>
MAY 31, 1996 (UNAUDITED)
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for sale $ 797,112 $ 21,973 $ 775,139
Held to maturity 14,146,029 $ 319,539 186,682 14,278,886
<CAPTION>
SEPTEMBER 30, 1995
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Held to maturity $ 17,420,613 $ 468,851 $ 60,719 $ 17,828,745
<CAPTION>
SEPTEMBER 30, 1994
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ ------
<S> <C> <C> <C> <C>
Held to maturity $ 17,754,714 $ 203,842 $ 794,963 $ 17,163,593
</TABLE>
During the eight months ended May 31, 1996, the Association reclassified
mortgage-backed securities with an amortized cost of $1,607,975 from held to
maturity to available for sale. The securities were transferred on November
21, 1995, as allowed by the Statement of Financial Accounting Standards No. 115
implementation guide issued by the Financial Accounting Standards Board, with
the related unrealized gain of $6,818 recorded net of tax as an increase in
retained earnings.
Proceeds from the sale of mortgage-backed securities during the eight months
ended May 31, 1996 were $763,370. Gross gains of $8,259 were realized on these
sales. There were no sales of mortgage-backed securities during the eight
months ended May 31, 1995 or for the years ended September 30, 1995, 1994 and
1993.
- -------------------------------------------------------------------------------
(Continued)
F-12
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
MAY 31, SEPTEMBER 30,
------------ ---------------------------------
1996 1995 1994
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Real estate loans
One- to four-family $ 61,172,863 $ 56,556,082 $ 49,424,160
Multi-family 1,379,237 1,521,058 1,276,329
Commercial real estate 5,108,536 3,900,984 3,706,589
Construction and land 3,785,382 3,808,903 3,080,380
------------ ------------ ------------
71,446,018 65,787,027 57,487,458
Less:
Mortgage loans in process (3,604,526) (3,712,057) (2,706,474)
Net deferred loan origination fees (48,436) (47,110) (49,092)
------------ ------------ ------------
67,793,056 62,027,860 54,731,892
------------ ------------ ------------
Consumer and other loans
Manufactured homes 65,228 90,005 95,950
Home equity loans 914,532 1,012,926 953,881
Unsecured loans 232,721 237,085 133,054
Other consumer loans 738,683 787,619 650,417
------------ ------------ ------------
1,951,164 2,127,635 1,833,302
Less: Non-mortgage loans in process (14,996) (20,446) (21,394)
------------ ------------ ------------
1,936,168 2,107,189 1,811,908
------------ ------------ ------------
Less: Allowance for loan losses (92,360) (92,360) (92,360)
------------ ------------ ------------
$ 69,636,864 $ 64,042,689 $ 56,451,440
------------ ------------ ------------
------------ ------------ ------------
Activity in the allowance for loan losses is summarized as follows:
<CAPTION>
EIGHT MONTHS
ENDED MAY 31, YEARS ENDED SEPTEMBER 30,
----------------------------- -------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 92,360 $ 92,360 $ 92,360 $ 32,360 $ 28,726
Provision charged to income 60,000 25,000
Charge-offs (21,366)
--------- --------- --------- --------- ---------
Balance at end of period $ 92,360 $ 92,360 $ 92,360 $ 92,360 $ 32,360
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-13
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE (Continued)
As of and for the eight months ended May 31, 1996, there were no impaired
loans. Loans on non-accrual status at May 31, 1996 were $316,450. Nonaccrual
and renegotiated loans for which interest has been reduced totaled
approximately $231,012, $238,209 and $458,282 at September 30, 1995, 1994 and
1993, respectively. Interest income foregone under the original terms of the
loans was $6,599 and $4,482 for the eight months ended May 31, 1996 and 1995,
respectively, and $5,780, $15,142, and $15,158 for the years ended September
30, 1995, 1994 and 1993, respectively. The Association is not committed to
lend additional funds to debtors whose loans have been modified.
In the ordinary course of business, the Association has and expects to continue
to have transactions, including borrowings, with its officers, directors and
their affiliates. In the opinion of management, such transactions were on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and did
not involve more than a normal risk of collectibility or present any other
unfavorable features to the Association. Loans to such borrowers, which in the
aggregate exceeded $60,000 at May 31, 1996 and September 30, 1995, are
summarized as follows:
<TABLE>
<CAPTION>
MAY 31, SEPTEMBER 30,
------- -------------
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Balance at beginning of period $ 350,722 $ 104,926
New loans 260,288
Payments (119,471) (14,492)
---------- ----------
Balance at end of period $ 231,251 $ 350,722
---------- ----------
---------- ----------
</TABLE>
NOTE 5 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
MAY 31, SEPTEMBER 30,
---------- -------------------------------
1996 1995 1994
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Investment securities $ 3,809 $ 5,847 $ 4,085
Mortgage-backed securities 94,093 103,896 102,927
Loans receivable 165,676 144,995 63,009
---------- ---------- ----------
$ 263,578 $ 254,738 $ 170,021
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-14
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
MAY 31, SEPTEMBER 30,
------------ -----------------------------
1996 1995 1994
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Land and parking lot $ 175,654 $ 175,654 $ 175,654
Building and improvements 643,190 643,190 633,743
Furniture and equipment 295,403 284,423 274,476
----------- ----------- -----------
1,114,247 1,103,267 1,083,873
Accumulated depreciation (404,360) (378,559) (326,990)
----------- ----------- -----------
$ 709,887 $ 724,708 $ 756,883
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Depreciation expense charged to earnings was $25,800 and $25,514 for the eight
months ended May 31, 1996 and 1995, respectively, and $51,570, $49,147 and
$48,037 for the years ended September 30, 1995, 1994 and 1993, respectively.
NOTE 7 - DEPOSITS
<TABLE>
<CAPTION>
MAY 31, SEPTEMBER 30,
------------------------------- ------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------ ---------------------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Demand and NOW accounts $ 4,510,249 5.70% $ 4,779,806 6.23% $ 4,166,085 5.77%
Money market 8,644,716 10.93 9,492,767 12.38 15,387,236 21.30
Savings and club accounts 8,820,135 11.15 8,426,231 10.99 8,852,722 12.25
------------- -------- ------------ --------- ------------- ---------
21,975,100 27.78 22,698,804 29.60 28,406,043 39.32
Certificates:
3.00% to 3.99% 14,747 .02 14,511 .02 6,635,849 9.18
4.00% to 4.99% 3,625,993 4.58 3,594,831 4.69 7,083,707 9.80
5.00% to 5.99% 29,420,741 37.20 16,711,033 21.80 22,841,774 31.61
6.00% to 6.99% 19,878,043 25.13 29,402,728 38.35 6,902,956 9.55
7.00% to 7.99% 4,149,909 5.25 4,205,353 5.49 275,023 .38
8.00% to 8.99% 32,755 .04 37,182 .05 109,674 .16
------------- -------- ------------ --------- ------------- ---------
57,122,188 72.22 53,965,638 70.40 43,848,983 60.68
------------- -------- ------------ --------- ------------- ---------
$ 79,097,288 100.00% $ 76,664,442 100.00% $ 72,255,026 100.00%
------------- -------- ------------ --------- ------------- ---------
------------- -------- ------------ --------- ------------- ---------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-15
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTE 7 - DEPOSITS (Continued)
The aggregate amount of short-term certificates of deposits with a minimum denomination of $100,000 was approximately $4,059,000 at
May 31, 1996, $4,150,000 at September 30, 1995 and $4,148,000 at September 30, 1994. Deposits in excess of $100,000 are not
insured by the FDIC.
At May 31, 1996, the scheduled maturities of certificates of deposits are as follows (unaudited):
1997 1998 1999 2000 2001 THEREAFTER
---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
3.00% to 3.99% $ 14,747 $ -- $ -- $ -- $ -- $ --
4.00% to 4.99% 3,625,993 -- -- -- -- --
5.00% to 5.99% 17,779,144 7,023,728 4,342,590 25,079 250,200 --
6.00% to 6.99% 18,459,438 796,247 15,103 509,067 98,188 --
7.00% to 7.99% 4,029,370 63,926 51,613 5,000 -- --
8.00% to 8.99% -- -- -- -- -- 32,755
------------ ------------ ------------ ------------- ----------- ----------
$ 43,908,692 $ 7,883,901 $ 4,409,306 $ 539,146 $ 348,388 $ 32,755
------------ ------------ ------------ ------------- ----------- ----------
------------ ------------ ------------ ------------- ----------- ----------
</TABLE>
At September 30, 1995, the scheduled maturities of certificates of deposits
are as follows:
<TABLE>
<CAPTION>
2000 AND
1996 1997 1998 1999 THEREAFTER
---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
3.00% to 3.99% $ 14,511 $ -- $ -- $ -- $ --
4.00% to 4.99% 2,565,404 1,029,427 -- -- --
5.00% to 5.99% 10,259,466 2,752,688 1,559,411 2,082,396 57,072
6.00% to 6.99% 15,169,057 13,082,794 551,569 375,452 223,856
7.00% to 7.99% 159,125 3,996,458 48,770 1,000 --
8.00% to 8.99% -- -- -- -- 37,182
------------ ------------ ------------- ----------- ----------
$ 28,167,563 $ 20,861,367 $ 2,159,750 $ 2,458,848 $ 318,110
------------ ------------ ------------- ----------- ----------
------------ ------------ ------------- ----------- ----------
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
EIGHT MONTHS ENDING YEAR ENDING
MAY 31, SEPTEMBER 30,
--------------------------- -------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Money market $ 178,349 $ 296,376 $ 399,912 $ 760,718 $ 645,011
Savings accounts 166,365 197,128 285,078 327,246 321,605
NOW and demand
accounts 61,346 77,683 109,163 115,713 131,691
Club accounts 1,926 1,865 1,865 1,803 1,818
Certificates of deposit 2,268,073 1,751,895 2,805,472 1,746,183 1,927,122
------------ ------------ ------------- ----------- ----------
$ 2,676,059 $ 2,324,947 $ 3,601,490 $ 2,951,663 $3,027,247
------------ ------------ ------------- ----------- ----------
------------ ------------ ------------- ----------- ----------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-16
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 8 - PENSION PLAN
The Association participated in a defined benefit pension plan for the benefit
of all eligible employees until the plan was terminated by the Board on May 31,
1994. The insurance plans that were used to fund the plan were cashed in on
their anniversary date, August 1, 1994. The cash value of policies were
transferred to the Huntington National Bank Trust Department where they are
earning interest until the assets can be distributed, upon approval of
termination by the Internal Revenue Service.
During 1994, the Association implemented a 401(k) profit sharing plan for all
eligible employees. Employees are eligible to participate in the plan if they
have been employed by the Association for one-half year and have attained age
twenty and one-half. Generally, employees can defer up to 10% of their
compensation into the plan, not to exceed $9,500 for 1996 (unaudited), and
$9,240 for 1995 and 1994. The Association can make a matching discretionary
contribution equal to a percentage of up to 6% of the employee's salary
reduction. The Association may also make special discretionary contributions
equal to a percentage of the employee's compensation.
The expense related to the profit sharing and defined benefit pension plans was
$21,727 and $5,938 for the eight months ended May 31, 1996 and 1995, and
$30,758, $26,348 and $39,500 for the years ending September 30, 1995, 1994 and
1993, respectively.
NOTE 9 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
EIGHT MONTHS ENDING YEAR ENDING
MAY 31, SEPTEMBER 30,
----------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current expense $ 285,956 $ 284,473 $ 453,412 $ 429,850 $ 386,928
Deferred expense 14,044 34,646 27,340 47,654 77,637
----------- ----------- ----------- ----------- -----------
$ 300,000 $ 319,119 $ 480,752 $ 477,504 $ 464,565
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-17
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
EIGHT MONTHS ENDING YEAR ENDING
MAY 31, SEPTEMBER 30,
----------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0% 34.0% 34.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Effective tax rate 34.0% 34.0% 33.7% 34.4% 32.4%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Tax expense at
statutory rate $ 299,962 $ 319,119 $ 484,485 $ 472,446 $ 487,939
Other 38 (3,733) 5,058 (23,374)
----------- ----------- ----------- ----------- -----------
$ 300,000 $ 319,119 $ 480,752 $ 477,504 $ 464,565
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Deferred income taxes are provided for temporary differences. The components
of the Association's net deferred tax liability at May 31, 1996 and September
30, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
MAY 31, SEPTEMBER 30,
------------ ---------------------------
1996 1995 1994
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets
Deferred loan fees $ 16,468 $ 16,017 $ 16,691
Non-accrual interest 1,600 1,965 2,971
Unrealized loss on investment
securities available for sale 7,471
----------- ----------- -----------
25,539 17,982 19,662
----------- ----------- -----------
Deferred tax liabilities
Bad debt deduction (215,583) (215,583) (197,678)
FHLB stock dividends (119,442) (106,250) (97,089)
Depreciation expense (15,798) (14,859) (16,265)
----------- ----------- -----------
(350,823) (336,692) (311,032)
----------- ----------- -----------
Net deferred tax liability $ (325,284) $ (318,710) $ (291,370)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-18
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
No valuation allowance for deferred tax assets was provided at May 31, 1996 or
September 30, 1995 and 1994, because the Association had sufficient net
deferred tax liabilities and taxes paid in and available for recovery to
warrant recording the full deferred tax asset.
Retained earnings at May 31, 1996, and September 30, 1995 and 1994, includes
approximately $1,997,990 for which no federal income tax liability has been
recorded. These amounts represent an allocation of income to bad debt
deductions for tax purposes alone. Reduction of amounts so allocated for
purposes other than tax bad debt losses or adjustments from carryback of net
operating losses would create income for tax purposes only, which would be
subject to current tax. The unrecorded deferred tax liability on the above
amounts at May 31, 1996, and September 30, 1995 and 1994 was approximately
$680,000.
Taxes attributable to securities gains approximated $2,808 for the eight months
ended May 31, 1996.
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Association is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financial needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and interest-rate
caps and floors written in connection with variable rate loans the Association
has originated. Those instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
statement of financial position. The Association's exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual notional amount
of those instruments. The Association uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
As of May 31, 1996, the Association had commitments to make loans at market
rates of $2,101,000. Of these commitments, $607,000 had fixed rates ranging
from 7.75% to 12.0%, and $1,494,000 had variable rates. The commitment period
ranged from 30 to 180 days. As of September 30, 1995, the Association had
commitments to make loans at market rates of $2,049,000. Since loan
commitments may expire without being used, the amount does not necessarily
represent future cash commitments.
- -------------------------------------------------------------------------------
(Continued)
F-19
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 11 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Association's business activity is with customers located within
northwest Ohio, specifically Allen and Van Wert counties. Although the
Association has a diversified loan portfolio, a substantial portion of its
debtors' ability to repay their loans is dependent on the economy in Allen and
Van Wert counties. Credit losses arising from lending transactions have
historically been minimal due to the Association's conservative lending and
collateral policies.
NOTE 12 - REGULATORY CAPITAL
The following is a reconciliation of generally accepted accounting principles
(GAAP) net income and capital to regulatory capital for the Association. The
following reconciliation also compares the capital requirements as computed to
the minimum capital requirements for the Association.
<TABLE>
<CAPTION>
MAY 31, 1996 (UNAUDITED)
-----------------------------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Per GAAP $ 11,367 $ 11,367 $ 11,367
General valuation allowance and
nondeductible subsidiaries (2) (2) 92
Unrealized loss on securities available
for sale, net of tax 15 15 15
--------- --------- ---------
Regulatory capital measure 11,380 11,380 11,474
Regulatory capital requirements 1,376 2,752 3,398
--------- --------- ---------
Excess capital $ 10,004 $ 8,628
--------- ---------
--------- ---------
Total assets $ 91,697 $ 91,697 $ 8,078
--------- --------- ---------
--------- --------- ---------
Risk-weighted assets $ 42,477
---------
---------
Capital ratio 12.41% 12.41% 27.01%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-20
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 12 - REGULATORY CAPITAL (Continued)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-----------------------------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Per GAAP $ 10,799 $ 10,799 $ 10,799
General valuation allowance and
nondeductible subsidiaries (2) (2) 92
---------- ---------- ----------
Regulatory capital measure 10,797 10,797 10,891
Regulatory capital requirements 1,320 2,641 3,122
---------- ---------- ----------
Excess capital $ 9,477 $ 8,156 $ 7,769
---------- ---------- ----------
---------- ---------- ----------
Total assets $ 88,022 $ 88,022
---------- ----------
---------- ----------
Risk-weighted assets $ 39,031
----------
----------
Capital ratio 12.27% 12.27% 27.90%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTE 13 - CONTINGENT LIABILITIES
The Association expects to pay a one-time special assessment of 85 to 90 cents
on each $100 of deposits as of January 1, 1996 to recapitalize the Savings
Association Insurance Fund (SAIF). As of September 30, 1995, the Association
has qualifying deposits of $76,664,400, which would result in an assessment of
approximately $651,600 to $690,000.
- -------------------------------------------------------------------------------
(Continued)
F-21
<PAGE>
CITIZENS SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 and 1995 (unaudited) and September 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 14 - SUBSEQUENT EVENT (UNAUDITED)
On June 11, 1996, the Board of Directors of the Association, subject to
regulatory approval and approval by the members of the Association, unanimously
adopted a Plan of Conversion to convert from a federally chartered mutual
savings and loan association to a federally chartered stock savings bank with
the concurrent formation of a holding company. The conversion is expected to
be accomplished through amendment of the Association's articles of
incorporation and the sale of the holding company's common stock in an amount
equal to the pro forma market value of the Association after giving effect to
the conversion. A subscription offering of the shares of the holding company's
common stock will be offered to the Association's depositors, then to an
employee stock benefit plan and other members. Any shares of the holding
company's common stock not sold in the subscription offering may be offered for
sale to the general public.
At the time of conversion, the Association will establish a liquidation account
in an amount equal to its regulatory capital as of the latest practicable date
prior to the conversion at which such regulatory capital can be determined.
The liquidation account will be maintained for the benefit of eligible
depositors who continue to maintain their accounts at the Association after the
conversion. The liquidation account will be reduced annually to the extent
that eligible depositors have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The Association may not pay dividends that would
reduce stockholders' equity below the required liquidation account balance.
Under Office of Thrift Supervision (OTS) regulations, limitations have been
imposed on all "capital distributions" by savings institutions including cash
dividends. The regulation establishes a three-tiered system of restrictions,
with the greatest flexibility afforded to thrifts which are both
well-capitalized and given favorable qualitative examination ratings by the OTS.
Conversion costs will be deferred and deducted from the proceeds of the shares
sold in the conversion. If the conversion is not completed, all costs will be
charged to expense. At May 1, 1996, no costs have been deferred.
- -------------------------------------------------------------------------------
F-22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION SHALL NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE ASSOCIATION OR CHARLES WEBB & COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THE ASSOCIATION SINCE ANY OF THE DATES AS OF WHICH
INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
----------------------------
TABLE OF CONTENTS
PAGE
----
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Selected Consolidated Financial and
Other Data of the Association . . . . . . . . . . . . . . . . . . . . 10
Recent Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Delphos Citizens Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . 22
Citizens Federal Savings and Loan Association of Delphos . . . . . . . . . 23
Regulatory Capital Compliance. . . . . . . . . . . . . . . . . . . . . . . 24
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Market for the Common Stock. . . . . . . . . . . . . . . . . . . . . . . . 27
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Pro Forma Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . 35
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . 36
Business of the Association. . . . . . . . . . . . . . . . . . . . . . . . 49
Federal and State Taxation . . . . . . . . . . . . . . . . . . . . . . . . 68
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
The Board of Directors and
Management of the Company . . . . . . . . . . . . . . . . . . . . . . 77
The Board of Directors and
Management of the Association . . . . . . . . . . . . . . . . . . . . 78
The Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Restrictions on Acquisition of the Company
and the Association . . . . . . . . . . . . . . . . . . . . . . . . . 110
Description of Capital Stock of the Company. . . . . . . . . . . . . . . . 116
Description of Capital Stock of the Association. . . . . . . . . . . . . . 118
Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . 119
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Legal and Tax Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Index of Consolidated Financial Statements . . . . . . . . . . . . . . . . F-1
----------------------------
UNTIL NOVEMBER 21, 1996 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,782,500 Shares
DELPHOS CITIZENS BANCORP, INC.
(Proposed Holding Company for
Citizens Bank of Delphos, now known as
Citizens Federal Savings and Loan Association of Delphos)
COMMON STOCK
------------------
PROSPECTUS
------------------
Charles Webb & Company
A Division of Keefe, Bruyette & Woods, Inc.
October 11, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
