<PAGE> 1
As filed with the Securities and Exchange Commission on February 3, 1998
Registration No. 333-42483
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
HOME LOAN FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 6036 31-1578552
- --------------- ---------------------------- ----------------------
(State or other (Primary Standard Industrial (I.R.S. employer
jurisdiction of) Classification Code Number) identification number)
incorporation or
organization
401 MAIN STREET
COSHOCTON, OHIO 43812-1580
(614) 622-0444
------------------------------------------------------------
Address, including Zip Code, and telephone number, including
area code, of registrant's principal executive offices)
ROBERT C. HAMILTON
HOME LOAN FINANCIAL CORPORATION
401 MAIN STREET
COSHOCTON, OHIO 43812-1580
(614) 622-0444
---------------------------------------------------------
(Name, address, including Zip Code, and telephone number,
including area code, of agent for service)
With copies to:
Terri R. Abare
Rick J. Landrum
Vorys, Sater, Seymour and Pease
Atrium Two, 221 East Fourth Street
Cincinnati, Ohio 45202
(513) 723-4000
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after the Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 of the Securities
Act of 1933, check the following box: [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Title of each class Proposed maximum Proposed maximum
of securities to be Amount to be offering price aggregate offering Amount of
registered registered per share price(1) registration fee
<S> <C> <C> <C> <C>
Common shares,
without par value 2,248,250 $10.00 $22,482,500 $6,633
- ----------------------------------------------------------------------------------------------------------
<FN>
(1) Estimated solely for the purpose of calculating the registration fee.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2
CROSS REFERENCE SHEET
Showing the location in the Prospectus of the Items of Form S-1
<TABLE>
<CAPTION>
Form S-1 Item and Caption Prospectus Heading
- ------------------------- ------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........... Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.................................... Cover Page, Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges..................... PROSPECTUS SUMMARY; RISK FACTORS
4. Use of Proceeds...................................... USE OF PROCEEDS
5. Determination of Offering Price...................... Cover Page; THE CONVERSION - Pricing and Number of
Common Shares to be Sold
6. Dilution............................................. Not Applicable
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Cover Page; THE CONVERSION - General;
- Subscription Offering; - Community Offering; and
- Plan of Distribution
9. Description of Securities to be Registered........... DESCRIPTION OF AUTHORIZED SHARES
10. Interest of Named Experts and Counsel................ Not Applicable
11. Information with Respect to the Registrant
(a) Description of Business......................... THE BUSINESS OF THE BANK
(b) Description of Property......................... THE BUSINESS OF THE BANK - Properties
(c) Legal Proceedings............................... THE BUSINESS OF THE BANK - Legal Proceedings
(d) Market Price and Dividends...................... Cover Page; MARKET FOR COMMON SHARES; DIVIDEND POLICY
(e) Financial Statements............................ FINANCIAL STATEMENTS
(f) Selected Financial Data......................... SELECTED FINANCIAL INFORMATION AND OTHER DATA
(g) Supplementary Financial Information............. Not Applicable
(h) Management's Discussion and Analysis of
Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(i) Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.................................... Not Applicable
(j) Directors and Executive Officers................ MANAGEMENT
(k) Executive Compensation.......................... MANAGEMENT - Compensation; and - Stock Benefit Plans
(l) Security Ownership of Certain Beneficial
Owners and Management......................... THE CONVERSION - Shares to be Purchased by
Management Pursuant to Subscription Rights
(m) Certain Relationships and Related
Transactions.................................. Not Applicable
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..... Not Applicable
</TABLE>
<PAGE> 3
PROSPECTUS
HOME LOAN FINANCIAL CORPORATION
(PROPOSED HOLDING COMPANY FOR THE HOME LOAN SAVINGS BANK)
COSHOCTON, OHIO
UP TO 1,955,000 COMMON SHARES, $10 PURCHASE PRICE PER SHARE
Home Loan Financial Corporation, an Ohio corporation (the "Holding
Company"), is hereby offering for sale up to 1,955,000 common shares, without
par value (the "Common Shares"), in connection with its acquisition of all of
the capital stock to be issued by The Home Loan Savings Bank, an Ohio mutual
savings and loan association located in Coshocton, Ohio (the "Bank"), upon the
conversion of the Bank from a mutual savings and loan association to a permanent
capital stock savings and loan association incorporated under Ohio law (the
"Conversion"). The consummation of the Conversion and the sale of the Common
Shares are subject to the approval of the Bank's Plan of Conversion (the "Plan")
and the adoption of amended articles of incorporation and an amended
constitution by the members of the Bank at a Special Meeting of Members of the
Bank to be held at ___:00 __.m., Eastern Standard Time, on March ___, 1998, at
_______________________, Coshocton, Ohio (the "Special Meeting").
Based on an independent appraisal of the pro forma market value of the
Bank, as converted, and the Holding Company as of November 28, 1997, the
aggregate purchase price of the Common Shares offered in connection with the
Conversion ranges from a minimum of $14,450,000 to a maximum of $19,550,000 (the
"Valuation Range"), resulting in a range of 1,445,000 to 1,955,000 Common Shares
at $10 per share. See "THE CONVERSION - Pricing and Number of Common Shares to
be Sold." Applicable regulations permit the Holding Company to offer additional
Common Shares in an amount not to exceed 15% above the maximum of the Valuation
Range, which would permit the issuance of up to 2,248,250 Common Shares with an
aggregate purchase price of $22,482,500. The actual number of Common Shares to
be sold in connection with the Conversion will be based upon the final valuation
of the Bank, as converted, and the Holding Company, as determined by an
independent appraiser upon the completion of this offering.
(Continued on next page)
AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY INVOLVES CERTAIN
RISKS. FOR A DISCUSSION OF THE RISKS AND OTHER FACTORS THAT SHOULD BE CONSIDERED
BY PROSPECTIVE PURCHASERS, SEE "RISK FACTORS" BEGINNING ON PAGE ___ OF THIS
PROSPECTUS.
THE COMMON SHARES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), THE OFFICE OF THRIFT
SUPERVISION (THE "OTS"), THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"),
THE DIVISION OF FINANCIAL INSTITUTIONS OF THE DEPARTMENT OF COMMERCE OF THE
STATE OF OHIO (THE "DIVISION"), OR THE SECURITIES COMMISSION OF ANY STATE, NOR
HAS THE SEC, THE OTS, THE FDIC, THE DIVISION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE COMMON SHARES BEING OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
FOR INFORMATION ON HOW TO SUBSCRIBE, PLEASE CALL THE CONVERSION
INFORMATION CENTER AT (740) 623-8678.
<TABLE>
<CAPTION>
=========================================================================================================================
Subscription Estimated Expenses and Estimated Net
Price Underwriting Commissions (1) Proceeds
=========================================================================================================================
<S> <C> <C> <C>
Per share Minimum $10.00 $.32 $9.68
Per share Mid-point $10.00 $.29 $9.71
Per share Maximum $10.00 $.26 $9.74
Per share Maximum, as adjusted (2) $10.00 $.25 $9.75
Total Minimum $14,450,000 $456,000 $13,994,000
Total Mid-point $17,000,000 $487,000 $16,513,000
Total Maximum $19,550,000 $517,000 $19,033,000
Total Maximum, as adjusted (2) $22,482,500 $552,000 $21,930,500
============================================================================================================================
<FN>
(1) Expenses of the Conversion payable by the Bank and the Holding Company
include legal, accounting, appraisal, printing, mailing and
miscellaneous expenses. Such expenses also include sales commissions,
estimated to be between $153,000 and $249,000, and reimbursable
expenses payable to Charles Webb & Company, a division of Keefe,
Bruyette & Woods, Inc. ("Webb"). Such sales commissions may be deemed
to be underwriting fees, although Webb will solicit subscriptions for
the Common Shares on a "best efforts" basis only and has no obligation
to purchase any of the Common Shares. See "THE CONVERSION - Plan of
Distribution." Actual expenses may vary from the estimates.
(2) Gives effect to the increase in the number of Common Shares sold in
connection with the Conversion of up to 15% above the maximum of the
Valuation Range. Such shares may be sold without the resolicitation of
persons who subscribe for Common Shares in the Subscription Offering
(hereafter defined) and the Community Offering (hereafter defined). See
"THE CONVERSION - Pricing and Number of Common Shares to be Sold."
</TABLE>
The date of this Prospectus is February ___, 1998.
CHARLES WEBB & COMPANY A
Division of Keefe, Bruyette & Woods, Inc.
<PAGE> 4
In accordance with the Plan, Common Shares are offered hereby at a
price of $10 per share in a subscription offering (the "Subscription Offering"),
subject to the rights and restrictions established by the Plan, to (a) each
account holder who, at the close of business on September 30, 1996 (the
"Eligibility Record Date"), had one or more deposit accounts with deposit
balances, in the aggregate, of $50 or more (a "Qualifying Deposit") with the
Bank (the "Eligible Account Holders"), (b) the Home Loan Financial Corporation
Employee Stock Ownership Plan (the "ESOP"), (c) each account holder who, at the
close of business on ___________ (the "Supplemental Eligibility Record Date"),
had a Qualifying Deposit with the Bank (the "Supplemental Eligible Account
Holders"), and (d) members of the Bank eligible to vote at the Special Meeting
("Other Eligible Members"). ALL SUBSCRIPTION RIGHTS TO PURCHASE COMMON SHARES IN
THE SUBSCRIPTION OFFERING ARE NONTRANSFERABLE AND WILL EXPIRE AT 12:00 NOON,
EASTERN STANDARD TIME, ON MARCH ___, 1998 (THE "SUBSCRIPTION EXPIRATION DATE"),
UNLESS EXTENDED BY THE BANK AND THE HOLDING COMPANY FOR UP TO 45 DAYS TO APRIL
___, 1998. Persons found to be transferring subscription rights will be subject
to forfeiture of such rights and possible further penalties imposed by the OTS.
See "THE CONVERSION - Subscription Offering."
To the extent that all of the Common Shares are not subscribed for in
the Subscription Offering, the remaining Common Shares may be offered to the
general public in a direct community offering in which preference will be given
to natural persons residing in Coshocton County, Ohio (the "Community
Offering"). See "THE CONVERSION - Community Offering." The Subscription Offering
and the Community Offering are referred to collectively in this Prospectus as
the "Offering."
The minimum number of Common Shares any person may purchase in the
Offering is 25. Each Eligible Account Holder, Supplemental Eligible Account
Holder and Other Eligible Member may purchase in the Subscription Offering not
more than 15,000 Common Shares. In connection with the exercise of subscription
rights arising from a single deposit account in which two or more persons have
an interest, however, the aggregate maximum number of Common Shares which the
persons having an interest in such account may purchase in the Subscription
Offering in relation to such account is 15,000 Common Shares. Except for the
ESOP, which may purchase up to 10% of the total Common Shares sold in the
Offering, no person, together with his or her Associates (hereinafter defined)
and other persons Acting in Concert (hereinafter defined) with him or her, may
purchase more than 30,000 Common Shares in the Offering. Subject to OTS
regulations, the purchase limitations may be increased or decreased after the
commencement of the Offering in the sole discretion of the Boards of Directors
of the Holding Company and the Bank. If the purchase limitations are increased
after the commencement of the Subscription Offering, persons who have subscribed
for the maximum amount will be given the opportunity to increase their
subscriptions. See "THE CONVERSION - Limitations on Purchases of Common Shares."
Common Shares may be subscribed for in the Offering only by returning
the accompanying Stock Order Form and Certification Form (the "Stock Order
Form"), along with full payment of the purchase price per share for all Common
Shares subscribed for, so that it is received by the Bank no later than 12:00
noon, Eastern Standard Time, on March ___, 1998. Payment for Common Shares may
be made (i) in cash, if delivered in person; (ii) by check, bank draft, or money
order made payable to the Bank; or (iii) by authorization of withdrawal from
deposit accounts in the Bank (other than non-self-directed IRAs). No payments by
wire transfer will be accepted. See "THE CONVERSION - Use of Stock Order Forms;
and - Payment for Common Shares."
THE CONSUMMATION OF THE CONVERSION IS CONTINGENT UPON (I) THE APPROVAL
OF THE PLAN AND THE ADOPTION OF THE AMENDED ARTICLES OF INCORPORATION AND THE
AMENDED CONSTITUTION BY THE BANK'S VOTING MEMBERS, (II) THE SALE OF THE
REQUISITE NUMBER OF COMMON SHARES AND (III) CERTAIN OTHER FACTORS. SEE "THE
CONVERSION."
ii
<PAGE> 5
THE HOME LOAN SAVINGS BANK
Main Office:
401 Main Street
Coshocton, Ohio 43812-1580
Full Service Branch:
590 Walnut Street
Coshocton, Ohio 43812-1632
[Map of the State of Ohio with an outline of Coshocton County, and indicating
the location of Columbus, Ohio. Above the map of Ohio is an enlargement of
Coshocton County showing the locations of the Bank within the county.]
-iii-
<PAGE> 6
PROSPECTUS SUMMARY
The following information is not complete and is qualified in its
entirety by the detailed information and the financial statements and
accompanying notes appearing elsewhere in this Prospectus.
HOME LOAN FINANCIAL CORPORATION
The Holding Company was incorporated under Ohio law in December 1997
for the purpose of purchasing all of the capital stock of the Bank to be issued
in connection with the Conversion. The Holding Company has not conducted and
will not conduct any business before the completion of the Conversion, other
than business related to the Conversion. Upon the consummation of the
Conversion, the Holding Company will be a unitary savings and loan holding
company, the principal assets of which initially will be the capital stock of
the Bank, cash, the investments made with the net proceeds retained from the
sale of Common Shares in connection with the Conversion and a loan to be made by
the Holding Company to the ESOP to facilitate the ESOP's purchase of Common
Shares in the Conversion. See "USE OF PROCEEDS."
The office of the Holding Company is located at 401 Main Street,
Coshocton, Ohio 43812-1580, and its telephone number is (740) 622-0444.
THE HOME LOAN SAVINGS BANK
The Bank is a mutual savings and loan association organized under Ohio
law in 1882. As an Ohio savings and loan association, the Bank is subject to
supervision and regulation by the OTS, the Division and the FDIC. The Bank is a
member of the Federal Home Loan Bank (the "FHLB") of Cincinnati and the deposit
accounts of the Bank are insured up to applicable limits by the FDIC in the
Savings Association Insurance Fund (the "SAIF"). See "REGULATION."
The Bank conducts business from its main office and one full-service
branch office, both located in Coshocton, Ohio. The principal business of the
Bank is the origination of permanent mortgage loans secured by first mortgages
on one- to four-family residential real estate located in Coshocton County,
Ohio, the Bank's primary market area. The Bank also originates a limited number
of loans for the construction of one- to four-family residences and permanent
mortgage loans secured by multifamily and nonresidential real estate in its
primary market area. In addition to real estate lending, the Bank originates
commercial loans and various types of consumer credits, including home
improvement loans, education loans, loans secured by savings accounts and motor
vehicles, unsecured loans and credit cards. See "THE BUSINESS OF THE BANK -
Lending Activities." For liquidity and interest rate risk management purposes,
the Bank invests in interest-bearing deposits in other financial institutions,
U.S. Treasury securities and other investments permitted by applicable law. See
"THE BUSINESS OF THE BANK - Investment Activities." Funds for lending and other
investment activities are obtained primarily from savings deposits, which are
insured up to applicable limits by the FDIC in the SAIF, principal repayments on
loans and maturities of investment securities. See "THE BUSINESS OF THE BANK -
Deposits and Borrowings."
The main office of the Bank is located at 401 Main Street, Coshocton,
Ohio 43812-1580, and its telephone number is (740) 622-0444.
THE CONVERSION
GENERAL. The Boards of Directors of the Holding Company and the Bank
have unanimously approved the Plan, which they believe to be in the best
interests of the members of the Bank. The Plan provides for the conversion of
the Bank from a mutual savings and loan association to a permanent capital stock
savings and loan association incorporated under the laws of the State of Ohio.
The OTS and the Division have approved the Plan, subject to the approval of the
Plan by the Bank's voting members at the Special Meeting, and to the
satisfaction of certain other conditions. See "THE CONVERSION - Conditions and
Termination."
The principal factors considered by the Bank's Board of Directors in
reaching the decision to pursue a mutual-to-stock conversion were the numerous
competitive advantages which the stock form of organization offers, including
growth opportunities, employee retention through the use of stock-based benefit
plans and increased capital levels. See "THE CONVERSION - Reasons for the
Conversion." The Bank has operated as an independent community oriented savings
association since 1882. It is the intention of the Bank to continue to operate
as an independent savings association following the Conversion.
-1-
<PAGE> 7
THE SUBSCRIPTION OFFERING AND THE COMMUNITY OFFERING. Pursuant to the
Plan, Common Shares are hereby offered at a price of $10 per share to (a)
Eligible Account Holders, (b) the ESOP, (c) Supplemental Eligible Account
Holders and (d) Other Eligible Members in the Subscription Offering. See "THE
CONVERSION - Subscription Offering."
To the extent Common Shares remain available after the satisfaction of
all subscriptions received in the Subscription Offering, the Holding Company may
offer Common Shares in the Community Offering, subject to certain limitations.
Preference will be given in the Community Offering to natural persons residing
in Coshocton County, Ohio. The Boards of Directors of the Holding Company and
the Bank have the right to reject, in whole or in part, any order for Common
Shares submitted in the Community Offering. See "THE CONVERSION - Community
Offering."
The Plan authorizes the Boards of Directors of the Holding Company and
the Bank to establish limits on the number of Common Shares which may be
purchased in the Offering. The minimum number of Common Shares any person may
purchase in the Offering is 25. Each Eligible Account Holder, Supplemental
Eligible Account Holder and Other Eligible Member may purchase in the
Subscription Offering not more than 15,000 Common Shares. In connection with the
exercise of subscription rights arising from a single deposit account in which
two or more persons have an interest, however, the aggregate maximum number of
Common Shares which the persons having an interest in such account may purchase
in the Subscription Offering in relation to such account is 15,000 Common
Shares. In addition, no person, together with his or her Associates and other
persons Acting in Concert with him or her, may purchase more than 30,000 Common
Shares in the Offering. Such limitations do not apply to the ESOP, which intends
to purchase up to 8% of the Common Shares sold in the Offering. Subject to
applicable regulations, the purchase limitations may be increased or decreased
after the commencement of the Offering in the sole discretion of the Boards of
Directors. See "THE CONVERSION - Limitations on Purchases of Common Shares."
An associate of a person (an "Associate") is: (a) any corporation or
organization (other than the Bank) of which such person is an officer, partner
or, directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities; (b) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity; and (c) any relative or spouse of such person,
or relative of such spouse, who either has the same home as such person or who
is a director or officer of the Bank.
"Acting in Concert" is defined as "knowing participation in a joint
activity or independent conscious parallel action towards a common goal" or "a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose." Persons shall be presumed to be Acting in Concert
with each other if they have certain family or business relationships, as
described in the OTS regulations, or if one person provides credit to the other
for the purchase of Common Shares or is instrumental in obtaining that credit.
In addition, if a person is presumed to be Acting in Concert with another
person, then the person is also presumed to be Acting in Concert with anyone
else who is, or is presumed to be, Acting in Concert with that other person.
For purposes of the Plan, the directors of the Bank and the Holding
Company are not Acting in Concert solely by reason of their membership on the
Board of Directors of the Bank and the Holding Company. Executive officers and
directors of the Bank and their Associates may not purchase, in the aggregate,
more than 34.8% of the total number of Common Shares sold in the Conversion.
Shares acquired by the ESOP will not be aggregated with the shares purchased by
the directors, officers and employees of the Bank.
In addition to the purchase limitations established by the Plan, OTS
regulations impose restrictions on certain acquisitions of more than 10% of the
outstanding shares of the Bank by any person or company, individually or Acting
in Concert with others. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
AND THE BANK AND ANTI-TAKEOVER PROVISIONS." The sale of Common Shares pursuant
to subscriptions received in the Offering will be subject to the approval of the
Plan by the voting members of the Bank at the Special Meeting, to the final
valuation of the Bank and the Holding Company, as determined by the independent
appraiser upon the completion of the Offering, and to certain other conditions.
See "THE CONVERSION - Subscription Offering; - Community Offering; and - Pricing
and Number of Common Shares to be Sold."
The Subscription Offering will terminate and subscription rights will
expire if not exercised by 12:00 noon, Eastern Standard Time, on March ____,
1998. The Community Offering will be terminated on or before March ____, 1998,
unless extended. Any extension of the Community Offering beyond April ___, 1998,
will require the consent of the OTS and the Division, and persons who have
subscribed for Common Shares in the Offering will be given the right to affirm,
increase, decrease or rescind their subscriptions for Common Shares. Persons who
do not affirmatively elect to continue their
-2-
<PAGE> 8
subscription or who elect to rescind their subscriptions during any such
extension will have all of their funds promptly refunded with interest. Persons
who elect to decrease their subscriptions will have the appropriate portion of
their funds promptly refunded with interest. See "THE CONVERSION - Pricing and
Number of Common Shares to be Sold."
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS. OTS and Ohio regulations
provide that subscription rights are non-transferable. OTS regulations
specifically prohibit any person from transferring or entering into any
agreement or understanding before the completion of the Conversion to transfer
the ownership of the subscription rights issued in the Conversion or the Common
Shares to be issued upon the exercise of such subscription rights. Persons
attempting to violate such provision may lose their rights to purchase Common
Shares in the Conversion and may be subject to penalties imposed by the OTS.
Each person exercising subscription rights will be required to certify that his
or her purchase of Common Shares is solely for the subscriber's own account and
that there is no agreement or understanding regarding the sale or transfer of
such Common Shares.
PRICING OF THE COMMON SHARES. Keller & Co., Inc. ("Keller"), a firm
experienced in valuing thrift institutions, has prepared an independent
valuation of the estimated pro forma market value of the Bank, as converted, and
the Holding Company. Keller's valuation of the estimated pro forma market value
of the Bank, as converted, and the Holding Company is $17,000,000 as of November
28, 1997 (the "Pro Forma Value"). Based on the Pro Forma Value of the Bank and
the Holding Company, the Valuation Range established in accordance with the Plan
is $14,450,000 to $19,550,000. The Holding Company will issue the Common Shares
at a fixed price of $10 per share. The number of Common Shares to be issued will
be determined by dividing the price per share into the aggregate pro forma value
of the Bank at the close of the Offering.
If, due to changing market conditions, the final valuation is less than
$14,450,000 or more than $22,482,500, subscribers will be given notice of such
final valuation and the right to affirm, increase, decrease or rescind their
subscriptions. Any person who does not affirmatively elect to continue his
subscription or elects to rescind his subscription before the date specified in
the notice will have all of his funds promptly refunded with interest. Any
person who elects to decrease his subscription will have the appropriate portion
of his funds promptly refunded with interest. See "THE CONVERSION - Pricing and
Number of Common Shares to be Sold."
USE OF PROCEEDS. The Holding Company will retain up to 50% of the net
proceeds from the sale of the Common Shares, or approximately $11.0 million at
the maximum, as adjusted, of the Valuation Range. Such proceeds will be used by
the Holding Company to make a loan to the ESOP to acquire Common Shares in the
Offering and for general corporate purposes. See "USE OF PROCEEDS."
The remainder of the net proceeds received from the sale of the Common
Shares, approximately $11.0 million at the maximum, as adjusted, of the
Valuation Range, will be invested by the Holding Company in the capital stock to
be issued by the Bank to the Holding Company as a result of the Conversion and
will initially be invested in short-term investments with maturities of one year
or less and utilized for general corporate purposes, including loan
originations. See "USE OF PROCEEDS."
TAX CONSEQUENCES
The consummation of the Conversion is expressly conditioned upon the
receipt by the Holding Company and the Bank of a private letter ruling from the
Internal Revenue Service (the "IRS") or an opinion of counsel to the effect
that, for federal income tax purposes, the Conversion will constitute a tax-free
reorganization as defined in Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"). The Holding Company and the Bank intend to
proceed with the Conversion based upon an opinion received from Vorys, Sater,
Seymour and Pease LLP that states, in part, that (1) no gain or loss will be
recognized by the Bank in connection with the Conversion or the receipt from the
Holding Company of proceeds from the sale of the Common Shares, (2) assuming
that the subscription rights received by deposit account holders in connection
with the Conversion have no ascertainable fair market value, no gain or loss
will be recognized to the deposit account holders of the Bank upon issuance to
them of subscription rights or interests in the Liquidation Account (hereinafter
defined) and (3) no taxable income will be realized by deposit account holders
as a result of their exercise of such subscription rights. The Holding Company
and the Bank have received an opinion from Keller that the subscription rights
have no ascertainable fair market value, although such opinion is not binding on
the IRS. See "THE CONVERSION - Principal Effects of the Conversion -- Tax
Consequences."
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<PAGE> 9
MARKET FOR THE COMMON SHARES
There is presently no market for the Common Shares. No assurance can be
given that an active or liquid market for the Common Shares will develop after
the completion of the Conversion or, if such a market does develop, that it will
continue. Investors should consider, therefore, the potentially illiquid and
long-term nature of an investment in the Common Shares. See "RISK FACTORS -
Limited Market for the Common Shares."
The Holding Company has received conditional approval from The Nasdaq
Stock Market to have the Common Shares quoted on The Nasdaq National Market
("Nasdaq") under the symbol "_______" upon the completion of the Conversion,
subject to certain conditions which the Bank and the Holding Company believe
will be satisfied, although no assurance can be provided that the conditions
will be met. One of the conditions to the Nasdaq listing is the commitment of at
least two brokerage firms to make a market in the Common Shares. Keefe, Bruyette
& Woods, Inc. ("KBW") has informed the Holding Company that it intends to make a
market in the Common Shares, but it has no obligation to do so.
DIVIDEND POLICY
The declaration and payment of dividends or other capital distributions
by the Holding Company will be subject to the discretion of the Board of
Directors of the Holding Company, to the earnings and financial condition of the
Holding Company and the Bank and to general economic conditions. If the Board of
Directors of the Holding Company determines in the exercise of its discretion
that the net income, capital and financial condition of the Holding Company and
the general economy justify the declaration and payment of dividends by the
Holding Company, dividends may be paid on the Common Shares. No assurance can be
given, however, that dividends will be paid or, if paid, will continue in the
future. In accordance with OTS policy, the Holding Company will not undertake an
extraordinary tax-free return of capital to its shareholders during the first
year following the completion of the Conversion. See "DIVIDEND POLICY" and
"REGULATION - Office of Thrift Supervision -- Limitations on Capital
Distributions."
BENEFITS OF THE CONVERSION TO DIRECTORS, OFFICERS AND EMPLOYEES OF THE HOLDING
COMPANY AND THE BANK
GENERAL. Among the factors considered by the Board of Directors of the
Bank in making the decision to pursue the Conversion is the ability of the
Holding Company and the Bank to utilize various types of stock benefit plans to
attract and retain qualified directors and employees. In connection with the
Conversion, the Holding Company has established the ESOP, which intends to
purchase 8% of the Common Shares sold in the Offering. After the completion of
the Conversion, but not sooner than six months thereafter, the Holding Company
intends to submit a stock option and incentive plan (the "Stock Option Plan")
and a recognition and retention plan (the "RRP") for approval by its
shareholders. It is anticipated that a number of shares equal to 10% of the
Common Shares sold in the Offering will be reserved out of authorized but
unissued shares for issuance to the directors, officers and employees of the
Holding Company and the Bank pursuant to the Stock Option Plan, and a number of
shares equal to 4% of the Common Shares sold in the Offering will be purchased
by the RRP in the open market or directly from the Holding Company for awards to
directors, officers and employees of the Holding Company and the Bank under the
RRP. See "THE CONVERSION - Reasons for the Conversion," and "MANAGEMENT - Stock
Benefit Plans." In the aggregate, 22% of the Common Shares sold in the Offering
may be allocated, awarded or granted to directors, officers and employees of the
Holding Company or the Bank pursuant to the ESOP, the Stock Option Plan and the
RRP.
EMPLOYEE STOCK OWNERSHIP PLAN. The ESOP intends to use a loan from the
Holding Company to purchase 8% of the Common Shares issued in the Conversion.
The loan will have a term of 15 years and an interest rate equal to the
applicable federal rate published periodically by the IRS, which is currently
_____%. The ESOP loan will be repaid through cash contributions to the ESOP from
the Bank and the use of any dividends paid on the unallocated ESOP shares. All
full-time employees of the Holding Company and the Bank who meet certain age and
years of service criteria will be eligible to participate in the ESOP. See
"MANAGEMENT - Stock Benefit Plans -- Employee Stock Ownership Plan."
STOCK OPTION PLAN AND RECOGNITION AND RETENTION PLAN. The Board of
Directors of the Holding Company anticipates that a number of shares equal to
10% of the Common Shares sold in the Offering will be reserved for issuance upon
the exercise of options granted under the Stock Option Plan and a number of
shares equal to 4% of the Common Shares sold in connection with the Conversion
will be purchased by, or issued to, the RRP. Based on the $10 per share price in
the Offering, the total value of the shares which may be available for awards
under the RRP ranges from $578,000 at the minimum of the Valuation Range to
$899,300 at 15% above the maximum of the Valuation Range. Awards of shares under
the RRP will not occur until at least six months after completion of the
Conversation. As a result, the value of such shares at
-4-
<PAGE> 10
the time of such awards, or at the time awarded shares become non-forfeitable
cannot be estimated. See "RISK FACTORS - Dilutive Impact of Benefit Plans on Net
Earnings and Shareholders' Equity" for a discussion of the possible dilutive
effects of the RRP. Each plan will be administered by a committee comprised of
not fewer than three directors. Persons eligible for awards under the plans will
consist of directors, officers and employees of the Holding Company or the Bank
who hold positions with significant responsibilities or whose performance or
potential contribution, in the judgment of the plan committee, will contribute
to the future success of the Holding Company or the Bank. The plan committee
will consider the position, duties and responsibilities of the directors,
officers and employees of the Holding Company and the Bank, the value of their
services to the Holding Company and the Bank and any other factors the plan
committee may deem relevant.
Under OTS regulations, no stock options or RRP shares may be awarded
during the first year after the completion of the Conversion unless the plan is
approved by the shareholders of the Holding Company at an annual or a special
meeting of shareholders held not less than six months following the completion
of the Conversion. If the plans are approved by the Holding Company shareholders
at such meeting and implemented during the first year after the completion of
the Conversion, the following restrictions will apply: (i) the number of shares
which may be subject to options awarded under the Stock Option Plan or shares
awarded under the RRP to directors who are not full-time employees of the
Holding Company may not exceed 5% per person and 30% in the aggregate of the
available plan shares; (ii) the number of shares which may be subject to options
awarded under the Stock Option Plan or shares awarded under the RRP to any
individual who is a full-time employee of the Holding Company or its
subsidiaries may not exceed 25% of the available shares; (iii) stock options
must be awarded with an exercise price at least equal to the fair market value
of the common shares of the Holding Company at the time of the award; and (iv)
stock options will become exercisable and RRP awards will vest at the rate of
one-fifth per year commencing no earlier than one year from the date the plan is
approved by the shareholders, subject to acceleration of vesting only in the
event of the death or disability of a participant. No decision has been made as
to anticipated awards under the Stock Option Plan or the RRP. See "MANAGEMENT -
Stock Benefit Plans -- Stock Option Plan; and -- Recognition and Retention
Plan."
EMPLOYMENT AGREEMENT. In connection with the Conversion, the Bank will
enter into an employment agreement with Robert C. Hamilton, the President of the
Bank. The employment agreement will provide for a term of three years with an
annual salary of not less than $165,000. The employment agreement will also
provide for severance payments in the event the agreement is terminated prior to
the expiration of its term upon a change in control of the Bank or for any
reason other than just cause, as defined therein. See "MANAGEMENT - Employment
Agreement."
INVESTMENT RISKS
An investment in the Common Shares involves certain risks. Special
attention should be given to the matters discussed under "RISK FACTORS -
Interest Rate Risk; - Anticipated Low Return on Equity; - Competition in Primary
Market Area; Concentration of Credit in Coshocton County; - Limited Market for
the Common Shares; - Uncertainty of Price of the Common Shares upon Resale; -
Legislation and Regulation Which May Adversely Affect Earnings and Operations; -
Dilutive Impact of Benefit Plans on Net Earnings and Shareholders' Equity;
Potential Awards of Shares to Directors, Officers and Employees Pursuant to
Benefit Plans; and - Anti-Takeover Provisions Which May Discourage Sales of
Common Shares for Premium Prices."
-5-
<PAGE> 11
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the
financial condition, earnings and other data regarding the Bank at the dates and
for the periods indicated. Such information should be read in conjunction with
the financial statements and notes thereto appearing elsewhere herein. In the
opinion of management, financial information at September 30, 1997 and 1996, and
for the three months then ended reflect all adjustments (consisting only of
normal recurring accruals) which are necessary to present fairly the results for
such periods.
<TABLE>
<CAPTION>
At September 30, At June 30,
---------------- -----------
SELECTED FINANCIAL CONDITION
AND OTHER DATA: 1997 1996 1997 1996 1995 1994 1993
--------------- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Total amount of:
Assets $59,853 $56,318 $60,401 $55,366 $49,102 $48,255 $46,868
Cash and cash equivalents 2,184 4,281 4,681 5,723 2,559 3,023 2,397
Interest-bearing time
deposits 39 41 39 41 - - -
Securities available for 4,518 2,751 5,004 1,743 753 - -
sale
Securities held to maturity - 2,001 - 2,252 5,498 8,243 12,267
Loans receivable, net 51,773 45,871 49,300 44,294 39,156 35,782 31,078
FHLB stock 373 347 366 341 318 295 282
Deposits 48,208 45,491 49,235 44,884 39,543 39,558 38,936
Retained earnings 10,579 9,820 10,366 9,771 9,001 8,285 7,548
Number of full-service offices 2 2 2 2 2 2 2
<CAPTION>
SUMMARY OF EARNINGS: Three months ended
September 30, Year ended June 30,
------------------ -------------------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $1,254 $1,132 $4,609 $4,259 $3,696 $3,353 $3,506
Interest expense 517 437 1,931 1,703 1,331 1,135 1,316
------ ------- ------ ------ ------ ------ ------
Net interest income 737 695 2,678 2,556 2,365 2,218 2,190
Provision for loan losses 30 1 6 - 2 13 10
------ ------- ------ ------ ------ ------ ------
Net interest income after
provision for loan losses 707 694 2,672 2,556 2,363 2,205 2,180
Noninterest income 43 42 175 165 149 162 132
Noninterest expense (1) 415 660 1,943 1,532 1,418 1,321 1,059
------ ------- ------ ------ ------ ------ ------
Net income before provision
for income taxes 335 76 904 1,189 1,094 1,046 1,253
Provision for income taxes 122 27 309 419 378 367 430
Cumulative effect of change in
accounting principle - - - - - 58 -
------ ------- ------ ------ ------ ------ ------
Net income $ 213 $ 49 $ 595 $ 770 $ 716 $ 737 $ 823
====== ======= ====== ====== ====== ====== ======
<FN>
- ------------------------------
(1) For the three months ended September 30, 1996, and the year ended June
30, 1997, noninterest expense includes a $261,000 assessment imposed on
the Bank as a result of legislation to recapitalize the SAIF.
</TABLE>
-6-
<PAGE> 12
SELECTED FINANCIAL RATIOS:
<TABLE>
<CAPTION>
At or for the three
months ended
September 30, At or for the year ended June 30,
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets 1.40% 0.35% 1.04% 1.47% 1.47% 1.55% 1.77%
Return on average equity 8.06 1.97 5.94 8.20 8.32 9.33 11.50
Interest rate spread 4.36 4.60 4.25 4.45 4.52 4.46 4.43
Net interest margin 5.03 5.17 4.88 5.10 5.04 4.87 4.88
Noninterest expense to
average assets 2.73 4.70 3.39 2.93 2.91 2.78 2.27
Efficiency ratio 53.19 89.46 68.09 56.30 56.41 55.52 45.60
Net interest income to
noninterest expenses 177.55 105.34 137.86 166.82 166.78 167.83 206.86
Average interest-earning
assets to average
interest-bearing 1.19x 1.18x 1.18x 1.19x 1.18x 1.16x 1.15x
liabilities
Capital ratios:
Average equity to average
assets 17.41% 17.65% 17.51% 17.95% 17.67% 16.64% 15.36%
Equity to assets, end of
period 17.70 17.35 17.17 17.64 18.34 17.13 16.10
Asset quality ratios and other
data:
Nonperforming assets to
average assets 0.10% 0.18% 0.06% 0.17% 0.03% 0.06% -%
Nonperforming assets to
total assets 0.10 0.18 0.05 0.16 0.03 0.06 -
Nonperforming loans to
total loans 0.12 0.22 0.07 0.20 0.04 0.08 -
Allowance for loans losses
to gross loans (1) 0.29 0.26 0.24 0.26 0.30 0.34 0.35
Allowance for loans losses
to nonperforming loans 242.99 117.83 361.27 133.54 734.46 431.09 -
Net (charge-offs) recoveries
to average loans (0.01) - (0.01) - (0.01) - -
Amount of nonperforming loans
$61 $101 $33 $88 $16 $28 $-
Amount of nonperforming
assets 61 101 33 88 16 28 -
- -------------------------------
<FN>
(1) Net of loans in process and deferred loan origination fees and costs.
</TABLE>
-7-
<PAGE> 13
RISK FACTORS
INVESTMENT IN THE COMMON SHARES INVOLVES CERTAIN RISKS. BEFORE
INVESTING, PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY THE FOLLOWING
MATTERS.
INTEREST RATE RISK
The Bank's operating results are dependent to a significant degree on
its net interest income, which is the difference between interest income from
loans and investments and interest expense on deposits and borrowings. Like most
thrift institutions, the Bank's interest income and interest expense change as
interest rates fluctuate and assets and liabilities reprice. Interest rates
generally may change because of general economic conditions, the policies of
various regulatory authorities and other factors beyond the Bank's control. The
interest rates on specific assets and liabilities of the Bank will change or
"reprice" in accordance with the contractual terms of the asset or liability
instrument and in accordance with customer reaction to general economic trends.
See "THE BUSINESS OF THE BANK - Lending Activities; and - Deposits and
Borrowings."
The Bank manages interest rate risk by originating mortgage loans
primarily with adjustable rates. At September 30, 1997, 75.0% of the Bank's
loans contractually due after September 30, 1998, had adjustable rates of
interest. The Bank also manages its interest rate risk by maintaining capital in
excess of regulatory requirements and by maintaining a high level of liquidity
through investments in instruments with maturities of five years or less. See
"THE BUSINESS OF THE BANK - Investment Activities." For the quarter ended
September 30, 1997, the Bank's tangible capital was 17.7% of total assets and
its liquidity ratio was 13.7%. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital
Resources."
In a period of rising interest rates, the interest income earned on the
Bank's assets may not increase as rapidly as the interest expense paid on the
Bank's liabilities. As a result, the earnings of the Bank may be adversely
affected. The degree to which such earnings will be adversely affected depends
upon the rapidity and extent of the increase in interest rates. In addition,
rising interest rates could negatively affect the Bank's earnings due to
diminished loan demand. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Asset and Liability Management."
ANTICIPATED LOW RETURN ON EQUITY
For the last five years, the Bank's return on equity has ranged from a
high of 11.50% for 1993 to a low of 5.94% for 1997, with an average of 8.7%.
Excluding the effect of the one-time special assessment to recapitalize the
SAIF, the return on equity would have been 7.7% for the year ended June 30,
1997. For the three months ended September 30, 1997, the Bank's return on equity
was 8.06%. The increased capital resulting from the Conversion is expected to
reduce the Bank's return on equity for a prolonged period after the Conversion,
which may adversely affect the market value of the Common Shares. Initially, the
Conversion proceeds will be invested in short-term investments which generally
have lower yields than loans and longer term securities, which could also
adversely affect the return on equity. See "USE OF PROCEEDS." In addition, it is
further anticipated that the ESOP and, if adopted by the Board of Directors of
the Holding Company and approved by the shareholders after the Conversion, the
Stock Option Plan and the RRP will increase compensation expense significantly,
further lowering return on equity. See "Dilutive Impact of Benefit Plans on Net
Earnings and Shareholders' Equity."
COMPETITION IN PRIMARY MARKET AREA
The Bank faces strong competition for deposits and loans from savings
and loan associations and commercial banks located in Coshocton, Ohio. In
addition, competing financial institutions exist in surrounding communities
located in the Bank's primary market area. The Bank's market penetration in
Coshocton County is 53.1% of thrift deposits and 13.2% of all financial
institution deposits at June 30, 1997.
CONCENTRATION OF CREDIT IN COSHOCTON COUNTY
Most of the Bank's loans have been made to borrowers residing in, and
most of its real estate loans are secured by property located in, Coshocton
County, Ohio. The Bank also has a greater percentage of commercial and consumer
loans in its portfolio, relative to many other savings and loan associations.
Events which negatively impact the local economy, such
-8-
<PAGE> 14
as the loss of a major employer, could result in increased defaults on loans
made by the Bank and decreases in the value of the Bank's collateral, making
collection of such loans more difficult.
With regard to several important economic factors, statistics for
Coshocton County, have in recent years trailed both the State of Ohio and the
United States. In 1990, Coshocton County's per capita annual income of $10,625
was lower than the per capita annual income for Ohio, of $12,788. By 1996, the
County's per capita income had increased 14.8 percent, to $12,193, compared to a
20.2% increase, to $15,376, for Ohio over the same period. During the same
period, median annual household incomes increased from $24,425 to $26,754 for
Coshocton County and from $29,276 to $32,120 for the State of Ohio.
LIMITED MARKET FOR THE COMMON SHARES
There is presently no market for the Common Shares. No assurance can be
given that an active or liquid market for the Common Shares will develop after
the completion of the Conversion or, if such a market does develop, that it will
continue. Investors should consider, therefore, the potentially illiquid and
long-term nature of an investment in the Common Shares.
The Holding Company has received conditional approval to have the
Common Shares quoted on Nasdaq under the symbol "____" upon the completion of
the Conversion, subject to certain conditions which the Holding Company and the
Bank believe will be satisfied, although no assurance can be provided that the
conditions will be met. One of the conditions of the Nasdaq listing is the
commitment of at least two brokerage firms to make a market in the Common
Shares. KBW has informed the Holding Company that it intends to make a market in
the Common Shares, but it has no obligation to do so.
UNCERTAINTY OF PRICE OF THE COMMON SHARES UPON RESALE
The offering price of the Common Shares is based upon an independent
appraisal of the Bank, as converted, and the Holding Company. The appraisal is
not a recommendation as to the advisability of purchasing Common Shares, nor
does it represent Keller's opinion as to the price at which the Common Shares
may trade. See "THE CONVERSION - Pricing and Number of Common Shares to be
Sold." There can be no assurance that the Common Shares may later be resold at
the price at which they are purchased in the Conversion.
LEGISLATION AND REGULATION WHICH MAY ADVERSELY AFFECT EARNINGS AND OPERATIONS
The Bank is subject to extensive regulation by the OTS, the Division
and the FDIC and is periodically examined by such regulatory agencies to test
compliance with various regulatory requirements. The Holding Company will also
be subject to regulation and examination by the OTS. Such supervision and
regulation of the Bank and the Holding Company are primarily for the protection
of the federal deposit insurance fund and not for the maximization of
shareholder value and may limit the ability of the Bank and the Holding Company
to engage in various business activities. See "REGULATION."
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations. Such legislation, if enacted, could eliminate the OTS, which would
likely subject the Bank to more regulation by the FDIC. In addition, the Holding
Company might become subject to new or different holding company regulations,
including separate capital requirements and stringent limitations on activities.
Although the Holding Company cannot predict when or whether Congress may
actually pass legislation regarding the Holding Company's and the Bank's
regulatory requirements or charter, it is not anticipated that the current
business activities of the Holding Company or the Bank will be materially
affected by such legislation.
DILUTIVE IMPACT OF BENEFIT PLANS ON NET EARNINGS AND SHAREHOLDERS' EQUITY
In connection with the Conversion, the Holding Company has established
the ESOP, which intends to use a loan from the Holding Company to purchase 8% of
the Common Shares issued in connection with the Conversion. All full-time
employees of the Holding Company and the Bank who meet certain age and years of
service criteria will be eligible to participate in the ESOP.
-9-
<PAGE> 15
The shares acquired by the ESOP in the Conversion will be purchased
with the proceeds of a loan from the Holding Company to the ESOP. The ESOP loan
will be repaid through cash contributions to the ESOP from the Bank and the use
of dividends paid on the Common Shares, if any. The Bank currently anticipates
that the ESOP loan will be repaid over a period of ten years. The amount of cash
or other assets that can be contributed to the ESOP each year is limited by
certain IRS regulations. The Bank intends to make the maximum contribution to
the ESOP permitted by such regulations, which could result in repayment of the
ESOP loan in fewer than ten years. A shorter repayment period could result in
increased compensation expense during the years in which payments are made on
the ESOP loan which would adversely impact the Holding Company's earnings.
Statement of Position ("SOP") No. 93-6, "Employers' Accounting for
Employee Stock Ownership Plans," published by the American Institute of
Certified Public Accountants (the "AICPA"), requires an employer to record
compensation expense in an amount equal to the fair value of shares committed to
be released to employees from the ESOP as the loan is repaid. See "PRO FORMA
DATA" for pro forma information regarding the effects of SOP 93-6 on net
earnings and shareholders' equity. If the Common Shares acquired by the ESOP
appreciate in value over time, or if the loan is repaid in fewer than ten years,
the Holding Company may incur increased compensation expense relating to the
ESOP which would adversely affect the Holding Company's net earnings.
The ESOP may purchase Common Shares on the open market or may purchase
authorized but unissued shares from the Holding Company. If the ESOP purchases
authorized but unissued shares from the Holding Company, such purchases could
have a dilutive effect on the interests of the Holding Company's shareholders.
Following the consummation of the Conversion, the Holding Company
intends to adopt the Stock Option Plan and the RRP. If the RRP is approved by
the Holding Company's shareholders, the shares issued to participants under the
RRP could be newly issued shares or shares purchased in the market. In the event
the shares issued under the RRP consist of newly issued common shares, the
interests of existing shareholders will be diluted. Shares issued pursuant to
the exercise of options under the Stock Option Plan will be authorized but
unissued shares, unless the Holding Company has treasury shares at the time of
exercise and elects to use the treasury shares. At the maximum, as adjusted, of
the estimated Valuation Range, if all shares under these plans were newly issued
and the exercise price for the option shares was equal to the $10 per share
purchase price in the Conversion, the pro forma book value per share of the
outstanding common shares at September 30, 1997, would decrease from $13.26 to
$12.97. See "PRO FORMA DATA" and "MANAGEMENT - Stock Benefit Plans."
POTENTIAL AWARDS OF SHARES TO DIRECTORS, OFFICERS AND EMPLOYEES PURSUANT TO
BENEFIT PLANS
In connection with the Conversion, the Holding Company has established
the ESOP, which intends to purchase 8% of the Common Shares sold in the
Offering. After the completion of the Conversion, but not sooner than six months
thereafter, the Holding Company intends to submit the Stock Option Plan and the
RRP for approval by its shareholders. It is anticipated that a number of shares
equal to 10% of the Common Shares sold in the Offering will be reserved out of
authorized but unissued shares for issuance to the directors, officers and
employees of the Holding Company and the Bank pursuant to the Stock Option Plan,
and a number of shares equal to 4% of the Common Shares sold in the Offering
will be purchased by the RRP in the open market or directly from the Holding
Company for awards to directors, officers and employees of the Holding Company
and the Bank under the RRP. In the aggregate, 22% of the Common Shares sold in
the Offering may be allocated, awarded or granted to directors, officers and
employees of the Holding Company or the Bank pursuant to the ESOP, the Stock
Option Plan and the RRP. Based on the $10 per share price in the Offering, the
total value of the shares which may be available for awards under the RRP ranges
from $578,000 at the minimum of the Valuation Range to $899,300 at 15% above the
maximum of the Valuation Range. Awards of shares under the RRP will not occur
until at least six months after completion of the Conversation. As a result, the
value of such shares at the time of such awards, or at the time awarded shares
are distributed to recipients, cannot be estimated. See "THE CONVERSION -
Reasons for the Conversion, and MANAGEMENT - Stock Benefit Plans."
ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE SALES OF COMMON SHARES FOR PREMIUM
PRICES
The Articles of Incorporation and Code of Regulations of the Holding
Company and the Amended Articles of Incorporation of the Bank contain certain
provisions that could deter or prohibit non-negotiated changes in the control of
the Holding Company and the Bank. Such provisions include (1) a restriction on
the direct or indirect acquisition of more than 10% of the outstanding shares of
the Bank by any person during the five-year period following the effective date
of the Conversion, (2) the ability to issue additional common shares without
shareholder approval, and (3) the requirement of a
-10-
<PAGE> 16
80% supermajority voting requirement for the approval of certain matters,
including mergers, acquisitions of a majority of the shares of the Holding
Company or the transfer of substantially all of the assets of the Holding
Company, if the Board of Directors recommends against the approval of any such
matter. See "DESCRIPTION OF AUTHORIZED SHARES" and "RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY AND THE BANK AND ANTI-TAKEOVER PROVISIONS."
The executive officers and directors of the Holding Company and their
Associates are expected to purchase approximately 9.7% of the shares issued in
connection with the Conversion, assuming the sale of 1,700,000 Common Shares at
the midpoint of the Valuation Range. In addition, executive officers of the
Holding Company will be able to vote shares allocated to their accounts under
the ESOP, which intends to purchase approximately 8% of the shares issued in
connection with the Conversion. The RRP trustees, who are expected to be
directors of the Bank, will vote shares awarded but not distributed under the
RRP in their discretion. In view of the various provisions of the Articles of
Incorporation and the stock benefit plans of the Holding Company and the Bank,
the ESOP trustee, the RRP Committee and the directors and officers of the
Holding Company and the Bank will have a significant influence over the vote on
any takeover attempt or proxy contest and may be able to defeat such a proposal.
The Boards of Directors of the Holding Company and the Bank believe that such
provisions will be in the best interests of shareholders by encouraging
prospective acquirors to negotiate a proposed acquisition with the directors.
Such provisions could, however, adversely affect the market value of the Common
Shares or restrict or eliminate the opportunity for shareholders to sell their
shares for premium prices.
Federal and Ohio law also restrict the acquisition of control of the
Holding Company and the Bank, and regulations of the OTS restrict the ability of
any person to acquire the beneficial ownership of more than 10% of any class of
voting equity security of the Bank or the Holding Company. Any or all of these
provisions may facilitate the perpetuation of current management and discourage
proxy contests or takeover attempts not first negotiated with the Board of
Directors. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK
AND ANTI-TAKEOVER PROVISIONS."
USE OF PROCEEDS
The following table presents the estimated gross and net proceeds from
the sale of the Common Shares, based on the Valuation Range:
<TABLE>
<CAPTION>
Minimum Mid-point Maximum Maximum, as adjusted
------- --------- ------- --------------------
<S> <C> <C> <C> <C>
Gross proceeds $14,450,000 $17,000,000 $19,550,000 $22,482,500
Less estimated expenses 456,000 487,000 517,000 552,000
----------- ----------- ----------- -----------
Total net proceeds $13,994,000 $16,513,000 $19,033,000 $21,930,500
=========== =========== =========== ===========
</TABLE>
The net proceeds from the sale of the Common Shares may vary depending
upon financial and market conditions at the time of the completion of the
Offering. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold."
The expenses detailed above are estimated. Actual expenses may be more than or
less than estimated. See "THE CONVERSION Plan of Distribution."
The Holding Company will retain up to 50% of the net proceeds from the
sale of the Common Shares, or approximately $11.0 million at the maximum, as
adjusted, of the Valuation Range. Such proceeds will be used to lend up to 8% of
the proceeds of the Offering to the ESOP to acquire Common Shares in the
Offering and the balance of the proceeds will be invested initially in
short-term investments. The loan to the ESOP will have a term of up to ten years
and an interest rate equal to the applicable federal rate published periodically
by the IRS, which is currently _____%. The ESOP loan will be repaid through cash
contributions to the ESOP from the Bank and the use of any dividends paid on the
unallocated ESOP shares. Ultimately the proceeds will be used for general
corporate purposes, which may include payments of dividends, repurchases of
Common Shares and funding of the RRP. See "THE CONVERSION - Restrictions on
Repurchase of Common Shares." OTS regulations generally prohibit stock
repurchases in the first year following the completion of the Conversion,
without prior approval of the OTS.
The remainder of the net proceeds received from the sale of the Common
Shares, approximately $11.0 million at the maximum, as adjusted, of the
Valuation Range, will be invested by the Holding Company in the capital stock to
be issued by
-11-
<PAGE> 17
the Bank to the Holding Company as a result of the Conversion and will increase
the regulatory capital of the Bank and will permit the Bank to expand its
lending and investment activities and to enhance customer services. The Bank
anticipates that such net proceeds will initially be invested in short-term
investments with maturities of one year or less and utilized for general
corporate purposes, including loan originations.
MARKET FOR COMMON SHARES
There is currently no market for the Common Shares. No assurance can be
given that an active or liquid market for the Common Shares will develop after
the completion of the Conversion or, if such a market does develop, that it will
continue. Investors should consider, therefore, the potentially illiquid and
long-term nature of an investment in the Common Shares.
A public trading market for the stock of any issuer, including the
Holding Company, depends upon the presence of both willing buyers and willing
sellers at any given time. The Holding Company has received conditional approval
to have the Common Shares quoted on Nasdaq under the symbol "______" upon
completion of the Conversion, subject to certain conditions which the Bank and
the Holding Company believe will be satisfied, although no assurance can be
provided that the conditions will be met. One of the conditions to the Nasdaq
listing is the commitment of at least two brokerage firms to make a market in
the Common Shares. KBW has informed the Holding Company that it intends to make
a market in the Common Shares, but it has no obligation to do so.
The appraisal of the pro forma market value of the Bank, as converted,
and the Holding Company is not a recommendation as to the advisability of
purchasing Common Shares, nor does it represent Keller's opinion as to the price
at which the Common Shares may trade. There can be no assurance that the Common
Shares may later be resold at the price at which they are purchased in
connection with the Conversion. See "RISK FACTORS - Limited Market for the
Common Shares."
DIVIDEND POLICY
The declaration and payment of dividends by the Holding Company will be
subject to the discretion of the Board of Directors of the Holding Company, to
the earnings and financial condition of the Holding Company and to general
economic conditions. If the Board of Directors of the Holding Company determines
in the exercise of its discretion that the net income, capital and consolidated
financial condition of the Holding Company and the general economy justify the
declaration and payment of dividends by the Holding Company, the Board of
Directors of the Holding Company may authorize the payment of dividends on the
Common Shares, subject to the limitation under Ohio law that a corporation may
pay dividends only out of surplus. There can be no assurance that dividends will
be paid on the Common Shares or, if paid, that such dividends will continue to
be paid in the future. In addition, the Holding Company will not take any action
that would further the payment of a tax-free return of capital to its
shareholders during the first year following the completion of the Conversion.
Other than earnings on the investment of the proceeds retained by the
Holding Company and interest earned on the loan to the ESOP, the principal
source of income of the Holding Company will be dividends periodically declared
and paid by the Board of Directors of the Bank on the common shares of the Bank
held by the Holding Company. The declaration and payment of dividends by the
Bank to the Holding Company will be subject to the discretion of the Board of
Directors of the Bank, to the earnings and financial condition of the Bank, to
general economic conditions and to federal and state restrictions on the payment
of dividends by thrift institutions. Under regulations of the OTS applicable to
converted associations, the Bank will not be permitted to pay a cash dividend on
its capital stock after the Conversion if its regulatory capital would, as a
result of the payment of such dividend, be reduced below the amount required for
the Liquidation Account or the applicable regulatory capital requirement
prescribed by the OTS. See "THE CONVERSION Principal Effects of the Conversion
- -- Liquidation Account" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources." The Bank
may not pay a dividend unless such dividend also complies with an OTS regulation
limiting capital distributions by savings and loan associations. Capital
distributions, for purposes of such regulation, include, without limitation,
payments of cash dividends, repurchases, and certain other acquisitions by an
association of its shares and payments to stockholders of another association in
an acquisition of such other association. See "REGULATION - Office of Thrift
Supervision -- Limitations on Capital Distributions."
-12-
<PAGE> 18
REGULATORY CAPITAL COMPLIANCE
The following table sets forth the historical regulatory capital of the
Bank at September 30, 1997, and the pro forma regulatory capital of the Bank at
such date based on the receipt of 50% of the net proceeds for the number of
Common Shares indicated.
<TABLE>
<CAPTION>
Pro forma capital at September 30, 1997, assuming the sale of: (1)
-------------------------------------------------------------------------------
1,445,000 1,700,000 1,955,000 2,248,250
Common Shares Common Shares Common Shares Common Shares
Historical at (offering price (offering price (offering price (offering price
September 30, 1997 of $10 per share) of $10 per share) of $10 per share) of $10 per share)
------------------ ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible capital:(2)
Capital level $10,579 17.7% $15,842 24.3% $16,796 25.4% $17,750 26.5% $18,846 27.7%
Requirement 898 1.5 977 1.5 991 1.5 1,005 1.5 1,022 1.5
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess $ 9,681 16.2% $14,865 22.8% $15,805 23.9% $16,745 25.0% $17,824 26.2%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Core capital:(3)
Capital level $10,579 17.7% $15,842 24.3% $16,796 25.4% $17,750 26.5% $18,846 27.7%
Requirement 1,795 3.0 1,953 3.0 1,982 3.0 2,010 3.0 2,043 3.0
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess $ 8,784 14.7% $13,889 21.3% $14,814 22.4% $15,740 23.5% $16,803 24.7%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Risk-based capital:(4)
Capital level $10,727 30.2% $15,990 41.9% $16,944 43.8% $17,898 45.7% $18,994 47.8%
Requirement 2,846 8.0 3,056 8.0 3,094 8.0 3,133 8.0 3,176 8.0
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess $ 7,881 22.2% $12,934 33.9% $13,850 35.8% $14,765 37.7% $15,818 39.8%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
<FN>
- -------------------------------
(1) Assumes that the Bank receives 50% of the net proceeds, offset in part
by the aggregate purchase price of Common Shares purchased by the ESOP.
The amount to be borrowed by the ESOP is deducted from pro forma
capital to illustrate the possible impact on the Bank. The ESOP loan
will be repaid through cash contributions to the ESOP from the Bank and
the use of any dividends paid on the unallocated shares. Also assumes
that a number equal to 4% of the Common Shares will be acquired by the
RRP in the open market after the Conversion as a price of $10 per
share. There can be no assurance that a sufficient number of shares
will be available in the open market for purchase by the RRP or that,
if available, the price of such shares will be $10 per share. A higher
price per share, assuming the purchase of the entire 4% of the Common
Shares, would reduce retained earnings. The RRP may purchase shares in
the open market or may purchase authorized but unissued shares from the
Holding Company.
(2) Tangible capital amounts are shown as a percent of adjusted total
assets.
(3) Consists of total retained earnings as calculated under generally
accepted accounting principles ("GAAP"). Core capital amounts are shown
as a percent of adjusted total assets.
(4) Includes $148,000 of general valuation allowances, all of which qualify
as supplementary capital. See "REGULATION - Regulatory Capital
Requirements." Risk-based capital levels are shown as a percentage of
risk-weighted assets. Assumes reinvestment of net proceeds in 50%
risk-weighted assets.
</TABLE>
-13-
<PAGE> 19
CAPITALIZATION
Set forth below is the historical capitalization of the Bank at
September 30, 1997, and the pro forma consolidated capitalization of the Holding
Company at such date, as adjusted to give effect to the sale of Common Shares
based on the Valuation Range and estimated expenses. See "USE OF PROCEEDS" and
"THE CONVERSION - Pricing and Number of Common Shares to be Sold."
<TABLE>
<CAPTION>
Pro forma capitalization of the Holding Company
at September 30, 1997, assuming the sale of:
-----------------------------------------------------------------------
1,445,000 1,700,000 1,955,000 2,248,250
Historical Common Common Common Common
capitalization Shares Shares Shares Shares
of the Bank at (Offering (Offering (Offering (Offering
September 30, price of price of price of price of
1997 $10 per share) $10 per share) $10 per share) $10 per share)
--------------- -------------- -------------- -------------- ----------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits (1) $48,208 $48,208 $48,208 $48,208 $48,208
Capital and retained earnings:
Common Shares, no par value per
share: authorized - 9,500,000
shares; assumed outstanding - $ - $ - $ - $ - $ -
as shown (2)
Preferred Shares, no par value
per share: authorized - 500,000
shares; assumed outstanding - $ - $ - $ - $ - $ -
none
Additional paid-in capital (3) - 13,994 16,513 19,033 21,931
Less Common Shares acquired by
the ESOP (4) - (1,156) (1,360) (1,564) (1,799)
Less Common Shares acquired by
the RRP (5) - (578) (680) (782) (899)
Retained earnings, net,
substantially restricted (6) 10,579 10,579 10,579 10,579 10,579
Unrealized gain on available for
sale securities, net 13 13 13 13 13
------- ------- ------- ------- -------
Total capital and retained $10,592 $22,852 $25,065 $27,279 $29,825
earnings ======= ======= ======= ======= =======
<FN>
- ------------------------------------
(1) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Shares in the Conversion. Any such
withdrawals will reduce pro forma deposits by the amount of such
withdrawals.
(2) The number of Common Shares to be issued will be determined on the
basis of the final valuation of the Bank. See "THE CONVERSION - Pricing
and Number of Common Shares to be Sold." Common Shares assumed
outstanding does not reflect the issuance of any common shares which
may be reserved for issuance under the Stock Option Plan. See
"MANAGEMENT - Stock Benefit Plans -- Stock Option Plan."
(3) Reflects receipt of the proceeds from the sale of the Common Shares,
net of estimated expenses.
(4) Assumes that 8% of the Common Shares sold in connection with the
Conversion will be acquired by the ESOP with funds borrowed by the ESOP
from the Holding Company for a term of 15 years at a rate of ___%. The
ESOP loan will be secured solely by the Common Shares purchased by the
ESOP. The ESOP loan will be repaid through cash contributions to the
ESOP from the Bank and the use of any dividends paid on the unallocated
ESOP shares. Contributions to the ESOP will reduce total capital and
retained earnings, as reflected in the table. If the ESOP purchases
authorized but unissued shares from the Holding Company, such purchases
would have a dilutive effect of approximately 7.4% on the voting
interests of the Holding Company's shareholders. See "MANAGEMENT Stock
Benefit Plans -- Employee Stock Ownership Plan."
(5) Assumes that 4% of the Common Shares will be acquired in the open
market by the RRP after the Conversion at a price of $10 per share.
There can be no assurance that a sufficient number of shares will be
available for purchase by the RRP, or that shares could be purchased at
a price of $10 per share. A higher price per share, assuming the
purchase of the entire 4% of the shares, would reduce retained
earnings. The RRP may purchase shares in the open market or may
purchase authorized but unissued shares from the Holding Company. If
authorized but unissued shares are purchased, the voting interests of
existing shareholders would be diluted approximately 3.9%. The RRP must
be approved by the shareholders of the Holding Company before being
implemented. See "MANAGEMENT - Stock Benefit Plans -- Recognition and
Retention Plan."
(6) Retained earnings include restricted and unrestricted retained
earnings. See "THE CONVERSION - Principal Effects of the Conversion --
Liquidation Account" for information concerning the liquidation account
to be established in connection with the Conversion and "TAXATION -
Federal Taxation" for information concerning restricted retained
earnings for federal tax purposes.
</TABLE>
-14-
<PAGE> 20
PRO FORMA DATA
Set forth below are the pro forma consolidated net earnings of the
Holding Company for the three months ended September 30, 1997, and for the year
ended June 30, 1997, and the pro forma consolidated shareholders' equity of the
Holding Company at September 30, 1997 and June 30, 1997, along with the related
pro forma earnings per share amounts, giving effect to the sale of the Common
Shares based on the Valuation Range. See "THE CONVERSION - Pricing and Number of
Common Shares to be Sold." The pro forma data is based on the following
assumptions: (i) the sale of the Common Shares occurred at the beginning of the
period and yielded the net proceeds indicated; (ii) such net proceeds were
invested at the beginning of the period to yield annualized after-tax net
returns of 3.53%; and (iii) no withdrawals from existing deposit accounts were
made to purchase the Common Shares. The assumed returns are based on the
one-year U.S. Treasury bill yield of 5.35% in effect at September 30, 1997.
Management believes that the one-year Treasury bill rate is a more realistic
indicator of yields in the current interest rate environment than the arithmetic
average of the average yield on interest-earning assets and the average rate
paid on deposits. In calculating pro forma net earnings, a statutory federal
income tax rate of 34% has been assumed for all periods. In the opinion of
management, the assumed after-tax yield does not differ materially from the
estimated after-tax yield which will be obtained on the initial investment of
the cash proceeds in short-term interest-bearing deposits and is viewed as being
more relevant in the current low interest rate environment than the use of an
arithmetic average of the fiscal year 1997 weighted average yield on
interest-earning assets and weighted average rates paid on deposits during such
period. Actual yields may differ, however, from the assumed returns. The pro
forma consolidated net earnings amounts derived from the assumptions set forth
herein should not be considered indicative of the actual results of operations
of the Holding Company that would have been attained for any period if the
Conversion had been actually consummated at the beginning of such period.
As the table demonstrates, pro forma consolidated earnings per share
and pro forma consolidated shareholders' equity per share decrease as the amount
of Common Shares sold moves from the minimum of the Valuation Range to the
adjusted maximum of the Valuation Range. In addition, the offering price as a
multiple of pro forma earnings per share and as a percent of pro forma
shareholders' equity per share increases as the amount of Common Shares sold
moves from the minimum of the Valuation Range to the adjusted maximum of the
Valuation Range.
THE PRO FORMA DATA AND ACCOMPANYING NOTES SHOULD BE READ IN CONJUNCTION
WITH THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE HEREIN. NO
ASSURANCE CAN BE PROVIDED THAT THE ASSUMED YIELDS WILL BE ACHIEVED ON THE
INVESTMENT OF THE CONVERSION PROCEEDS. THE PRO FORMA DATA DOES NOT PURPORT TO
REPRESENT WHAT THE HOLDING COMPANY'S FINANCIAL POSITION OR RESULTS OF OPERATIONS
ACTUALLY WOULD HAVE BEEN HAD THE CONVERSION BEEN COMPLETED AS OF THE DATE OR AT
THE BEGINNING OF THE PERIODS INDICATED, OR TO PROJECT THE HOLDING COMPANY'S
FINANCIAL POSITION OR RESULTS OF OPERATIONS AT ANY FUTURE DATE OR FOR ANY FUTURE
PERIOD.
-15-
<PAGE> 21
<TABLE>
<CAPTION>
Three months ended September 30, 1997, assuming the sale of:
----------------------------------------------------------------------
1,445,000 1,700,000 1,955,000 2,248,250
Common Shares Common Shares Common Shares Common Shares
(Offering price of (Offering price of (Offering price of (Offering price of
$10 per share) $10 per share) $10 per share) $10 per share)
-------------- -------------- -------------- --------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $14,450 $17,000 $19,550 $22,483
Estimated expenses (456) (487) (517) (552)
----------- ----------- ----------- -----------
Estimated net proceeds 13,994 16,513 19,033 21,931
Less Common Shares acquired by the ESOP(1) (1,156) (1,360) (1,564) (1,799)
Less Common Shares acquired by the RRP(2) (578) (680) (782) (899)
----------- ----------- ----------- -----------
Net cash proceeds 12,260 14,473 16,687 19,233
=========== =========== =========== ===========
Net income:
Historical 213 213 213 213
Pro forma income on net proceeds 108 128 147 170
Pro forma adjustment for the ESOP(1) (13) (15) (17) (20)
Pro forma adjustment for the RRP(2) (19) (22) (26) (30)
----------- ----------- ----------- -----------
Pro forma net income 289 304 317 333
=========== =========== =========== ===========
Earnings per share(3):
Historical 0.16 0.14 0.12 0.10
Pro forma income on net proceeds 0.08 0.08 0.08 0.08
Pro forma adjustment for the ESOP(1) (0.01) (0.01) (0.01) (0.01)
Pro forma adjustment for the RRP(2) (0.01) (0.01) (0.01) (0.01)
----------- ----------- ----------- -----------
Pro forma net earnings per share 0.22 0.20 0.18 0.16
=========== =========== =========== ===========
Number of shares used in calculating
earnings per share(4) 1,331,327 1,566,267 1,801,207 2,071,388
Shareholders' equity (book value):
Historical 10,592 10,592 10,592 10,592
Estimated net proceeds from the
sale of Common Shares 13,994 16,513 19,033 21,931
Less unearned ESOP shares(1) (1,156) (1,360) (1,564) (1,799)
Less unearned RRP shares (2) (578) (680) (782) (899)
----------- ----------- ----------- -----------
Pro forma shareholders' equity(5) 22,852 25,065 27,279 29,825
=========== =========== =========== ===========
Per share shareholders' equity(3):
Historical 7.33 6.23 5.42 4.71
Estimated net proceeds 9.68 9.71 9.74 9.75
Less unearned ESOP shares(1) (0.80) (0.80) (0.80) (0.80)
Less unearned RRP shares(2) (0.40) (0.40) (0.40) (0.40)
----------- ----------- ----------- -----------
Pro forma shareholders' equity per share(5) $15.81 $14.74 $13.96 $13.26
=========== =========== =========== ===========
Number of shares used in calculating 1,445,000 1,700,000 1,955,000 2,248,250
book value per share
Ratio of offering price to pro forma
shareholders' equity per share(3) 63.23% 67.82% 71.67% 75.38%
Offering price as a multiple of pro
forma earnings per share(3) 11.50 12.91 14.19 15.54
</TABLE>
(Footnotes on page 18)
-16-
<PAGE> 22
<TABLE>
<CAPTION>
Year ended June 30, 1997, assuming the sale of:
----------------------------------------------------------------------------
1,445,000 1,700,000 1,955,000 2,248,250
Common Shares Common Shares Common Shares Common Shares
(Offering price of (Offering price of (Offering price of (Offering price of
$10 per share) $10 per share) $10 per share) $10 per share)
-------------- -------------- -------------- --------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $14,450 $17,000 $19,550 $22,483
Estimated expenses (456) (487) (517) (552)
----------- ----------- ----------- -----------
Estimated net proceeds 13,994 16,513 19,033 21,931
Less Common Shares acquired by the ESOP(1) (1,156) (1,360) (1,564) (1,799)
Less Common Shares acquired by the RRP(2) (578) (680) (782) (899)
----------- ----------- ----------- -----------
Net cash proceeds 12,260 14,473 16,687 19,233
=========== =========== =========== ===========
Net income:
Historical 595 595 595 595
Pro forma income on net proceeds 433 511 589 679
Pro forma adjustment for the ESOP(1) (51) (60) (69) (79)
Pro forma adjustment for the RRP(2) (76) (90) (103) (119)
----------- ----------- ----------- -----------
Pro forma net income 901 956 1,012 1,076
=========== =========== =========== ===========
Earnings per share(3):
Historical 0.44 0.38 0.33 0.29
Pro forma income on net proceeds 0.32 0.32 0.32 0.33
Pro forma adjustment for the ESOP(1) (0.04) (0.04) (0.04) (0.04)
Pro forma adjustment for the RRP(2) (0.06) (0.06) (0.06) (0.06)
----------- ----------- ----------- -----------
Pro forma net earnings per share 0.66 0.60 0.55 0.52
=========== =========== =========== ===========
Number of shares used in calculating
earnings per share(4) 1,337,107 1,573,067 1,809,027 2,080,381
Shareholders' equity (book value):
Historical 10,370 10,370 10,370 10,370
Estimated net proceeds from the
sale of Common Shares 13,994 16,513 19,033 21,931
Less unearned ESOP shares(1) (1,156) (1,360) (1,564) (1,799)
Less unearned RRP shares(2) (578) (680) (782) (899)
----------- ----------- ----------- -----------
Pro forma shareholders' equity(5) 22,630 24,843 27,057 29,603
=========== =========== =========== ===========
Per share shareholders' equity(3):
Historical 7.18 6.10 5.30 4.61
Estimated net proceeds 9.68 9.71 9.74 9.75
Less unearned ESOP shares(1) (0.80) (0.80) (0.80) (0.80)
Less unearned RRP shares(2) (0.40) (0.40) (0.40) (0.40)
----------- ----------- ----------- -----------
Pro forma shareholders' equity per share(5) $15.66 $14.61 $13.84 $13.16
=========== =========== =========== ===========
Number of shares used in calculating 1,445,000 1,700,000 1,955,000 2,248,250
book value per share
Ratio of offering price to pro forma
shareholders' equity per share(3) 63.85% 68.43% 72.25% 75.95%
Offering price as a multiple of pro
forma earnings per share(3) 14.84 16.45 17.87 19.33
</TABLE>
(Footnotes on next page)
-17-
<PAGE> 23
(1) Assumes that 8.0% of the shares sold in the Conversion are purchased by
the ESOP and that the funds used to purchase such shares are borrowed
from the Holding Company. The approximate amount expected to be
borrowed by the ESOP is not reflected as a liability, but is reflected
as a reduction of capital. The Bank intends to make annual
contributions to the ESOP over a fifteen year period in an amount at
least equal to the principal and interest requirement of the debt. The
pro forma net income assumes that: (i) 7,707, 9,067, 10,427, and 11,991
shares at the minimum, mid-point, maximum, and maximum, as adjusted, of
the Valuation Range, respectively, were committed to be released during
the year at an average fair value of $10 per share in accordance with
SOP 93-6 of the AICPA; (ii) 2,890, 3,400, 3,910 and 4,497 shares were
committed to be released the three months ended September 30, 1997, at
an average price of $10 per share; (iii) the effective tax rate was 34%
for such periods; and (iv) only the ESOP shares committed to be
released were considered outstanding for purposes of the per share net
earnings. The pro forma shareholders' equity per share calculations
assume all ESOP shares were outstanding, regardless of whether such
shares would have been released. Because the Holding Company will loan
to the ESOP the funds necessary to purchase the Common Shares, only
principal payments on the ESOP loan are reflected as employee
compensation and benefits expense. To the extent the value of the
Common Shares appreciates over time, compensation expense related to
the ESOP will increase in accordance with SOP 93-6. See Note 4 below.
See "MANAGEMENT - Stock Benefit Plans -- Employee Stock Ownership
Plan."
(2) Assumes that 4% of the Common Shares sold in connection with the
Conversion will be purchased by the RRP after the Conversion at a price
of $10 per share and that one-fifth of the purchase price of the RRP
shares will be expensed in each of the first five years after the
Conversion. If the RRP is implemented in the first year after the
completion of the Conversion, it will be subject to various OTS
requirements, including the requirement that the RRP be approved by the
shareholders of the Holding Company. There can be no assurance that the
RRP will be approved by the shareholders, that a sufficient number of
shares will be available for purchase by the RRP or that the shares
could be purchased at $10 per share. A higher per share price, assuming
the purchase of the entire 4% of the shares, would reduce pro forma net
earnings and pro forma shareholders' equity. If an insufficient number
of shares is available in the open market to fund the RRP at the
desired level, the Holding Company may issue additional authorized
shares. The issuance of authorized but unissued shares in an amount
equal to 4% of the Common Shares issued in the Conversion would result
in a 3.9% dilution in existing shareholders' voting interests. If the
RRP purchases authorized but unissued shares, pro forma net earnings
per share would be $0.21, $0.19, $0.17 and $0.16 for the three months
ended September 30, 1997, and $0.66, $0.60, $0.55 and $0.51 for the
year ended June 30, 1997, at the minimum, mid-point, maximum and
maximum, as adjusted, of the Valuation Range, respectively. In such
circumstance, pro forma shareholders' equity per share would be $15.59,
$14.56, $13.80 and $13.14 for the three months ended September 30,
1997, and $15.44, $14.44, $13.69 and $13.05 for the year ended June 30,
1997, at the minimum, mid-point, maximum and maximum, as adjusted, of
the Valuation Range, respectively. See "MANAGEMENT - Stock Benefit
Plans -- Recognition and Retention Plan."
(3) No effect has been given to shares reserved for issuance upon the
exercise of stock options pursuant to the Stock Option Plan. See
"MANAGEMENT - Stock Benefit Plans -- Stock Option Plan."
(4) Pro forma net income per share calculations include the number of
shares assumed to be sold in the Conversion and, in accordance with SOP
93-6, exclude ESOP shares which would not have been released during the
period. Accordingly, for the three months ended September 30, 1997,
113,673, 133,733, 153,793, and 176,862 shares, and for the year ended
June 30, 1997, 107,893, 126,933, 145,973, and 168,869 shares have been
subtracted from the shares assumed to be sold at the minimum,
mid-point, maximum, and maximum, as adjusted, of the Valuation Range.
See Note 1 above.
(5) Pro forma shareholders' equity represents the excess of the carrying
value of the assets of the Holding Company over its liabilities. The
per share calculations are based upon the number of shares issued in
the Conversion, without giving effect to SOP 93-6. The amounts shown do
not reflect the federal income tax consequences of the potential
restoration to income of the tax bad debt reserves for income tax
purposes, which would be required in the event of liquidation. The
amounts shown also do not reflect the amounts required to be
distributed in the event of liquidation to Eligible Account Holders and
Supplemental Eligible Account Holders from the Liquidation Account
(hereinafter defined) which will be established upon the consummation
of the Conversion. Pro forma shareholders' equity information is not
intended to represent the fair market value of the Common Shares, the
current value of the Bank's assets or liabilities, or the amounts, if
any, that would be available for distribution to shareholders in the
event of liquidation. Such pro forma data may be materially affected by
a change in the number of Common Shares to be sold in the Conversion
and by other factors. See "TAXATION - Federal Taxation."
-18-
<PAGE> 24
RECENT DEVELOPMENTS
The following tables set forth selected financial condition data for
the Bank at June 30, 1997, and December 31, 1997, and selected earnings data for
the Bank for the three months and six months ended December 31, 1997 and 1996.
Financial data as of and for the three and six months ended December 31, 1997,
are unaudited. In the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the results for
the unaudited periods have been made. The results of operations presented below
are not necessarily indicative of the results that may be expected for any other
period. This information should be read in conjunction with the financial
statements and notes thereto included herein.
<TABLE>
<CAPTION>
SELECTED FINANCIAL CONDITION AND
OTHER DATA: At December 31, 1997 At June 30, 1997
- -------------------------------- -------------------- ----------------
(In thousands)
Total amount of:
<S> <C> <C>
Assets $61,324 $60,401
Cash and cash equivalents 2,446 4,681
Interest-bearing time 40 39
deposits
Securities available for sale 4,520 5,004
Loans receivable, net 52,919 49,300
FHLB stock 379 366
Deposits 48,587 49,235
FHLB advances 1,000 -
Retained earnings 10,788 10,366
<CAPTION>
Three months ended Six months ended
December 31, December 31,
------------ ------------
SUMMARY OF EARNINGS: 1997 1996 1997 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Interest income $1,270 $1,119 $2,524 $2,251
Interest expense 529 495 1,046 932
--------- ------ ------ -------
Net interest income 741 624 1,478 1,319
Provision for loan losses 30 1 60 2
--------- ------ ------ -------
Net interest income after provision
for loan losses 711 623 1,418 1,317
Noninterest income 43 45 86 87
Noninterest expense 430 418 845 1,078 (1)
--------- ------ ------ -------
Net income before provision for
income taxes 324 250 659 326
Provision for income taxes 115 84 237 111
--------- ------ ------ -------
Cumulative effect of change in
accounting principle - - - -
--------- ------ ------ -------
Net income $ 209 $ 166 $ 422 $ 215
========= ====== ====== =======
<FN>
- ----------------------------
(1) For the six months ended December 31, 1996, noninterest expense
includes a $261,000 assessment imposed on the Bank as a result of
legislation to recapitalize the SAIF.
</TABLE>
-19-
<PAGE> 25
<TABLE>
<CAPTION>
At or for the three months ended At or for the six months ended
December 31, December 31,
--------------------------------- -------------------------------
SELECTED FINANCIAL RATIOS: 1997 1996 1997 1996
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Performance ratios:
Return on average assets 1.37% 1.17% 1.39% 0.76%
Return on average equity 7.80 6.71 7.96 4.35
Interest rate spread 4.39 3.92 4.42 4.27
Net interest margin 5.08 4.58 5.09 4.90
Noninterest expense to average assets 2.83 2.94 2.79 3.82
Efficiency ratio 54.87 62.52 54.04 76.69
Net interest income to noninterest expense 172.25 149.16 174.86 122.32
Average interest-earning assets to average
interest-bearing liability 1.19x 1.18x 1.19x 1.18x
Capital ratios:
Average equity to average assets 17.62% 17.43% 17.48% 17.57%
Equity to assets, end of period 17.61 17.49 17.61 17.49
Asset quality ratios and other data:
Nonperforming assets to average assets 0.06% 0.20% 0.06% 0.20%
Nonperforming assets to total assets 0.06 0.20 0.06 0.20
Nonperforming loans to
total loans 0.07 0.24 0.07 0.24
Allowance for loans losses
to gross loans (1) 0.33 0.25 0.33 0.25
Allowance for loans losses
to nonperforming loans 462.87 105.46 462.87 105.46
Net (charge-offs) recoveries to average
loans (0.03) - (0.02) -
Amount of nonperforming loans $ 38 $ 114 $ 38 $ 114
Amount of nonperforming assets $ 38 $ 114 $ 38 $ 114
</TABLE>
The following table summarizes the Bank's regulatory capital
requirements and actual capital at December 31, 1997:
<TABLE>
<CAPTION>
Excess of actual capital Applicable
Actual capital Current requirement over current requirement asset
--------------------- --------------------- ------------------------ ----------
Amount Percent Amount Percent Amount Percent total
------ ------- ------ ------- ------ ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $10,788 17.59% $ 920 1.5% $9,868 16.09% $61,324
Core capital 10,788 17.59 1,839 3.0 8,949 14.59 61,324
Risk-based capital 10,962 30.12 2,912 8.0 8,050 22.12 36,396
</TABLE>
At December 31, 1997, the Bank had no material commitments for capital
expenditures.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND JUNE 30, 1997
Total assets at December 31, 1997, were $61.3 million, compared to
$60.4 million at June 30, 1997, an increase of $923,000. The primary factor in
this increase was a $3.6 million increase in loans receivable, partially offset
by a $2.2 million decrease in cash and cash equivalents and a $484,000 decrease
in securities available for sale. The increase in loans receivable reflects a
stable local economy and the interest rate environment during the period. The
decreases in cash and cash equivalents and securities available for sale were
the result of a redirection of funds to fund loan growth.
-20-
<PAGE> 26
Total deposits decreased $648,000, from $49.2 at June 30, 1997, to
$48.6 million at December 31, 1997, primarily due to a reduction in certificates
of deposit, which was partially offset by an increase in savings accounts. The
reduction in certificates of deposit was due to the maturity of a large public
fund deposit, which was not renewed.
Advances from the FHLB of Cincinnati totaled $1.0 million at December
31, 1997. The borrowings are used as a source of short-term liquidity to provide
funding for loan demand.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
AND DECEMBER 31, 1996
NET INCOME. Net income for the six months ended December 31, 1997,
totaled $422,000, compared to $215,000 for the six months ended December 31,
1996. The increase in net income was primarily the result of reduced SAIF
deposit insurance expense of $261,000, as more fully discussed below.
NET INTEREST INCOME. Net interest income totaled $1.5 million for the
six months ended December 31, 1997, as compared to $1.3 million for the six
months ended December 31, 1996, an increase of $159,000, or 12.05%. This
occurred due to an increase in the average net interest margin, from 4.90% for
the six months ended December 31, 1996, to 5.09% for the six months ended
December 31, 1997.
The increase in the average net interest margin was the result of an
increase in the average yield on interest-earning assets, which was partially
offset by an increase in the cost of funds. The average yield on
interest-earning assets increased to 8.69% for the six months ended December 31,
1997, from 8.36% for the six months ended December 31, 1996, while the average
cost of funds increased to 4.27% from 4.09% for the same periods.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses for the
six months ended December 31, 1997, was $60,000, compared to $2,000 for the six
months ended December 31, 1996. The increase in the provision for loan losses is
attributable to an increase in the total loan portfolio, as well as management's
evaluation of the changing composition of the Bank's loan portfolio, including
increases in nonresidential real estate loans and consumer loans. The allowance
for loan losses totaled $175,000, or .33% of gross loans receivable and 462.87%
of total nonperforming loans, at December 31, 1997, compared to $119,000
dollars, or .25% of gross loans receivable and 105.46% of total nonperforming
loans, at December 31, 1996.
NONINTEREST INCOME. Noninterest income for the six months ended
December 31, 1997, was $86,000, compared to $87,000 for the six months ended
December 31, 1996, a decrease of $1,000, or 1.15%. The decrease was primarily
the result of a decrease in overdraft charges.
NONINTEREST EXPENSE. Noninterest expense was $845,000 for the six
months ended December 31, 1997, compared to $1,078,000 for the six months ended
December 31, 1996, a decrease of $233,000, or 21.61%. The decrease was primarily
a result of payment in September 1996 of a $261,000 special assessment as part
of legislation to recapitalize the SAIF. The decrease in noninterest expense due
to the special deposit insurance assessment was partially offset by an increase
of $41,000 in compensation and benefits.
INCOME TAX EXPENSE. The provision for income taxes totaled $237,000 for
the six months ended December 31, 1997, compared to $111,000 for the six months
ended December 31, 1996, an increase of $126,000, or 113.51%. The increase was
primarily due to the $89,000 tax savings in 1996 related to the special SAIF
assessment. The effective tax rates were 35.96% and 34.05% for the six months
ended December 31, 1997 and 1996, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
AND DECEMBER 31, 1996
NET INCOME. Net income for the three months ended December 31, 1997,
totaled $209,000, compared to $166,000 for the three months ended December 31,
1996. The increase in net income was primarily the result of an increase in net
interest income, partially offset by increases in noninterest expense and the
provisions for loan losses and income taxes.
NET INTEREST INCOME. Net interest income totaled $741,000 for the three
months ended December 31, 1997, compared to $624,000 for the three months ended
December 31, 1996, an increase of $117,000, or 18.75%, due to an increase in the
average net interest margin from 4.58% for the three months ended December 31,
1996, to 5.08% for the three months ended December 31, 1997.
-21-
<PAGE> 27
The increase in the average net interest margin was the result of an
increase in the average yield on interest-earning assets, which was partially
offset by an increase in the costs of funds. The average yield on
interest-earning assets increased to 8.72% for the three months ended December
31, 1997, from 8.22% for the three months ended December 31, 1996, while the
average costs of funds increased to 4.33% from 4.30% for the same periods.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses for the
three months ended December 31, 1997, was $30,000, compared to $1,000 for the
three months ended December 31, 1996. The increase in the provision for loan
losses is attributable to an increase in the total loan portfolio, as well as
management's evaluation of the changing composition of the Bank's loan
portfolio, including increases in nonresidential real estate loans and consumer
loans.
NONINTEREST INCOME. Noninterest income for the three months ended
December 31, 1997 was $43,000 compared to $45,000 for the three months ended
December 31, 1997, a decrease of $2,000, or 4.44%. The decrease was primarily
the result of a decrease in overdraft charges.
NONINTEREST EXPENSE. Noninterest expense was $430,000 for the three
months ended December 31, 1997, compared to $418,000 for the three months ended
December 31, 1996, an increase of $12,000, or 2.87%. This increase was primarily
due to an increase of $17,000 in compensation and benefits.
INCOME TAX EXPENSE. The provision for income taxes totaled $115,000 for
the three months ended December 31, 1997, compared to $84,000 for the three
months ended December 31, 1996, an increase of $31,000, or 36.90%, primarily as
a result of the change in net income before income taxes. The effective tax
rates were 35.49% for and 33.60% for the three months ended December 31, 1997
and 1996, respectively.
-22-
<PAGE> 28
SUMMARY STATEMENTS OF INCOME
The following summary sets forth certain information concerning the net
income of the Bank for the periods indicated. Such information should be read in
conjunction with the financial statements and notes thereto appearing elsewhere
herein.
<TABLE>
<CAPTION>
Three months
ended September 30, Year ended June 30,
------------------- ------------------------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
Loans $1,137 $1,016 $4,163 $3,755 $3,143
Securities, interest-bearing deposits and other 117 116 446 504 553
------ ------- ------- ------- -------
Total interest income 1,254 1,132 4,609 4,259 3,696
Interest expense on deposits 517 437 1,931 1,703 1,331
------ ------- ------ ----- ------
Net interest income before provision
for losses on loans 737 695 2,678 2,556 2,365
Provision for loan losses 30 1 6 - 2
------ -------- -------- -------- --------
Net interest income after provision
for loan losses 707 694 2,672 2,556 2,363
Other income 43 42 175 165 149
General, administrative and other expense(1) 415 660 1,943 1,532 1,418
------ ------ ------ ------ -----
Earnings before income taxes 335 76 904 1,189 1,094
Federal income taxes 122 27 309 419 378
------ ------ ------ ------ -----
Net income $ 213 $ 49 $ 595 $ 770 $ 716
====== ======= ======= ======= ======
<FN>
- ----------------------------
(1) Includes a nonrecurring pre-tax expense of $261,000 for the three
months ended September 30, 1996, and for the year ended June 30, 1997,
for a special one-time assessment to recapitalize the SAIF.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Bank is a state-chartered community-oriented financial institution
which is primarily engaged in the business of attracting savings deposits from
the general public and investing those funds in mortgage loans secured by one-
to four-family residential real estate located in the Bank's primary market
area. To a much lesser extent, the Bank also originates loans for the
construction or improvement of one- to four-family residential real estate,
loans secured by multifamily residential real estate (over four units), and
nonresidential real estate, commercial loans and consumer loans, and invests in
U.S. Treasury securities, interest-bearing deposits in other financial
institutions and other investments permitted by law.
The Bank's results of operations are primarily dependent on its net
interest income, which is the difference between the interest income earned on
its assets, primarily loans and securities, and the interest expense on its
liabilities, primarily customer deposits. Net interest income may be affected
significantly by general economic and competitive conditions and policies of
regulatory agencies, particularly those affecting market interest rates. The
Bank currently originates mortgage
-23-
<PAGE> 29
loans primarily with adjustable rates and with terms up to 25 years and attempts
to maintain sufficient capital and other liquid assets to manage interest rate
risk. The results of operations are also significantly influenced by the level
of noninterest expenses, such as employee salaries and benefits, noninterest
income, such as service charges, and the Bank's provision for losses on loans.
The following discussion of the operating results and financial
condition of the Bank should be read in conjunction with the financial
statements and related footnotes and the selected financial data included
elsewhere in this Prospectus.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND JUNE 30, 1997
Total assets at September 30, 1997, were $59.9 million compared to
$60.4 million at June 30, 1997, a decrease of $0.5 million, or 0.8%. The slight
decrease in total assets was primarily due to decreases of $2.5 million in cash
and cash equivalents and $486,000 in securities available for sale, which were
partially offset by an increase of $2.5 million in net loans receivable. The
growth in net loans receivable occurred primarily in one- to four-family
residential real estate loans, which increased approximately $1.7 million, and
in consumer and other loans, which increased approximately $903,000. The
increase in net loans receivable is primarily due to competitive loan rates and
products and a steady local economy.
Total liabilities at September 30, 1997, were $49.3 million, compared
to $50.0 million at June 30, 1997, a decrease of $700,000, or 1.4%. Total
deposits decreased $1.0 million, from $49.2 million at June 30, 1997, to $48.2
million at September 30, 1997. The decrease was primarily in certificates of
deposit, which decreased approximately $839,000. This decrease was due in part
to maturity of a large public fund deposit, which was not renewed. The decrease
in deposits was partially offset by a $258,000 increase in accrued expenses and
other liabilities, which was primarily the result of an increase in accrued
interest payable and federal income taxes payable due to the timing of the
payment of these expenses.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 AND JUNE 30, 1996
Total assets at June 30, 1997 were $60.4 million compared to $55.4
million at June 30, 1996, an increase of $5.0 million, or 9.0%. Net loans
receivable accounted for all of the $5.0 million of asset growth, increasing
from $44.3 million at June 30, 1996 to $49.3 million at June 30, 1997. The
increase in loans receivable was largely in one- to four-family residential real
estate loans, which increased $2.3 million, and consumer and other loans, which
increased $1.8 million. These increases are reflective of a steady local economy
coupled with competitive loan rates and products compared to the local
competition.
Securities available for sale increased $3.3 million, to $5.0 million
at June 30, 1997 from $1.7 million at June 30, 1996. This increase was offset by
decreases in securities held to maturity of $2.3 million and cash and cash
equivalents of $1.0 million. The change in the securities portfolio is the
result of replacing maturing held-to-maturity securities with available-for-sale
securities to increase the flexibility in managing the overall portfolio. The
decrease in cash and cash equivalents was due to investing in longer-term
securities to achieve a better yield.
Total liabilities were $50.0 million at June 30, 1997 compared to $45.6
million at June 30, 1996, an increase of $4.4 million, or 9.6%. Total deposit
accounts increased by $4.3 million from $44.9 million at June 30, 1996 to $49.2
million at June 30, 1997. Deposit growth was primarily due to an increase in
certificates of deposit of $4.9 million, which was offset by a decrease in
savings accounts of $843,000. The increase in certificates of deposit was the
result of offering several products with very competitive interest rates.
Members' equity at June 30, 1997 was $10.4 million compared to $9.8
million at June 30, 1996. The increase of $602,000, or 6.1%, is principally
comprised of the net income for the fiscal year ended June 30, 1997.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1997 AND SEPTEMBER 30, 1996
NET INCOME. The Bank earned net income of $213,000 for the three months
ended September 30, 1997, compared to net income of $49,000 for the three months
ended September 30, 1996. The increase in net income was primarily the result of
a special deposit insurance assessment in September 1996, as more fully
discussed below.
NET INTEREST INCOME. Net interest income totaled $737,000 for the three
months ended September 30, 1997, compared to $695,000 for the three months ended
September 30, 1996, an increase of $42,000, or 6.0%. This increase was
-24-
<PAGE> 30
attributable primarily to higher yield on a larger average balance of
interest-earning assets, which was partially offset by an overall increase in
the cost of funds, for an increased average volume of deposits. See "Yields
Earned and Rates Paid."
Interest and fees on loans increased approximately $121,000, or 11.9%,
from $1.0 million for the three months ended September 30, 1996, to $1.1 million
for the three months ended September 30, 1997. The increase in interest income
was due to a higher average balance of loans receivable.
Interest earned on securities totaled $74,000 for the three months
ended September 30, 1997, compared to $71,000 for the three months ended
September 30, 1996. The $3,000 increase in interest earned was a result of a
higher average balance of securities, partially offset by a decrease in yield.
Dividends on FHLB stock increased slightly for the three months ended
September 30, 1997, compared to the three months ended September 30, 1996,
primarily due to an increase in the number of shares of FHLB stock owned.
Interest on interest-bearing deposits and federal funds sold decreased
approximately $3,000, from $39,000 for the three months ended September 30,
1996, to $36,000 for the three months ended September 30, 1997. This decrease
was due to a lower average balance of interest-bearing deposits and overnight
deposits, partially offset by a higher yield earned.
Interest paid on deposits increased approximately $80,000, from
$437,000 for the three months ended September 30, 1996, to $517,000 for the
three months ended September 30, 1997. The increase in interest expense was due
to an increase in average deposit balances combined with an increase in the cost
of funds. The average cost of deposits increased from 3.85% for the three months
ended September 30, 1996, to 4.20% for the three months ended September 30,
1997. The increase in the average cost of deposits was the result of an increase
in higher yielding certificates of deposit, due to special interest rate
promotions as well as a general increase in the interest rate on certificates of
deposit offered by the Bank. Certificates of deposit increased from 55.3% of
total deposits at September 30, 1996 to 58.9% of total deposits at September 30,
1997. The yield on certificates of deposits was 5.19% for the three months ended
September 30, 1996, compared to 5.58% for the three months ended September 30,
1997, while the average yield on savings and demand deposit accounts decreased
from 2.22% to 2.19% for the same three month periods.
PROVISION FOR LOAN LOSSES. The Bank maintains an allowance for loan
losses in an amount which, in management's judgment, is adequate to absorb
reasonably foreseeable losses inherent in the loan portfolio. While management
utilizes its best judgment and information available, the ultimate adequacy of
the allowance is dependent upon a variety of factors, including the performance
of the Bank's loan portfolio, the economy and changes in real estate values and
interest rates, and the view of the regulatory authorities toward loan
classifications. The provision for loan losses is determined by management as
the amount to be added to the allowance for loan losses after net charge-offs
have been deducted to bring the allowance to a level which is considered
adequate to absorb losses inherent in the loan portfolio. The amount of the
provision is based on management's monthly review of the loan portfolio and
consideration of such factors as historical loss experience, general prevailing
economic conditions, changes in the size and composition of the loan portfolio
and specific borrower considerations, including the ability of the borrower to
repay the loan and the estimated value of the underlying collateral.
The provision for loan losses for the three months ended September 30,
1997, totaled $30,000 compared to $1,500 for the three months ended September
30, 1996, an increase of $28,500. The increase in the provision for loan losses
was attributable to an increase in the total loan portfolio as well as
management's evaluation of the changing composition of the Bank's loan
portfolio, including the increase in nonresidential real estate loans and
consumer loans. The allowance for loan losses totaled $148,000, or 0.29% of
gross loans receivable, net of loans in process and deferred loan origination
fees and costs, and 243.0% of total nonperforming loans at September 30, 1997,
compared to $119,000, or 0.26% of gross loans, net of loans in process and
deferred loan origination fees and costs and 117.8% of total nonperforming loans
at September 30, 1996.
NONINTEREST INCOME. Noninterest income for the three months ended
September 30, 1997 was $43,300 compared to $42,500 for the three months ended
September 30, 1996, an increase of $800, or 1.9%. The increase was primarily a
result of an increase in miscellaneous operating income.
NONINTEREST EXPENSE. Noninterest expense was $415,000 for the three
months ended September 30, 1997 compared to $660,000 for the three months ended
September 30, 1996, a decrease of $245,000, or 37.1%. The decrease was primarily
a result of $261,000 accrued for a special deposit insurance assessment
resulting from legislation enacted on
-25-
<PAGE> 31
September 30, 1996, to recapitalize the SAIF of the FDIC. The legislation called
for a one-time assessment of $0.657 for each $100 in deposits held as of March
31, 1995. As a result of the recapitalization of the SAIF, the current disparity
between Bank and thrift insurance assessments was reduced. Thrifts had been
paying assessments of $0.23 per $100 of deposits. For most thrifts, including
the Bank, the assessment level was reduced to $0.064 per $100 in deposits in
January 1997 and is expected to be reduced to $0.024 per $100 in deposits no
later than January 2000.
INCOME TAX EXPENSE. The volatility of income tax expense is primarily
attributable to the change in net income before income taxes. The provision for
income taxes totaled $122,000 for the three months ended September 30, 1997
compared to $27,000 for the three months ended September 30, 1996, an increase
of $95,000. The increase was largely due to the tax effect of $89,000 for the
special SAIF assessment discussed above. The effective tax rates were 36.4% and
35.9% for the three months ended September 30, 1997 and 1996, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1997 AND JUNE
30, 1996
NET INCOME. Net income for the year ended June 30, 1997, was $595,000,
a decrease of $175,000, or 22.7%, from net earnings of $770,000 for the year
ended June 30, 1996. The decrease was primarily a result of the special SAIF
assessment in September 1996, combined with an increase in salary and employee
benefits expense, which were partially offset by an increase in net interest
income.
NET INTEREST INCOME. Net interest income increased approximately
$122,000, or 4.8%, from $2.7 million for the year ended June 30, 1997 compared
to $2.6 million for the year ended June 30, 1996. The increase in net interest
income was the result of an increase in the average balance of interest-earning
assets, partially offset by a decrease in the rate earned on such assets and an
overall increase in the cost of funds, for an increased average volume of
deposits.
Interest and fees on loans increased approximately $408,000, or 10.9%,
from $3.8 million for the year ended June 30, 1996, to $4.2 million for the year
ended June 30, 1997. The increase in interest income was due to a higher average
loans receivable balance, partially offset by a decrease in the average yield
earned on loans receivable. The average yield declined to 8.81% for the year
ended June 30, 1997, from 8.94% for the year ended June 30, 1996.
Interest earned on securities totaled $265,000 for the year ended June
30, 1997, compared to $332,000 for the year ended June 30, 1996. The decrease
was primarily a result of a lower average balance of securities and, to a lesser
extent, a decrease in the yield earned.
Dividends on FHLB stock increased slightly for the year ended June 30,
1997, compared to the year ended June 30, 1996, primarily due to an increase in
the number of shares of FHLB stock owned.
Interest on interest-bearing deposits and federal funds sold increased
approximately $8,000, or 5.4%, from $149,000 for the year ended June 30, 1996 to
$157,000 for the year ended June 30, 1997. The increase was the result of a
higher average balance of short-term funds, which was partially offset by a
decrease in the yield earned from 5.71% for the year ended June 30, 1996, to
5.33% for the year ended June 30, 1997.
Interest paid on deposits totaled $1.9 million for the year ended June
30, 1997, compared to $1.7 million for the year ended June 30, 1996, an increase
of $228,000, or 13.4%. The increase in interest expense was due primarily to an
increase in the average deposit balance and, to a lesser extent, an increase in
the cost of funds. The average cost of deposits increased from 4.04% for the
year ended June 30, 1996, to 4.15% for the year ended June 30, 1997. The
increase in the average cost of deposits and the resulting increase in the
average outstanding balance was the result of several interest rate promotions
for certificates of deposit and a general increase in the interest rates paid on
certificates of deposit offered by the Bank. Certificates of deposit increased
from 54.3% of total deposits at June 30, 1996, to 59.3% of total deposits at
June 30, 1997. The average rate on certificates of deposit was 5.56% for the
year ended June 30, 1996, compared to 5.62% for the year ended June 30, 1997,
while the average cost of savings and demand deposit accounts declined from
2.27% to 2.23% over the same periods.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year
ended June 30, 1997 was $6,000. There was no provision for the year ended June
30, 1996. The allowance for loan losses totaled $119,000, or 0.24% of gross
loans receivable, net of loans in process and deferred loan origination fees and
costs and 361.3% of total nonperforming loans at June 30, 1997, compared with
$118,000, or 0.26% of gross loans receivable, net of loans in process and
deferred loan origination fees and costs, and 133.5% of total nonperforming
loans at June 30, 1996. The amount of the provision and the
-26-
<PAGE> 32
allowance for loan losses is influenced by current economic conditions, actual
loss experience, industry trends and other factors. The increase in the
provision for loan losses was the result of a higher volume of loans receivable
during the year ended June 30, 1997 compared to the year ended June 30, 1996.
NONINTEREST INCOME. Noninterest income increased approximately $10,000,
or 6.1%, to $175,000 for the year ended June 30, 1997, compared to $165,000 for
the year ended June 30, 1996. This increase was primarily due to increases in
service charges and other fees.
NONINTEREST EXPENSE. Noninterest expense increased $411,000, or 26.8%,
from $1.5 million for the year ended June 30, 1996, to $1.9 million for the year
ended June 30, 1997. This increase was primarily due to increases in salaries
and employee benefits of $103,000, SAIF deposit insurance premiums of $228,000,
and other expense of $31,000. The salaries and employee benefits expense
increase was primarily due to increases in the Bank's short-term incentive plan,
salary increases and the addition of one full time equivalent employee. SAIF
deposit insurance premiums totaled $321,000 for the year ended June 30, 1997,
compared to $93,000 for the year ended June 30, 1996, due to the special SAIF
assessment in September 1996. The increase in other expense was primarily due to
increases in professional services fees, printing and office supplies and credit
card and ATM-related expenses, which were partially offset by decreases in
advertising and seminar and conference expenses.
INCOME TAX EXPENSE. The provision for income taxes totaled $309,000 for
the year ended June 30, 1997, compared to $419,000 for the year ended June 30,
1996, resulting in an effective tax rate of 34.2% and 35.3% for the years ended
June 30, 1997 and 1996, respectively. The volatility of income tax expense is
primarily attributable to the change in net income, before income taxes.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1996 AND JUNE
30, 1995
NET INCOME. Net income for the year ended June 30, 1996 totaled
$770,000, an increase of $54,000, or 7.5%, from net earnings of $716,000 for the
year ended June 30, 1995. The increase was primarily the result of an increase
in net interest income which was partially offset by increases in noninterest
expense and the provision for income taxes.
Interest and fees on loans increased $612,000, or 19.5%, from $3.1
million for the year ended June 30, 1995, to $3,755,000 for the year ended June
30, 1996. The increase was due to a higher average loans receivable balance
combined with an increase in the average yield earned on loans receivable from
8.39% for the year ended June 30, 1995 to 8.94% for the year ended June 30,
1996.
Interest earned on securities totaled $332,000 for the year ended June
30, 1996, compared to $429,000 for the year ended June 30, 1995. The decrease
was the result of a lower average balance of securities, which was partially
offset by an increase in the yield earned.
Dividends on FHLB stock decreased slightly for the year ended June 30,
1996, compared to the year ended June 30, 1995, primarily due to a decrease in
the dividend rate on FHLB stock.
Interest on interest-bearing deposits and federal funds sold increased
$48,000, or 47.5%, from $101,000 for the year ended June 30, 1995 to $149,000
for the year ended June 30, 1996. The increase was the result of a higher
average balance due to the temporary investment of excess funds received from
deposit growth and maturing securities in federal funds sold and overnight
deposits with the FHLB.
Interest paid on deposits totaled $1.7 million for the year ended June
30, 1996, compared to $1.3 million for the year ended June 30, 1995, an increase
of $372,000, or 27.9%. The increase in interest expense was due to an increase
in the average deposit balance combined with an increase in the cost of funds.
The increase in the overall cost of funds was a result of consumers shifting
funds from lower-yielding savings and demand deposit accounts to higher-yielding
certificates of deposit. Certificates of deposit increased from 50.9% of total
deposits at June 30, 1995, to 54.3% of total deposits at June 30, 1996.
Additionally, the yield on certificates of deposit increased from 4.52% for the
year ended June 30, 1995, to 5.56% for the year ended June 30, 1996. The average
yield on savings and demand deposit accounts decreased from 2.33% to 2.27% over
the same periods.
PROVISION FOR LOAN LOSSES. There was no provision for loan losses for
the year ended June 30, 1996 compared to a $2,000 provision for the year ended
June 30, 1995. The allowance for loan losses totaled $118,000 or 0.26% of gross
loans
-27-
<PAGE> 33
receivable, net of loans in process and deferred loan origination fees and
costs, and 133.5% of total nonperforming loans at June 30, 1996, compared with
$118,000, or 0.30% of gross loans receivable, net of loans in process and
deferred loan origination fees and costs, and 734.5% of total nonperforming
loans at June 30, 1995. The provision for loan losses was higher for the year
ended June 30, 1995, compared to the year ended June 30, 1996, as a result of
management's evaluation of the adequacy of the allowance.
NONINTEREST INCOME. Noninterest income increased by $16,000, or 10.7%,
totaling $165,000 for the year ended June 30, 1996, compared to $149,000 for the
year ended June 30, 1995. The increase was due to an increase in premium rebates
on credit-life insurance policies.
NONINTEREST EXPENSE. Noninterest expense totaled $1.5 million for the
year ended June 30, 1996, compared to $1.4 million for the year ended June 30,
1995, an increase of $114,000, or 8.0%. The major components of the increase
were increases in compensation and benefits expense of $35,000, an increase of
$29,000 in occupancy and equipment expense, and a $40,000 increase in other
expense. The increase in compensation and benefits was due to an increase in
short-term incentive expense and salary increases, which were offset partially
by a decrease in pension expense. The increase in occupancy and equipment
expense was due to an increase in depreciation, service contracts and other
repair and maintenance expenses, which resulted from purchases of office
equipment. The increase in other expense was primarily due to increases in
advertising, seminars and conferences and credit card-related expenses and other
professional services fees.
INCOME TAX EXPENSE. The provision for income taxes totaled $419,000 for
the year ended June 30, 1996 and $378,000 for the year ended June 30, 1995,
resulting in effective tax rates of 35.3% and 34.5%, respectively. The
volatility of income tax expense is primarily attributable to the change in net
income before income taxes.
YEAR 2000 ISSUE
The Bank's operations, like those of most financial institutions,
depend almost entirely on computer systems. See "BUSINESS OF THE BANK - Year
2000 Considerations." The Bank is addressing the potential problems associated
with the possibility that the computers which control or operate the Bank's
operating systems, facilities and infrastructure may not be programmed to read
four-digit date codes and, upon arrival of the year 2000, may recognize the
two-digit code "00" as the year 1900, causing systems to fail to function or to
generate erroneous data. The Bank is working with the companies that supply or
service its computer-operated or -dependent systems to identify and remedy any
year-2000 related problems.
At this time, the Bank has not identified any specific expenses which
are reasonably likely to be incurred by the Bank in connection with year-2000
issues and the Bank does not expect to incur significant expense to implement
corrective measures. No assurance can be given at this time, however, that
significant expense will not be incurred in future periods. In the event that
the Bank is ultimately required to purchase replacement computer systems,
programs and equipment, or that substantial expense must be incurred to make the
Bank's current systems, programs and equipment year-2000 compliant, the Bank's
net income and financial condition could be adversely affected. While the Bank
is endeavoring to ensure that its computer-dependent operations are year-2000
compliant, no assurance can be given that some year-2000 problems will not
occur.
In addition to possible expense related to its own systems, the Bank
could incur losses if year-2000 issues adversely affect the Bank's depositors or
borrowers, such problems could include delayed loan payments due to year-2000
problems affecting any of the Bank's significant borrowers or impairing the
payroll systems of large employers in the Bank's primary market area. Because
the Bank's loan portfolio is highly diversified with regard to individual
borrowers and types of businesses and the Bank's primary market area is not
significantly dependent upon one employer or industry, the Bank does not expect
any significant or prolonged year-2000 related difficulties that will affect net
earnings or cash flow. See " - Loans to One Borrower Limits," and "- Primary
Market Area."
YIELDS EARNED AND RATES PAID
The following table sets forth certain information relating to the
Bank's average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the periods indicated. Such yields and costs are derived by dividing income or
expense by the average balances of interest-earning assets or interest-bearing
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Nonaccruing loans have been included in the
table as loans carrying a zero yield. The average balance for
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<PAGE> 34
securities available for sale is computed using the carrying value and the
average yield on securities available for sale has been computed using the
historical amortized cost average balance.
-29-
<PAGE> 35
<TABLE>
<CAPTION>
Three months ended September 30, Year ended June 30,
1997 1996 1997
------------------------------------ ------------------------------- ----------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/
balance paid balance balance paid rate balance paid
----------- -------- ------- ----------- -------- ----- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $50,667 $1,137 8.90% $45,314 $1,016 8.90% $47,225 $4,163
Securities available for sale(2) 4,883 74 6.06 2,435 39 6.41 3,521 212
Securities held to maturity 2,125 32 5.95 845 53 6.29 4,193 270
FHLB stock 368 7.22 343 6 6.95 352 25
Interest-bearing deposits 2,193 36 6.44 3,114 39 4.97 2,937 156
------- ------ ------- ------ ------- -------
Total interest-earning assets $58,111 1,254 8.56 $53,331 1,132 8.45 $54,880 4,609
======= ------ ======= ------ ======= -------
Interest-bearing liabilities:
Demand and NOW deposits $8,426 38 1.80 $ 8,351 39 1.87 $ 8,275 154
Savings deposits 11,412 71 2.48 12,132 75 2.46 11,840 295
Certificate accounts 28,981 408 5.58 24,632 323 5.19 26,383 1,482
------- ------ ------- ------ ------- -------
Total interest-bearing liabilities $48,819 517 4.20 $45,115 437 3.85 $46,498 1,931
======= ------ ======= ------ ======= -------
Net interest income $737 $ 695 $2678
==== ===== =====
Interest rate spread(3) 4.36% 4.60%
==== ====
Net earning assets $9,292 $ 8,216 $ 8,382
====== ======= =======
Net interest margin(4) 5.03% 5.17%
==== ====
Average interest-earning assets to
average interest-bearing liabilities 1.19x 1.18x 1.18x
==== ==== ====
<CAPTION>
-----------------------------------------------------------------------------------------
1997 1996 1995
------ ----------------------- -----------------------------------------------
Average Interest Average Interest
Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
Rate Balance paid rate Balance paid Rate
----- ---------- -------- ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) 8.81% $42,016 $3,755 8.94% $37,465 $3,143 8.39%
Securities available for sale(2) 6.02 1,001 62 6.18 880 58 6.66
Securities held to maturity 6.44 6,438 370 5.75
FHLB stock 7.03 328 23 6.99 306 24 7.80
Interest-bearing deposits 5.33 2,609 149 5.71 1,813 101 5.59
------- ------- ------- -------
Total interest-earning assets 8.40 $50,147 4,259 8.49 $46,902 3,696 7.88
======= ------- ------- =======
Interest-bearing liabilities:
Demand and NOW deposits 1.85 $7,724 152 1.97 $8,028 168 2.10
Savings deposits 2.49 11,892 294 2.47 12,940 321 2.48
Certificate accounts 5.62 22,592 1,257 5.56 18,630 842 4.52
------- ------- ------- -------
Total interest-bearing liabilities 4.15 $42,208 1,703 4.04 $39,598 1,331 3.36
======= ------- ------- =======
Net interest income $2,556 $2,365
====== ======
Interest rate spread(3) 4.25% 4.45% 4.52%
==== ==== ====
Net earning assets $7,939 $7,304
====== ======
Net interest margin(4) 4.88% 5.10% 5.04%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities 1.19x 1.18x
==== ====
<FN>
- -------------------
(1) Amount is net of loans in process, net deferred loan origination fees
and includes nonperforming loans.
(2) Includes unamortized discounts and premiums. Average balance is
computed using the carrying value of securities. The average yield has
been computed using the historical amortized cost average balance for
available for sale securities.
(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.
</TABLE>
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<PAGE> 36
The following table sets forth, at the dates indicated, the weighted
average yields earned on the Bank's interest-earning assets, the weighted
average interest rates paid on interest-bearing liabilities and the interest
rate spread between the weighted average yields and rates at the dates
presented.
<TABLE>
<CAPTION>
At September 30, At June 30,
1997 1997
<S> <C> <C>
Weighted average yield on loans(1) 8.57% 8.52%
Weighted average yield on securities portfolio 6.04 6.03
Weighted average yield on FHLB stock 7.25 7.25
Weighted average yield on interest-bearing deposits 6.65 6.07
Weighted average yield on all interest-earning assets 8.35 8.17
Weighted average rate paid on deposits 4.51 4.51
Interest rate spread 3.84 3.66
<FN>
- -------------------------
(1) Does not include loan origination fees and costs and late charges.
</TABLE>
The table below describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior period rate), (ii)
changes in rate (change in rate multiplied by prior period volume) and (iii)
total changes in rate and volume. For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately based on the absolute value of the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Three months ended September 30, Year ended June 30,
----------------------------- -------------------------------------------------------------
1997 vs. 1996 1997 vs. 1996 1996 vs. 1995
----------------------------- ------------------------------ ----------------------------
Increase Increase Increase Total
(decrease) due to Total (decrease) due to Total (decrease) due to increase
----------------- increase -------------------- increase -----------------
Volume Rate (decrease) Volume Rate (decrease) Volume Rate (decrease)
-------- ----- ---------- -------- ------- ---------- ------ ------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $120 $ 1 $ 121 $ 460 $(52) $ 408 $ 398 $214 $ 612
Securities available for sale 37 (2) 35 152 (2) 150 8 (4) 4
Securities held to maturity (32) - (32) (211) (6) (217) (140) 40 (100)
FHLB stock 1 1 2 - 2 2 (3) (1)
-
Interest-bearing deposits (13) 10 (3) 18 (11) 7 46 2 48
---- ------- ----- ------- ------- ------- ------ ------- ------
Total interest-earning
assets $113 $ 9 122 $ 421 $ (71) 350 $314 $249 563
Interest-bearing liabilities:
Demand and NOW deposits $ 1 $ (2) (1) $ 11 $ (9) 2 $ (6) $ (10) (16)
Savings deposits (5) 1 (4) (1) 2 1 (26) (1) (27)
Certificates of deposit 60 25 85 213 12 225 199 216 415
------ -------- ------ ----- ----- ------ ----- ----- ------
Total interest-bearing
liabilities $ 56 $ 24 80 $ 223 $ 5 228 $167 $205 372
==== ======= ----- ======= ====== ------- ====== ======= ------
Increase in net interest $ 42 $ 122 $ 191
income ===== ===== =====
</TABLE>
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
GENERAL. The principal market risk affecting the Bank is interest-rate
risk. The Bank does not maintain a trading account for any class of financial
instrument, and the Bank is not affected by foreign currency exchange rate risk
or commodity price risk. Because the Bank does not hold any equity securities
other stock in the FHLB of Cincinnati, the Bank is not subject to equity price
risk.
The Bank, like other financial institutions, is subject to interest
rate risk to the extent that its interest-earning assets reprice differently
than its interest-bearing liabilities. One of the Bank's principal financial
objectives is to achieve long-term profitability while reducing its exposure to
fluctuations in interest rates. The Bank has sought to reduce exposure of its
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<PAGE> 37
earnings to changes in market interest rates by managing asset and liability
maturities and interest rates primarily through the maintenance of a high level
of investments in short-term assets in the portfolio, including one- and
three-year adjustable-rate mortgage loans ("ARMs"). In addition, in managing the
Bank's portfolio of investment securities, management primarily purchases U.S.
Treasury obligations and U.S. agency and federally-sponsored corporation
obligations with maturities of five years or less. The Bank does not engage in
hedging activities.
QUANTITATIVE ASPECTS OF MARKET RISK. As part of its effort to monitor
and manage interest rate risk, the Bank uses the "net portfolio value" ("NPV")
methodology adopted by the OTS as part of its capital regulations. Although the
Bank is not currently subject to NPV regulation because such regulation does not
apply to institutions with less than $300 million in assets and risk-based
capital in excess of 12%, application of NPV methodology is an indicator of the
Bank's interest rate risk.
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and outgoing
cash flows on interest-bearing and other liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
that would result from various levels of theoretical basis point (1 basis point
equals 0.01%) changes in market interest rates. The OTS considers an institution
to be subject to interest rate risk if the NPV would decrease by more than 2% of
the present value of the institution's assets with either a 200 basis point
increase or decrease in market rates. At June 30, 1997, 2% of the present value
of the Bank's assets was $1.3 million. The interest rate risk of a 200 basis
point decrease in market interest rates (which was greater than the interest
rate risk of a 200 basis point increase) was $372,000 at June 30, 1997, which
was less than 2% of the present value of the Bank's assets.
Presented below, as of June 30, 1997, is an analysis of the Bank's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis point increments in market interest rates.
<TABLE>
<CAPTION>
NPV as % of
portfolio value
Net portfolio value of assets
Change ------------------------------------- --------------------------
in rates $ Amount $ Change % Change NPV Ratio Change in %
-------- -------- -------- -------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 $11,735 $(1,056) (8.3)% 19.34% (1.05)%
+300 12,242 (549) (4.3) 19.93 (0.46)
+200 12,615 (177) (1.4) 20.33 (0.06)
+100 12,801 9 0.1 20.49 0.10
Static 12,792 - - 20.39 -
(100) 12,612 (179) (1.4) 20.07 (0.32)
(200) 12,420 (372) (2.9) 19.73 (0.65)
(300) 12,475 (317) (2.5) 19.71 (0.68)
(400) 12,716 (76) (0.6) 19.92 (0.47)
</TABLE>
As illustrated in the table, the Bank's NPV declines in both a rising
and a declining interest rate environment. In either instance, however, the
percent decline is relatively small, ranging from a low of 0.6% with a 400 basis
point decline in interest rates to a high of 8.3% with a 400 basis point
increase in interest rates.
This result is principally attributable to the fact that the Bank's
interest-earning assets are very interest rate sensitive, and the Bank's deposit
liabilities, while not as rate sensitive as the assets, are also significantly
rate sensitive. Approximately 73.2% of the Bank's loans are adjustable-rate
loans, and approximately 74.5% of the Bank's deposits are transaction accounts
or certificates of deposit with maturities of one year or less. Also
contributing to the rate sensitivity of the Bank's interest-earning assets is
the amount of the Bank's liquid assets, which constituted approximately 11.2% of
total assets at September 30, 1997. The unlimited exposure of the Bank's liquid
assets to changes in interest rates, compared to the Bank's adjustable-rate
loans which have limits on rate charges, contribute to the decline in NPV in a
declining rate environment. The Bank's NPV is also affected by the pace of loan
prepayment activity, which usually declines in a rising interest rate
environment and increases in a declining rate environment.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the NPV approach. For example, although certain
assets and liabilities may have similar maturities or periods of repricing, they
may react in
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<PAGE> 38
different degrees to changes in market interest rates. Also, the interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates. Further, in the event of a change in interest rates,
expected rates of prepayment on loans and early withdrawal levels from
certificates of deposit may deviate significantly from those assumed in making
risk calculations.
The Board of Directors and management of the Bank believe that certain
factors afford the Bank the ability to operate successfully despite its exposure
to interest rate risk. The Bank manages its interest rate risk by originating
mortgage loans primarily with adjustable rates and by maintaining capital well
in excess of regulatory requirements and by maintaining a high level of
investments in short-term instruments with maturities of five years or less. See
"THE BUSINESS OF THE BANK - Investment Activities." For the quarter ended
September 30, 1997, the Bank's tangible capital was 17.7% of total assets and
its liquidity ratio was 13.7%.
See "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity, primarily represented by cash and cash
equivalents, is a result of its operating, investing and financing activities.
These activities are summarized below for the three months ended September 30,
1997 and 1996, and the years ended June 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Three months
ended September 30, Years ended June 30,
---------------------- ----------------------------------------
1997 1996 1997 1996 1995
(In thousands)
<S> <C> <C> <C> <C> <C>
Net income $ 213 $ 49 $ 595 $ 770 $ 716
Adjustments to reconcile net income to net cash
from operating activities 333 240 104 80 246
------- ------ ------- ------ ------
Net cash from operating activities 546 289 699 850 962
Net cash from investing activities (2,015) (2,339) (6,093) (3,026) (1,411)
Net cash from financing activities (1,028) 608 4,352 5,340 (15)
------- ------ ------- ------ ------
Net change in cash and cash equivalents (2,497) (1,442) (1,042) 3,164 (464)
Cash and cash equivalents at beginning of period 4,681 5,723 5,723 2,559 3,023
------- ------ ------- ------ ------
Cash and cash equivalents at end of period $ 2,184 $4,281 $ 4,681 $5,723 $2,559
======= ====== ======= ====== ======
</TABLE>
The Bank's principal sources of funds are deposits, loan repayments,
maturities of securities, and other funds provided by operations. The Bank also
has the ability to borrow from the FHLB. While scheduled loan repayments and
maturing investments are relatively predictable, deposit flows and early loan
prepayments are more influenced by interest rates, general economic conditions
and competition. The Bank maintains investments in liquid assets based upon
management's assessment of (1) need for funds, (2) expected deposit flows, (3)
yields available on short-term liquid assets and (4) objectives of the Bank's
asset and liability management program.
OTS regulations presently require the Bank to maintain an average daily
balance of investments in United States Treasury, federal agency obligations and
other investments having maturities of five years or less in an amount equal to
4% of the sum of the Bank's average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. The liquidity requirement
is intended to provide a source of relatively liquid funds upon which the Bank
may rely, if necessary, to fund loan originations, deposit withdrawals or other
short-term funding needs. On September 30, 1997, the Bank had commitments to
originate adjustable-rate real estate mortgage loans totaling $1.3 million. Loan
commitments are generally for 30 days. The Bank considers its liquidity and
capital reserves sufficient to meet its outstanding short- and long-term needs.
The Bank is required by OTS regulations to meet certain minimum capital
requirements, which must be generally as stringent as the requirements
established for banks. Current capital requirements call for tangible capital of
1.5% of adjusted total assets, core capital (which for the Bank consists solely
of tangible capital) of 3.0% of adjusted total assets and risk-based capital
(which for the Bank consists of core capital and general valuation allowances)
of 8% of risk-weighted assets (assets are weighted at percentage levels ranging
from 0% to 100% depending on their relative risk). The OTS has proposed to amend
the core capital requirement so that those Banks that do not have the highest
examination rating and an acceptable level of risk will be required to maintain
core capital of from 4% to 5%, depending on the institution's examination rating
-33-
<PAGE> 39
and overall risk. The Bank does not anticipate that it will be adversely
affected if the core capital requirements are amended as proposed.
The following table summarizes the Bank's regulatory capital
requirements and actual capital at September 30, 1997.
<TABLE>
<CAPTION>
Excess of actual capital
Actual capital Current requirement over current requirement Applicable
--------------------- --------------------- ------------------------ asset
Amount Percent Amount Percent Amount Percent total
------ ------- ------ ------- ------ ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $10,579 17.7% $898 1.5% $9,681 16.2% $59,837
Core capital 10,579 17.7 1,795 3.0 8,784 14.7 59,837
Risk-based capital 10,727 30.2 2,846 8.0 7,881 22.2 35,572
</TABLE>
At September 30, 1997, the Bank had no material commitments for capital
expenditures.
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," was issued by the Financial Accounting Standards Board ("FASB")
in 1996. It revises the accounting for transfers of financial assets, such as
loans and securities, and for distinguishing between sales and secured
borrowings. SFAS No. 125 was originally effective for some transactions in 1997
and others in 1998. SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125," which was issued in December 1996, defers
for one year the effective date of provisions relating to securities lending,
repurchase agreements and other similar transactions. The remaining portions of
SFAS 125 became effective January 1, 1997. SFAS No. 125 did not have a material
impact on the Bank's financial statements.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which is effective for periods ending after December 15, 1997, including interim
periods. SFAS No. 128 simplifies the calculation of earnings per share ("EPS")
by replacing primary EPS with basic EPS. It also requires dual presentation of
basic EPS and diluted EPS for entities with complex capital structures. Basic
EPS includes no dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could share in
earnings such as stock options, warrants or other common stock equivalents. All
prior period EPS data must be restated to conform with the new presentation.
In February 1997, the FASB issued SFAS No. 129, "Disclosures of
Information about Capital Structure." SFAS No. 129 consolidates existing
accounting guidance relating to disclosure about a company's capital structure.
Public companies generally have always been required to make disclosures now
required by SFAS No. 129 and, therefore, SFAS No. 129 should have no impact on
the Bank. SFAS No. 129 is effective for financial statements for periods ending
after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 requires that an enterprise (1) classify items of other
comprehensive income by their nature in a financial statement and (2) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purpose is required.
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<PAGE> 40
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 significantly changes
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about reportable segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 uses a "management approach" to disclose financial and descriptive
information about an enterprise's reportable operating segments which is based
on reporting information the way that management organizes the segments within
the enterprise for making operating decisions and assessing performance. For
many enterprises, the management approach will likely result in more segments
being reported. In addition, SFAS No. 131 requires significantly more
information to be disclosed for each reportable segment than is presently being
reported in annual financial statements and requires that selected information
be reported in interim financial statements. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. Because the
Bank has no non-banking subsidiaries, SFAS No. 131 will not affect the Bank or
the Holding Company.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes included herein have been prepared
in accordance with GAAP. GAAP requires the Bank to measure financial position
and operating results primarily in terms of historic dollars. Changes in the
relative value of money due to inflation or recession are generally not
considered.
In management's opinion, changes in interest rates affect the financial
condition of the Bank to a far greater degree than changes in the inflation
rate. While interest rates are greatly influenced by changes in the inflation
rate, they do not change at the same rate or in the same magnitude as the
inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as on changes in monetary and fiscal
policies.
THE BUSINESS OF THE BANK
GENERAL
The Bank is a mutual savings and loan association which was organized
under Ohio law in 1882 as "The Home Building Loan and Savings Company." In 1937,
the name of the Bank was changed to "The Home Loan & Savings Company," and in
1996, the Bank adopted its present name. As an Ohio savings and loan
association, the Bank is subject to supervision and regulation by the OTS, the
Division and the FDIC. The Bank is a member of the FHLB of Cincinnati, and the
deposits of the Bank are insured up to applicable limits by the FDIC in the
SAIF. See "REGULATION."
The Bank conducts business from its main office and one full-service
branch, both located in Coshocton, Ohio. The principal business of the Bank is
the origination of permanent mortgage loans on one- to four-family residential
real estate located in the Bank's primary market area, Coshocton County, Ohio.
The Bank also originates a limited number of loans for the construction of one-
to four-family residences and permanent mortgage loans secured by nonresidential
real estate in its primary market area. In addition to real estate lending, the
Bank originates commercial loans and various types of consumer credits,
including home improvement loans, education loans, loans secured by savings
accounts and motor vehicles, unsecured loans and credit cards. See "Lending
Activities." For liquidity and interest rate risk management purposes, the Bank
invests in interest-bearing deposits in other financial institutions and U.S.
Treasury Securities. See "Investment Activities." Funds for lending and other
investment activities are obtained primarily from savings deposits, which are
insured up to applicable limits by the FDIC in the SAIF, principal repayments of
loans and maturities of securities. See "Deposits and Borrowings."
Interest on loans and other investments is the Bank's primary source of
income. The Bank's principal expense is interest paid on deposit accounts.
Operating results are dependent to a significant degree on the net interest
income of the Bank, which is the difference between interest earned on loans and
other investments and interest paid on deposits. Like most thrift institutions,
the Bank's interest income and interest expense are significantly affected by
general economic conditions and by the policies of various regulatory
authorities. See "RISK FACTORS - Interest Rate Risk" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset
and Liability Management."
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<PAGE> 41
PRIMARY MARKET AREA
The Bank's primary market area for lending and deposits is Coshocton
County, Ohio. The City of Coshocton, in which the Bank's two offices are
located, is the county seat of Coshocton County. Coshocton is approximately 35
miles north of Zanesville, Ohio, and approximately 75 miles east of Columbus,
Ohio. Major employers of residents of Coshocton County include Ansell Edmont,
Inc., Armco Steel, Coshocton County Memorial Hospital, Clow Water Systems Co.,
American Electric Power, Jordan Industries, Inc., Stone Container Corp, Pretty
Products, Inc., General Electric Company and the Longaberger Company.
Coshocton County has a higher unemployment rate than either Ohio or the
United States. The County's unemployment rate declined, however, from 6.1% in
1995 to 5.3% in 1996, compared to 4.9% for the state and 5.2% for the county,
and is 5.4% through the first nine months of 1997. Coshocton County's population
increased 2.9% from 35,427 residents in 1990 to 36,459 in 1996.
In 1990, Coshocton County's per capita annual income was lower than the
per capita annual income for Ohio, $10,625 compared to $12,788. By 1996, the
County's per capita income had increased 14.8 percent, to $12,193, compared to a
20.2% increase, to $15,376, for Ohio over the same period. During the same
period, median annual household incomes increased from $24,425 to $26,754 for
Coshocton County and from $29,276 to $32,120 for the State of Ohio.
The Bank faces competition in its market area for loan and deposit
customers in Coshocton County from a national bank, a state commercial bank, a
savings and loan association, and branch offices of two large regional banks.
Management of the Bank monitors on a continual basis the lending and deposit
rates being offered by the Bank's competitors and offers competitive rates
within the parameters of the Bank's policies
See "RISK FACTORS - Competition in Primary Market Area; - Concentration
of Credit; and - Performance of Local Economy."
LENDING ACTIVITIES
GENERAL. The Bank's principal lending activity is the origination of
conventional real estate loans secured by one- to four-family residences located
in the Bank's primary market area. The Bank also originates a limited number of
loans for the construction of one- to four-family residences and permanent
mortgage loans secured by nonresidential real estate in its primary market area.
In addition to real estate lending, the Bank originates various types of
consumer credits, including home improvement loans, education loans, loans
secured by savings accounts and motor vehicles, unsecured loans and credit
cards, and loans for commercial business purposes.
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<PAGE> 42
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information regarding the composition of the Bank's loan portfolio at the dates
indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------
At September 30, 1997 1997 1996
---------------------- --------------------- -----------------------
Percent of Percent of Percent of
Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to four-family $36,827 70.00% $35,156 70.64% $32,882 72.63%
Home equity 826 1.57 728 1.46 979 2.16
Nonresidential 3,686 7.01 3,297 6.62 2,971 6.56
Construction and land 901 1.71 1,125 2.26 757 1.67
------- ----- ------- ----- ------- -----
Total real estate loans 42,240 80.29 40,306 80.98 37,589 83.02
Commercial loans 1,703 3.24 1,645 3.31 950 2.10
Consumer loans:
Home improvement 4,151 7.89 3,701 7.44 2,672 5.90
Automobile loans 2,678 5.09 2,506 5.03 2,054 4.54
Loans on deposits 234 0.44 219 0.44 245 0.54
Credit card 403 0.77 347 0.70 331 0.73
Other consumer loans 1,200 2.28 1,047 2.10 1,436 3.17
------- ----- ------- ----- ------- -----
Total consumer loans 8,666 16.47 7,820 15.71 6,738 14.88
------- ----- ------- ----- ------- -----
Total loans 52,609 100.00% 49,771 100.00% 45,277 100.00%
====== ====== ======
Less:
Net deferred loan fees and costs (112) (107) (104)
Loans in process (576) (245) (762)
Allowance for loan losses (148) (119) (117)
------- ------- --------
Net loans $51,773 $49,300 $44,294
======= ======= =======
</TABLE>
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<PAGE> 43
LOAN MATURITY. The following table sets forth certain information as of
June 30, 1997, regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity. Demand loans and other
loans having no stated schedule of repayments or no stated maturity are reported
as due in one year or less. Mortgage loans originated by the Bank generally
include due-on-sale clauses that provide the Bank with the contractual right to
deem the loan immediately due and payable in the event the borrower transfers
the ownership of the property without the Bank's consent. The table does not
include the effects of possible prepayments or scheduled repayments.
<TABLE>
<CAPTION>
Due 2-5 Due more than
During the year ending years 5 years
June 30, 1998 after 6/30/97 after 6/30/97 Total
---------------------- ------------- ------------- -----
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One-to four-family $ 36 $ 902 $34,218 $35,156
Home equity - 60 668 728
Nonresidential - 16 3,281 3,297
Construction and land - 40 1,085 1,125
Commercial loans 1,058 373 214 1,645
Consumer loans 1,740 4,111 1,969 7,820
------- ------- --------- --------
Total $2,834 $5,502 $41,435 $49,771
====== ====== ======= =======
</TABLE>
The next table sets forth the dollar amount of all loans due after June
30, 1998, which have predetermined interest rates and have floating or
adjustable interest rates:
Due after June 30, 1998
-----------------------
(In thousands)
Fixed rate of interest $11,622
Adjustable rate of interest 35,315
$46,937
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending
activity of the Bank is the origination of conventional loans secured by first
mortgages on one- to four-family residences, primarily single-family residences,
located within the Bank's primary market area. At September 30, 1997, the Bank's
one- to four-family residential real estate loans totaled approximately $36.8
million, or 70.00% of total loans.
OTS regulations and Ohio law limit the amount which the Bank may lend
in relationship to the appraised value of the real estate and improvements which
will secure the loan at the time of loan origination. In accordance with such
regulations, the Bank makes loans on one- to four-family residences of up to 80%
of the value of the real estate and improvements thereon (the "LTV") or up to
95% for borrowers who obtain private mortgage insurance.
The Bank currently offers fixed-rate mortgage loans and adjustable-rate
mortgage loans ("ARMs") for terms of up to 25 years. The interest rate
adjustment periods on ARMs are typically one or three years, although most loans
originated by the Bank are one-year ARMs. The maximum interest rate adjustment
on most of the ARMs is 2% on any adjustment date and a total of 6% over the life
of the loan. The interest rate adjustments on one-year and three-year ARMs
presently offered by the Bank are indexed to the weekly average rate on one-year
and three-year U.S. Treasury securities, respectively. Rate adjustments are
computed by adding a stated margin, typically 2.75%, to the index.
HOME EQUITY LOANS. The Bank also makes closed-end home equity loans in
an amount which, when added to the prior indebtedness secured by the real
estate, does not exceed 80% of the estimated value of the real estate. The Bank
also offers home equity loans with a line of credit feature. Home equity loans
are made with adjustable rates of interest. Rate adjustments on home equity
loans are determined by adding 1% for loans under $20,000 or .75% for loans over
$20,000 to the National City Bank prime rate. At September 30, 1997,
approximately $826,000, or 1.57%, of the Bank's portfolio consisted of home
equity loans.
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<PAGE> 44
NONRESIDENTIAL REAL ESTATE. The Bank originates loans for the purchase
of nonresidential real estate. The Bank's nonresidential real estate loans have
fixed or adjustable rates, terms of up to 15 years and LTVs of up to 75%. Rate
adjustments on ARMs secured by nonresidential real estate are determined by
adding 3.75% to the current Treasury Index. Rates are determined for fixed-rate
loans by adding 2% to the then current rate at which fixed-rate residential
loans are offered. Among the properties securing nonresidential real estate
loans are farms, an office building and a gas station, all located in the Bank's
primary market area.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. The Bank has endeavored to reduce such
risk by evaluating the credit history of the borrower, the location of the real
estate, the financial condition of the borrower, the quality and characteristics
of the income stream generated by the property and the appraisals supporting the
property's valuation. At September 30, 1997 the Bank's largest loan secured by
nonresidential real estate was approximately $595,000 and such loan was
performing according to its terms.
At September 30, 1997, approximately $3.7 million, or 7.01%, of the
Bank's total loans were secured by mortgages on nonresidential real estate.
CONSTRUCTION AND LAND LOANS. The Bank originates a limited number of
loans for the construction of single-family residential real estate. During
recent years, all of the Bank's construction loans have been to owners for
construction of their personal residences. Due to a lack of residential
development in the Bank's primary market area, no construction loans have been
made to builders or developers. Construction loans are structured as permanent
loans with adjustable rates of interest and terms of up to 25 years. During the
first six months, while the residence is being constructed, the borrower is
required to pay interest only. Construction loans have LTVs of up to 80%, with
the value of the land counting as part of the owner's equity. At September 30,
1997, the Bank had approximately $341,000, or 1.71% of its total loans, invested
in construction loans.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties because
construction loans are more difficult to evaluate and monitor. Loan funds are
advanced upon the security of the project under construction, which is more
difficult to value before the completion of construction. Moreover, because of
the uncertainties inherent in estimating construction costs, it is relatively
difficult to evaluate accurately the LTVs and the total loan funds required to
complete a project. In the event of a default on a construction loan occurs and
foreclosure follows, the Bank must take control of the project and attempt
either to arrange for completion of construction or dispose of the unfinished
project.
The Bank also originates a limited number of loans secured by land,
some of which is purchased for the construction of single-family houses. The
Bank's land loans are generally adjustable-rate loans for terms up to 15 years
and require an LTV of 75% or less. At September 30, 1997, approximately
$560,000, or 1.1%, of the Bank's total loans were secured by land loans made to
individuals intending to construct and occupy single-family residences on the
properties.
COMMERCIAL LOANS. The Bank makes commercial loans to businesses in its
primary market area. Most commercial loans are made with LTVs of 70-75% and
adjustable interest rates. Adjustments on commercial loans are usually indexed
to the then current prime rate.
At September 30, 1997, the Bank had approximately $1.7 million, or
3.24% of total loans, invested in commercial loans. All of the loans were made
to local businesses and are secured by property such as trucks and equipment.
The Bank intends to increase its commercial lending activity.
Commercial loans are generally deemed to entail significantly greater
risk than real estate lending. The repayment of commercial loans is typically
dependent on the income stream and successful operation of a business, which can
be affected by economic conditions.
CONSUMER LOANS. The Bank originates various types of consumer credit
loans, including home improvement loans, education loans, loans secured by
savings accounts and motor vehicles, unsecured loans and credit cards. Consumer
loans are made at fixed rates of interest for terms of up to ten years.
-39-
<PAGE> 45
The Bank requires a 20% down payment on loans secured by automobiles.
Since June 1993, the Bank has offered Mastercard(R) cards to qualified
customers. The Bank's credit cards are processed by an unaffiliated third party
which receives a fee for such service.
Consumer loans may entail greater credit risk than do residential
mortgage loans. The risk of default on consumer loans increases during periods
of recession, high unemployment, and other adverse economic conditions. Although
the Bank has not had significant delinquencies on consumer loans, no assurance
can be provided that delinquencies will not increase.
At September 30, 1997, the Bank had approximately $8.7 million, or
16.47% of its total loans, invested in consumer loans.
LOAN SOLICITATION AND PROCESSING. Loan originations are generally
obtained from existing customers and members of the local community and from
referrals from real estate brokers, lawyers, accountants, and current and former
customers. The Bank also advertises in the local print media and radio.
In underwriting real estate loans, the Bank typically obtains a credit
report, verification of employment and other documentation concerning the
creditworthiness of the borrower. An appraisal of the fair market value of the
real estate that will be given as security for the loan is prepared by a
certified fee appraiser approved by the Board of Directors. Upon the completion
of the appraisal and the receipt of information on the credit history of the
borrower, the application for a loan is submitted for review in accordance with
the Bank's underwriting guidelines, which are established annually by the Board
of Directors. The Bank's loan officers have authority to approve loans up to
$100,000. The President of the Bank has authority to approve all loans up to
$200,000. The Executive Committee of the Board of Directors may approve loans up
to $500,000 and loans over $500,000 must be approved by the full Board of
Directors.
Borrowers are required to carry satisfactory fire and casualty
insurance and flood insurance, if applicable, and to name the Bank as an insured
mortgagee. The Bank generally obtains an attorney's opinion of title and may
purchase title insurance on larger commercial loans.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications, and estimates of construction costs. The
Bank also evaluates the feasibility of the proposed construction project and the
experience and record of the builder. Once approved, the construction loan is
disbursed in installments based upon periodic inspections of construction
progress.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan, and the value of the collateral, if any. The President of the Bank has
authority to approve consumer loans of up to $200,000. The Bank's loan officers
have the authority to approve secured consumer loans up to $100,000, and
unsecured consumer loans up to $10,000. The Executive Committee has authority to
approve consumer loans up to $500,000. Consumer loans over $500,000 must be
approved by the full Board of Directors.
LOAN ORIGINATIONS, PURCHASES AND SALES. Currently, the Bank does not
originate loans in conformity with secondary market standards and has sold no
loans in recent years. The Bank has, however, established relationships with
entities which purchase loans in the secondary market and the Bank may, in the
future, originate loans in conformity with the standards of the Federal Home
Loan Mortgage Corporation (the "FHLMC") and may sell some of such loans, but
does not currently originate loans in conformity with FHLMC standards. The Bank
has purchased neither participation interests nor any loans in recent years.
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<PAGE> 46
The following table presents the Bank's total loan origination and
repayment activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
Three months ended ----------------------------
September 30, 1997 1997 1996
------------------ ---- ----
(In thousands)
<S> <C> <C> <C>
Loans originated:
One- to four-family $ 2,798 $ 9,417 $ 8,720
Home equity 286 639 868
Nonresidential 401 578 2,367
Construction and land 425 1,026 956
Commercial 394 1,511 610
Consumer 1,998 8,146 7,190
-------- ---------- -----------
Total loans originated 6,302 21,317 20,771
Loans purchased - - -
Loans sold - - -
Principal repayments (3,464) (16,823) (15,403)
Increase (decrease) in other items, net (1) 365 (512) 170
--------- ---------- -----------
Net increase $ 2,473 $ 5,006 $ 5,138
======= ======== =========
<FN>
- ----------------------------
(1) Consists of net deferred loan fees and costs, loans in process and
allowance for loan losses.
</TABLE>
At September 30, 1997, the Bank had $1.3 million of outstanding
commitments to originate loans $1.6 million dollars available to borrowers under
lines of credit and $689.000 available to customers under credit card
arrangements. At September 30, 1997, the Bank had $575,000 in undisbursed funds
related to construction loans.
LOANS TO ONE BORROWER LIMITS. OTS regulations generally limit the
aggregate amount that a savings association may lend to any one borrower to an
amount equal to 15% of the Bank's unimpaired capital and unimpaired surplus (the
"Lending Limit Capital"). A savings association may lend to one borrower an
additional amount not to exceed 10% of the Bank's Lending Limit Capital if the
additional amount is fully secured by certain forms of "readily marketable
collateral." Real estate is not considered "readily marketable collateral." In
applying this limit, the regulations require that loans to certain related or
affiliated borrowers be aggregated. An exception to this limit permits loans of
any type to one borrower of up to $500,000.
Based on such limits, the Bank was able to lend approximately $1.6
million to one borrower at September 30, 1997. The largest amount the Bank had
outstanding to one borrower at September 30, 1997, was $874,364, which consisted
of nine loans, secured by a commercial property, equipment and borrowers
residences. At September 30, 1997, such loans were performing in accordance with
their terms.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. The Bank
attempts to maintain a high level of asset quality through sound underwriting
policies and aggressive collection practices.
To discourage late payments, the Bank charges a late fee of 5% of the
payment amount after 10 days and the borrower is sent a delinquency notice. The
Bank also utilizes personalized letters and telephone calls from Bank personnel
to collect payments in a timely manner. When a loan becomes 90 days delinquent,
the loan is generally referred to an attorney for foreclosure, unless the Bank
has reason to believe that repayment will be made in a reasonable period of
time.
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<PAGE> 47
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
At September 30, 1997 1997 1996
---------------------------- ---------------------------- -----------------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ ------ ----- ------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days 37 $902 1.71% 21 $532 1.07% 18 $252 0.56%
60-89 days 4 30 0.06 11 85 0.17 10 120 0.27
90 days or over 8 61 0.12 7 33 0.07 5 88 0.19
-- ---- ---- -- ---- ---- -- ---- ----
Total delinquent loans 49 $993 1.89% 39 $650 1.31% 33 $460 1.02%
== ==== ==== == ==== ==== == ==== ====
</TABLE>
Nonperforming assets include nonaccruing loans, accruing loans which
are delinquent 90 days or more, real estate acquired by foreclosure or by
deed-in-lieu thereof, in-substance foreclosures and repossessed assets.
Loans are reviewed on a monthly basis and are placed on nonaccrual
status when collection in full is considered doubtful by management. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent cash payments are generally applied to
interest income unless, in the opinion of management, the collection of
principal and interest is doubtful. In those cases, subsequent cash payments
would be applied to principal. None of the Bank's nonperforming loans at
September 30, 1997, were on nonaccrual status.
The following table sets forth information with respect to the accrual
and nonaccrual status of the Bank's loans and other nonperforming assets at the
dates indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------------
At September 30, 1997 1997 1996
--------------------- ------ -----
(Dollars in thousands)
<S> <C> <C> <C>
Total nonaccrual loans $ - $ - $ -
Accruing loans delinquent 90 days or more 61 33 88
----- ----- -----
Total nonperforming loans 61 33 88
Real estate owned - - -
----- ----- -----
Total nonperforming assets $ 61 $ 33 $ 88
===== ===== =====
Allowance for loan losses $148 $119 $117
Nonperforming assets as a percent of total assets 0.10% 0.05% 0.16%
Nonperforming loans as a percent of total loans 0.12% 0.07% 0.20%
Allowance for loan losses as a percent of
nonperforming loans 242.99% 361.27% 133.54%
</TABLE>
Real estate acquired in settlement of loans is classified separately on
the balance sheet at fair value as of the date of acquisition. Prior to
foreclosure, the loan is written down to the value of the underlying collateral
by a charge to the allowance for loan losses, if necessary. Any subsequent
write-downs are charged against operating expenses. Operating expenses of such
properties, net of related income or loss on disposition, are included in other
expenses. At September 30, 1997, the Bank had no real estate acquired in
settlement of loans.
The Bank classifies its assets on a regular basis in accordance with
federal regulations. Problem assets are classified as "substandard," "doubtful"
or "loss." "Substandard" assets have one or more defined weaknesses and are
characterized by the distinct possibility that the Bank will sustain some loss
if the deficiencies are not corrected. "Doubtful" assets have the same
weaknesses as "substandard" assets, with the additional characteristics that (i)
the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, questionable and (ii) there is a high
possibility of loss. An asset classified "loss" is considered uncollectible and
of such little value that its continuance as an
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<PAGE> 48
asset of the Bank is not warranted. In addition, federal regulations also
contain a "special mention" category, consisting of assets which do not
currently expose an institution to a different degree of risk to warrant
classification but which possess credit deficiencies or potential weaknesses
deserving management's close attention.
The aggregate amounts of the Bank's classified assets at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At September 30, At June 30,
------------------------ -------------------------
1997 1996 1997 1996
------ ------ ------ ----
(In thousands)
<S> <C> <C> <C> <C>
Classified assets:
Substandard $61 $101 $33 $88
Doubtful - - - -
Loss - - - -
--- ---- --- ---
Total classified assets $61 $101 $33 $88
=== ==== === ===
</TABLE>
The Bank analyzes each classified asset on a quarterly basis to
determine whether changes in the classifications are appropriate under the
circumstances. Such analysis focuses on a variety of factors, including the
amount of any delinquency and the reasons for the delinquency, if any, the use
of the real estate securing the loan, the status of the borrower, and the
appraised value of the real estate. As such factors change, the classification
of the asset will change accordingly. At September 30, 1997, the Bank had
classified $61,000 of assets as substandard and no assets as special mention,
doubtful or loss.
The Bank establishes a general allowance for loan losses for any loan
classified as substandard or doubtful. If an asset, or portion thereof, is
classified as loss, the Bank establishes a specific allowance for loss in the
amount of 100% of the portion of the asset classified loss or charges off the
portion of any real estate loan deemed to be uncollectible.
ALLOWANCE FOR LOAN LOSSES. Management reviews on a quarterly basis the
allowance for loan losses as it relates to a number of relevant factors,
including, but not limited to, growth and changes in the composition of the loan
portfolio, trends in the level of delinquent and problem loans, current and
anticipated economic conditions in the primary lending area, past loss
experience, and possible losses arising from specific problem assets.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments and net income could be significantly affected if
circumstances differ substantially from the assumptions used in making the final
determination. In addition, the Bank's determination as to the amount of its
allowance for loan losses is subject to review by the OTS, as part of its
examination process, which may result in the establishment of an additional
allowance based upon the judgment of the OTS after a review of the information
available at the time of the OTS examination.
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<PAGE> 49
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated:
<TABLE>
<CAPTION>
Three months ended
September 30, Year ended June 30,
--------------------- ------------------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $119 $117 $117 $117 $121
Charge-offs (1) - (4) - (7)
Recoveries - - - - 1
---- ---- ---- ---- ----
Net (charge-offs) recoveries (1) - (4) - (6)
Provision for losses on loans 30 2 6 - 2
---- ---- ---- ---- ----
Balance at end of period $148 $119 $119 $117 $117
==== ==== ==== ==== ====
Ratio of net (charge-offs) recoveries
to average gross loans outstanding
during the period, net of loans in
process and deferred loan fees and costs (0.01)% - (0.01)% - (0.02)%
Ratio of allowance for loan losses
to gross loans, net of loans in process
and deferred loan fees and costs 0.29% 0.26% 0.24% 0.26% 0.30%
</TABLE>
The following table sets forth the allocation of the allowance for loan
losses by category. The allocations are based on management's assessment of the
risk characteristics of each of the components of the total loan portfolio and
is subject to changes as and when the risk factors of each such component
changes. The allocation is not indicative of either the specific amounts or the
loan categories in which future charge-offs may be taken, nor should it be taken
as an indicator of future loss trends. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------
At September 30, 1997 1997 1996
----------------------------- ------------------------------- --------------------------------
Percent of loans in Percent of loans in Percent of loans in
each category each category each category
Amount to total loans Amount to total loans Amount to total loans
------ ------------------- ------ -------------------- ------ --------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans $ 94 80.29% $67 80.98% $ 75 83.02%
Commercial loans 14 3.24 14 3.31 9 2.10
Consumer loans 40 16.47 38 15.71 33 14.88
---- ------ ---- ------ ---- ------
Total $148 100.00% $119 100.00% $117 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
INVESTMENT ACTIVITIES
GENERAL. Federal regulations and Ohio law permit the Bank to invest in
various types of investment securities, including interest-bearing deposits in
other financial institutions, U.S. Treasury and agency obligations,
mortgage-backed securities, and certain other specified investments. The Board
of Directors of the Bank has adopted an investment policy which authorizes
management to make investments in U.S. Treasury obligations, U.S. agency and
federally-sponsored corporation obligations, municipal obligations, bankers'
acceptances, mutual funds, federal funds and term deposits. The Bank's
investment policy is designed primarily to provide and maintain liquidity within
regulatory guidelines, to maintain a balance of high quality investments to
minimize risk, and to maximize return without sacrificing liquidity and safety.
See "REGULATION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Analysis of Financial Condition; and -
Liquidity and Capital Resources."
As of September 30, 1997, the Bank's investment portfolio was comprised
of FHLB stock and U.S. Treasury securities with an aggregate market value of
$4.9 million. The Bank's securities at September 30, 1997, did not include
securities of any issuer with an aggregate book value in excess of 10% of the
Bank's equity, excluding those issued by the U. S. Government.
-44-
<PAGE> 50
The following table sets forth the composition of the Bank's
interest-bearing deposits and investment securities portfolio, including those
designated as available for sale, at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
------------------------------------------
At September 30, 1997 1997
-------------------------------------------- ------------------------------------------
Carrying % of Fair % of Carrying % of Fair % of
value total value total value total value total
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Interest-bearing checking $ 223 4.13% $ 223 4.13% $ 165 1.98% $ 165 1.98%
Interest-bearing deposits in
other financial institutions 39 0.72 39 0.72 39 0.47 39 0.47
Overnight deposits - - - - 1,250 15.02 1,250 15.02
Federal funds 250 4.63 250 4.63 1,500 18.02 1,500 18.02
------ ------ ------ ------ ------ ------ ------ ------
Total interest-bearing deposits 512 9.48 512 9.48 2,954 35.49 2,954 35.49
Investment securities:
U.S. Treasury securities,
available for sale 4,518 83.62 4,518 83.62 5,004 60.11 5,004 60.11
U.S. Treasury securities, held
to maturity - - - - - - - -
FHLB stock 373 6.90 373 6.90 366 4.40 366 4.40
------ ------ ------ ------ ------ ------ ------ ------
Total investment securities 4,891 90.52 4,891 90.52 5,370 64.51 5,370 64.51
------ ------ ------ ------ ------ ------ ------ ------
Total $5,403 100.00% $5,403 100.00% $8,324 100.00% $8,324 100.00%
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
At June 30,
--------------------------------------------
1996
--------------------------------------------
Carrying % of Fair % of
value total value total
------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-bearing deposits:
Interest-bearing checking $ 573 7.21% $ 573 7.20%
Interest-bearing deposits in
other financial institutions 41 0.52 41 0.52
Overnight deposits 3,000 37.74 3,000 37.72
Federal funds - - - -
------ ------ ------ ------
Total interest-bearing deposits 3,614 45.47 3,614 45.44
Investment securities:
U.S. Treasury securities,
available for sale 1,743 21.91 1,743 21.91
U.S. Treasury securities, held
to maturity 2,252 28.33 2,256 28.36
FHLB stock 341 4.29 341 4.29
Total investment securities 4,336 54.53 4,340 54.56
------ ------ ------ ------
Total $7,950 100.00% $7,954 100.00%
====== ====== ====== ======
</TABLE>
-45-
<PAGE> 51
The maturities of the Bank's interest-bearing deposits and securities
at September 30, 1997, excluding FHLB stock, are indicated in the following
table:
<TABLE>
<CAPTION>
At September 30,1997
-------------------------------------------------------------------------------------------
After one through
One year or less five years After five years Total
-------------------- ----------------- ------------------ -----------------------------
Carrying Average Carrying Average Carrying Average Carrying Market Weighted
value yield value yield value yield value value average yield
------ ------- -------- ------- ------- ------- -------- ------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Interest-bearing demand deposits $ 223 7.01% $ - -% $ - -% $ 223 $ 223 7.01%
Interest-bearing deposits in
other financial institutions 39 6.00 - - - - - 39 6.00
Federal funds 250 6.44 - - - - 250 250 6.44
------ ---- ------ ---- ----- ---- ------ ------ ----
Total interest-bearing deposits 512 6.65 - - - - 512 512 6.65
U.S. Treasury securities, available
for sale 2,256 5.76 2,262 6.33 - - 4,518 4,518 6.04
Total interest earning assets $2,768 5.93% $2,262 6.33% $ - -% $5,030 $5,030 6.11%
====== ==== ====== ==== ===== ====== ====== ====
</TABLE>
The maturities of the Bank's interest-bearing deposits and securities
at June 30, 1997, excluding FHLB stock, are indicated in the following table:
<TABLE>
<CAPTION>
At June 30, 1997
---------------------------------------------------------------------------------------------
After one through
One year or less five years After five years Total
-------------------- ----------------- ------------------ --------------------------------
Carrying Average Carrying Average Carrying Average Carrying Market Weighted
value yield value yield value yield value value average yield
------- ------ -------- ----- -------- ------- ------ ------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Interest-bearing demand deposits $ 165 6.25% $ - -% $ - -% $ 165 $ 165 6.25%
Interest-bearing deposits in
other financial institutions 39 6.00 - - - - 39 39 6.00
Overnight deposits 1,250 6.20 - - - - 1,250 1,250 6.20
Federal funds 1,500 5.94 - - - - 1,500 1,500 5.94
------ ---- ------ ---- ------- ----- ------ ------ ----
Total interest-bearing deposits 2,954 6.07 - - - - 2,954 2,954 6.07
U.S. Treasury securities,
available for sale 1,500 5.91 3,504 6.08 - - 5,004 5,004 6.03
Total interest earning assets $4,454 6.01% $3,504 6.08% $ - -% $7,958 $7,958 6.04%
====== ==== ====== ==== ======= ===== ====== ====== ====
</TABLE>
-46-
<PAGE> 52
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of the
Bank's funds for use in lending and other investment activities. In addition to
deposits, the Bank derives funds from interest payments and principal repayments
on loans and income on earning assets. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." Loan payments are a
relatively stable source of funds, while deposit inflows and outflows fluctuate
in response to general interest rates and money market conditions. The Bank may
also borrow from the FHLB as a source of funds.
DEPOSITS. Deposits are attracted principally from within the Bank's
primary market area through the offering of a selection of deposit instruments,
including regular passbook savings accounts, demand deposits, NOW accounts,
money market accounts, and certificates of deposit. Interest rates paid,
maturity terms, service fees, and withdrawal penalties for the various types of
accounts are monitored weekly by the Bank's President. The Bank does not use
brokers to attract deposits. The amount of deposits from outside the Bank's
primary market area is not significant.
The following table sets forth the dollar amount of deposits in the
various types of accounts offered by the Bank at the dates indicated:
<TABLE>
<CAPTION>
At September 30, At June 30,
---------------------- ----------------------------------------------------
1997 1997 1996
---------------------- ---------------------- ----------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Non-interest bearing demand
deposit accounts $ 877 1.82% $ 1,069 2.17% $ 873 1.95%
NOW accounts(1) 5,576 11.57 5,800 11.78 5,275 11.75
Savings accounts(2) 11,583 24.03 11,295 22.94 12,137 27.04
Money market accounts(3) 1,790 3.71 1,850 3.76 2,247 5.01
-------- ------ ------- ------ ------- ------
Total transaction accounts 19,826 41.13 20,014 40.65 20,532 45.74
Certificates of deposit:
4.00% or less 74 0.15 63 0.13 32 0.07
4.01% - 6.00% 21,748 45.11 22,866 46.44 20,957 46.69
6.01% - 8.00% 6,260 12.99 5,992 12.17 3,063 6.82
Over 8.01% 300 0.62 300 0.61 300 0.67
-------- ------ ------- ------ ------- ------
Total certificates of
deposit(4) 28,382 58.87 29,221 59.35 24,352 54.26
-------- ------ ------- ------ ------- ------
Total deposits(5) $ 48,208 100.00% $49,235 100.00% $44,884 100.00%
======== ====== ======= ====== ======= ======
- -----------------------------
<FN>
(1) The weighted average rate on NOW accounts was 2.02%, 2.02%, and 2.02%
at September 30, 1997, and June 30, 1997 and 1996, respectively.
(2) The weighted average rate on savings accounts was 2.49%, 2.50% and
2.50% at September 30, 1997, and June 30, 1997 and 1996, respectively.
(3) The weighted average rate on money market accounts was 2.63%, 2.63% and
2.64% at September 30, 1997, and June 30, 1997 and 1996, respectively.
(4) The weighted average rate on all certificates of deposit was 5.93%,
5.90% and 5.65% at September 30, 1997, and June 30, 1997 and 1996,
respectively.
(5) The decrease of 2.1% in total deposits from June 30, 1997, to September
30, 1997, was the result of the maturity of a large public fund
deposit, which was not renewed. Management does not expect the decrease
in deposits to continue in future periods.
</TABLE>
-47-
<PAGE> 53
The following table shows rate and maturity information for the Bank's
certificates of deposit at September 30, 1997:
<TABLE>
<CAPTION>
At September 30, 1997
------------------------------------------------------
Over
Up to 1 year to Over
Rate one year 2 years 2 years Total
---- -------- --------- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
4.00% or less $ 43 $ 31 $ - $ 74
4.01% to 6.00% 15,432 4,919 1,397 21,748
6.01% to 8.00% 591 2,808 2,861 6,260
Over 8.01% - - 300 300
------- ------ ------ -------
Total certificates of deposit $16,066 $7,758 $4,558 $28,382
======= ====== ====== =======
</TABLE>
At September 30, 1997, approximately $16.1 million of the Bank's
certificates of deposit mature within one year. Based on past experience and the
Bank's prevailing pricing strategies, management believes that a substantial
percentage of such certificates will be renewed with the Bank at maturity. If,
however, the Bank is unable to renew the maturing certificates for any reason,
borrowings of up to $22.3 million are available from the FHLB of Cincinnati. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Liquidity and Capital Resources."
The following table presents the amount of the Bank's certificates of
deposit of $100,000 or more by the time remaining until maturity at September
30, 1997:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $ -
Over 3 months to 6 months 200
Over 6 months to 12 months 101
Over 12 months 821
-------
Total $1,122
</TABLE>
Management believes that a substantial percentage of the above certificates will
be renewed with the Bank at maturity.
The following table sets forth the Bank's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
Three months ended ------------------------------
September 30, 1997 1997 1996
------------------ ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $49,235 $44,884 $ 39,543
Deposits 31,285 119,082 124,936
Withdrawals (32,671) (116,055) (120,672)
------- -------- --------
Net deposits before interest
credited 47,849 47,911 43,807
Interest credited 359 1,324 1,077
------- -------- --------
Ending balance $48,208 $49,235 $ 44,884
======= ======= ========
Net increase (decrease) $(1,027) $ 4,351 $ 5,341
======= ======== =========
Percent increase (decrease) (2.09)% 9.69% 13.51%
===== ==== =====
</TABLE>
-48-
<PAGE> 54
BORROWINGS. The FHLB system functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. See "REGULATION - Federal Home Loan Banks." As a member in good
standing of the FHLB of Cincinnati, the Bank is authorized to apply for advances
from the FHLB of Cincinnati, provided certain standards of creditworthiness have
been met. Under current regulations, an association must meet certain
qualifications to be eligible for FHLB advances. The extent to which an
association is eligible for such advances will depend upon whether it meets the
Qualified Thrift Lender (the "QTL") test. See "REGULATION - Office of Thrift
Supervision -- Qualified Thrift Lender Test." If an association meets the QTL
test, the Bank will be eligible for 100% of the advances it would otherwise be
eligible to receive. If an association does not meet the QTL test, the
association will be eligible for such advances only to the extent it holds
specified QTL test assets. At September 30, 1997, the Bank was in compliance
with the QTL test, but had no outstanding advances from the FHLB.
COMPETITION
The Bank faces competition for deposits and loans from other savings
and loan associations and banks in the Bank's primary market area. The primary
factors in competition for deposits are customer service, convenience of office
location and interest rates. The Bank competes for loan originations primarily
through the interest rates and loan fees it charges and through the efficiency
and quality of services it provides to borrowers. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels and other factors which
are not readily predictable. The Bank does not offer all of the products and
services offered by some of its competitors, particularly commercial banks.
PROPERTIES
The following table sets forth certain information at September 30,
1997, regarding the properties on which the main office and the branch office of
the Bank are located:
<TABLE>
<CAPTION>
Owned or Date Net book
Location leased acquired value Deposits
- -------- ------ -------- ----- --------
(In thousands)
<S> <C> <C> <C> <C>
401 Main Street Owned 1924 $176,635 $39,973
Coshocton, Ohio 43812-1580
590 Walnut Street Owned 1985 $187,155 $ 8,235
Coshocton, Ohio 43812-1632
</TABLE>
EMPLOYEES
At September 30, 1997, the Bank had 19 full-time equivalent employees
and three part-time employees.
LEGAL PROCEEDINGS
The Bank is not presently involved in any material legal proceedings.
From time to time, the Bank is a party to legal proceedings incidental to its
business to enforce its security interest in collateral pledged to secure loans
made by the Bank.
YEAR 2000 CONSIDERATIONS
The Bank's lending and deposit activities are almost entirely dependent
upon computer systems which process and record transactions, although the Bank
can effectively operate with manual systems for brief periods when its
electronic systems malfunction or cannot be accessed. The Bank utilizes the
services of a nationally-recognized data processing service bureau which
specializes in data processing for financial institutions. In addition to its
basic operating activities, the Bank's facilities and infrastructure, such as
security systems and communications equipment, are dependent to varying degrees
upon computer systems.
-49-
<PAGE> 55
The Bank is aware of the potential year- 2000 related problems that may
affect the computers which control or operate the Bank's operating systems,
facilities and infrastructure. In 1997, the Bank began the process of
identifying any year-2000 related problems that may be experienced by its
computer-operated or -dependent systems. The Bank has contacted the companies
that supply or service the Bank's computer-operated or -dependent systems to
obtain confirmation that each such system that is material to the operations of
the Bank is either currently year-2000 compliant or is expected to be year-2000
compliant. With respect to systems that cannot presently be confirmed as
year-2000 compliant, the Bank will continue to work with the appropriate
supplier or servicer to ensure that all such systems will be rendered compliant
in a timely manner, with minimal expense to the Bank or disruption of the Bank's
operations.
In addition to possible expense related to its own systems, the Bank
could incur losses if loan payments are delayed due to year-2000 problems
affecting any of the Bank's significant borrowers or impairing the payroll
systems of large employers in the Bank's primary market area. Because the Bank's
loan portfolio is highly diversified with regard to individual borrowers and
types of businesses and the Bank's primary market area is not significantly
dependent upon one employer or industry, the Bank does not expect any
significant or prolonged Year 2000 related difficulties that will affect net
earnings or cash flow. See " - Loans to One Borrower Limits," and "- Primary
Market Area." At this time, however, the expense that may be incurred by the
Bank in connection with Year 2000 issues cannot be determined. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Year
2000 Issue."
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
THE HOLDING COMPANY. The Board of Directors of the Holding Company
consists of five members. All of the directors of the Holding Company were
initially elected to the Board of Directors at the time the Holding Company was
formed in 1997. Each director is elected for a one-year term and until his or
her successor is elected or until his or her earlier resignation, removal from
office or death. The following persons are officers of the Holding Company:
Robert C. Hamilton, President and Chairman of the Board; and Preston W. Bair,
Secretary and Treasurer.
THE BANK. The Amended Constitution of the Bank provides for a Board of
Directors consisting of not less than five directors. The Board of Directors of
the Bank currently consists of five directors. Each director serves for a
three-year term. The Board of Directors met 12 times during the fiscal year
ended June 30, 1997, for regular and special meetings. No director attended
fewer than 75% of the aggregate of such meetings and all meetings of the
committees of which such director was a member.
The following table presents certain information with respect to the
present directors of the Bank, each of whom is also a director of the Holding
Company, and the executive officers of the Bank:
<TABLE>
<CAPTION>
Year of
Position(s) with commencement Term
Name Age (1) the Bank of directorship expires
- ---- --- ---------------- --------------- -------
<S> <C> <C> <C> <C>
Neal J. Caldwell 53 Director 1989 1998
Charles H. Durmis 34 Director 1996 1999
Robert C. Hamilton 54 Director and President 1982 1998
Robert D. Mauch 46 Director and Chairman 1989 2000
Douglas L. Randles 52 Director 1992 2000
Preston W. Bair 34 Secretary and Treasurer - -
- ----------------------------
<FN>
(1) As of September 30, 1997
</TABLE>
NEAL J. CALDWELL. Mr. Caldwell has practiced veterinary medicine in
Coshocton, Ohio, since 1972 and is an owner and operator of Coshocton Veterinary
Clinic.
-50-
<PAGE> 56
CHARLES H. DURMIS. Since 1994, Dr. Durmis has practiced general surgery
and has maintained an office in Coshocton, Ohio. From 1990 to 1994, Dr. Durmis
was a resident in general surgery at Brentwood Hospital in Warrensville Heights,
Ohio.
ROBERT C. HAMILTON. Mr. Hamilton was employed by the Bank in 1981 as
Secretary, Treasurer and managing officer and has served as the President of the
Bank since 1983. Mr. Hamilton has worked in banking for the past 37 years.
ROBERT D. MAUCH. Mr. Mauch, a Certified Public Accountant, has provided
accounting, payroll and tax counseling through Robert D. Mauch, CPA, Inc.,
located in Coshocton, Ohio, since 1988.
DOUGLAS L. RANDLES. Mr. Randles is the President of L.W. Randles
Cheese, Inc., located in Warsaw, Ohio.
PRESTON W. BAIR. Mr. Bair has served as Secretary and Treasurer of the
Bank since 1994. Prior to 1994, Mr. Bair, a Certified Public Accountant, was a
shareholder of Brott Mardis & Co., located in Akron, Ohio.
COMMITTEES OF DIRECTORS
The Board of Directors of the Bank has Executive, Compensation, Audit,
and Proxy Committees. The Board of Directors has no separate nominating
committee.
The Executive Committee is comprised of Mr. Caldwell, Mr. Hamilton and
Mr. Mauch. The function of the Executive Committee is to consider matters of
concern to the Bank and to make recommendations thereon to the full Board of
Directors. The Executive Committee met 12 times during the year ended June 30,
1997.
The Compensation Committee is comprised of Mr. Caldwell, Mr. Hamilton
and Mr. Mauch. The function of the Compensation Committee is to determine
compensation for the Bank's employees and to make decisions regarding employee
benefits and related matters. Mr. Hamilton does not participate in any
discussions of the Compensation Committee concerning his own compensation. The
Compensation Committee met one time during the year ended June 30, 1997.
The Audit Committee is comprised of Mr. Caldwell, Mr. Mauch and Mr.
Randles. The Audit Committee reviews audit reports and related matters to ensure
effective compliance with regulatory and internal policies and procedures. The
Audit Committee met one time during the year ended June 30, 1997.
The Proxy Committee is comprised of Mr. Caldwell, Mr. Hamilton and Mr.
Randles. The Proxy Committee serves as the inspectors of election at the Bank's
annual meeting of members.
The Board of Directors of the Holding Company does not currently have
any committees, but will establish appropriate committees upon the completion of
the Conversion.
COMPENSATION
Each director of the Bank currently receives a retainer of $10,200 per
year and $450 per meeting of the full Board attended. The Chairman receives an
additional retainer of $3,300 per year. Members of the Executive Committee
receive $250 per Executive Committee meeting attended. Director compensation is
approved by the members of the Bank at the annual meeting of members.
The following table presents certain information regarding the annual
compensation received by Mr. Hamilton during the fiscal year ended June 30,
1997. No other executive officer of the Bank received annual compensation in an
amount equal to or greater than $100,000.
-51-
<PAGE> 57
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
--------------------------------
Annual compensation
- ---------------------------------------------------------------------------
Fiscal
Name and principal position Year Salary Bonus
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert C. Hamilton 1997 $145,500 (1) $103,612 (2)
President
- ---------------------------------------------------------------------------
<FN>
(1) Does not include amounts attributable to miscellaneous benefits. The
cost to the Bank of providing such miscellaneous benefits was less than
10% of Mr. Hamilton's total salary and bonus.
(2) Includes $38,000 which the Bank accrued for payment to Mr. Hamilton
pursuant to the Equity Appreciation Agreement (hereinafter defined) and
$65,612 paid pursuant to the Profit Sharing Plan (hereafter defined).
</TABLE>
PENSION PLAN
The Bank maintains a defined benefit pension plan administered by
trustees of the Financial Institutions Retirement Fund (the "Pension Plan").
Employees become eligible to participate in the Pension Plan following one year
of service and attainment of age 21. Participants must accrue 1,000 hours of
service in each calendar year in order to accrue benefits for that year.
Participants become 100% vested upon completion of five years of service or upon
reaching age 65. Upon retirement, vested participants are entitled to annual
benefits equal to 3% multiplied by the number of years for which the employee
was a participant in the Pension Plan, not to exceed 25 years, multiplied by the
average of the highest five consecutive years of the participant's annual
salary.
The Bank's cost related to the Pension Plan is determined annually
according to actuarial computations. The Bank recognizes pension expense equal
to contributions made to the Pension Plan. Contributions of $84,552 and $87,561
were made for the years ended June 30, 1997 and 1996.
The following table indicates the annual retirement benefit that would
be payable under the Pension Plan upon retirement at age 65 to a participant
electing to receive his retirement benefit in the standard form of benefit:
<TABLE>
<CAPTION>
Average compensation Years of credited service
(highest 5 years) 5 10 15 20 25
-------------------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 20,000 $ 3,000 $ 6,000 $ 9,000 $ 12,000 $ 15,000
40,000 6,000 12,000 18,000 24,000 30,000
60,000 9,000 18,000 27,000 36,000 45,000
80,000 12,000 24,000 36,000 48,000 60,000
100,000 15,000 30,000 45,000 60,000 75,000
150,000 22,500 45,000 67,500 90,000 112,500
200,000 30,000 60,000 90,000 120,000 150,000
</TABLE>
Mr. Hamilton has 16 years of credited service under the Pension Plan.
The base salary and bonus for Mr. Hamilton for 1997 are reported above in the
Summary Compensation Table.
PROFIT SHARING PLAN
The Bank has a non-qualified profit sharing plan covering officers of
the Bank (the "Profit Sharing Plan"). Prior to July 1, 1996, the Bank's
contribution to the Profit Sharing Plan was based on the Bank's return on
average assets for the year then ended. Effective July 1, 1996, up to 10% of
pretax income, excluding nonrecurring items and extraordinary gains or losses
not related to operations and before deductions of awards under the Profit
Sharing Plan and the Deferred Compensation Agreement (hereafter defined) will be
contributed by the Bank annually. The total contribution is allocated to the
Bank's officers based upon percentages established by the Board of Directors. No
incentive awards are payable unless a
-52-
<PAGE> 58
minimum return on assets is exceeded. The Bank's expense related to the Profit
Sharing Plan amounted to $128,037, $104,000 and $90,990 for the years ended June
30, 1997, 1996 and 1995. For the year ended June 30, 1997, $65,612, was paid to
Mr. Hamilton pursuant to the Profit Sharing Plan. See " - Summary Compensation
Table."
EQUITY APPRECIATION AGREEMENT
In 1994, the Bank entered into an agreement with Mr. Hamilton (the
"Equity Appreciation Agreement") which provides for the payment to Mr. Hamilton
of an amount equal to 5% of the Bank's increase in equity over a five-year
period ending June 30, 1998. At June 30, 1997 and 1996, the Bank had accrued
$146,000 and $108,000 related to the Equity Appreciation Agreement. Expense
recorded relating to the Equity Appreciation Agreement was $38,000 and $36,000
for the years ended June 30, 1997 and 1996, respectively.
The Conversion will accelerate Mr. Hamilton's right to payment under
the Equity Appreciation Agreement. It is anticipated that the amount to be paid
to Mr. Hamilton pursuant to the Equity Appreciation Agreement will total
approximately $175,000. The actual amount will depend, however, on changes in
the Bank's financial condition which occur between September 30, 1997, and the
consummation of the Conversion.
STOCK BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. The Holding Company intends to establish
the ESOP for the benefit of employees of the Holding Company and its
subsidiaries, including the Bank, who are age 21 or older and who have completed
at least one-year of service with the Holding Company and its subsidiaries. The
Board of Directors of the Holding Company believes that the ESOP will be in the
best interests of the Holding Company and its shareholders.
The ESOP trust intends to borrow funds from the Holding Company with
which to acquire up to 8% of the Common Shares sold in connection with the
Conversion. Such loan will be secured by the Common Shares purchased with the
proceeds from the loan and will be repaid by the ESOP over a period of
approximately 15 years with discretionary contributions to the ESOP and earnings
on ESOP assets. The interest rate paid on the loan will be the applicable
federal rate published periodically by the IRS, which is currently _____%.
Common Shares purchased with such loan proceeds will be held in a suspense
account for allocation among ESOP participants as the loan is repaid.
The amount of cash or other assets that can be contributed to the ESOP
each year is limited by certain IRS regulations. The Bank intends to make the
maximum contribution to the ESOP permitted by such regulations, which could
result in repayment of the ESOP loan in fewer than ten years. A shorter
repayment period could result in increased compensation expense during the years
in which payments are made on the ESOP loan. See "PRO FORMA DATA."
Contributions to the ESOP and shares released from the suspense account
will be allocated pro rata to participants on the basis of compensation. Except
for participants who retire, become disabled, or die during the plan year, all
other participants must have completed at least 1,000 hours of service during a
plan year in order to receive an allocation. Benefits become fully vested after
five years of service. Vesting will be accelerated upon retirement or at age 65,
death, disability, termination of the ESOP, or change in control of the Holding
Company or the Bank. Shares allocated to the account of a participant whose
employment by the Bank terminates prior to such participant having satisfied the
vesting requirement will be forfeited. Forfeitures will be reallocated among
remaining participating employees. Benefits may be paid either in the Holding
Company common shares or in cash. Benefits may be payable upon retirement,
death, disability, or separation from service. Benefits payable under the ESOP
cannot be estimated.
A committee appointed by the Board of Directors of the Holding Company
will administer the ESOP. The Common Shares and other ESOP funds will be held by
a trustee selected and appointed by the Holding Company (the "ESOP Trustee").
The ESOP Committee may instruct the ESOP Trustee regarding investments of funds
contributed to the ESOP. The ESOP Trustee must vote all common shares of the
Holding Company held in the ESOP that are allocated to the accounts of ESOP
participants in accordance with the instructions of such participants. Common
shares held by the ESOP that are not allocated to participants' accounts and
allocated shares for which voting instructions are not received will be voted by
the ESOP Trustee in its sole discretion.
The tax-qualified status of the ESOP and its purchase of the Common
Shares of the Holding Company are subject to the subsequent approval of the
Commissioner of the IRS (the "Commissioner"). The Holding Company will submit to
the
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Commissioner an application for approval of the ESOP. Although no assurances
can be given, the Holding Company expects that the ESOP will be approved by the
Commissioner.
STOCK OPTION PLAN. After the completion of the Conversion, the Board of
Directors of the Holding Company intends to adopt the Stock Option Plan, subject
to approval by the shareholders of the Holding Company. The purposes of the
Stock Option Plan include retaining and providing incentives to the directors,
officers, and employees of the Holding Company and its subsidiaries by
facilitating their purchase of a stock interest in the Holding Company.
Options granted to the officers and employees under the Stock Option
Plan may be "incentive stock options" within the meaning of Section 422 of the
Code ("ISOs"). Options granted under the Stock Option Plan to directors who are
not full-time employees of the Holding Company or the Bank will not qualify
under the Code and thus will not be ISOs ("Non-qualified Options"). Although any
eligible director, officer, or employee of the Holding Company or the Bank may
receive Non-qualified Options, it is anticipated that the non-employee directors
will receive Non-qualified Options and other eligible participants will receive
ISOs.
The option exercise price will be determined by the Stock Option
Committee at the time of grant; provided, however, that the exercise price for
an ISO, or for any option if the Stock Option Plan is implemented by the Holding
Company during the first year following completion of the Conversion, must not
be less than 100% of the fair market value of the shares on the date of the
grant. No stock option will be exercisable after the expiration of ten years
from the date of grant, except that in the case of an ISO granted to an employee
who owns more than 10% of the Holding Company's outstanding common shares at the
time such ISO is granted under the Stock Option Plan, the exercise price of the
ISO may not be less than 110% of the fair market value of the shares on the date
of the grant and the ISO may not be exercisable after the expiration of five
years from the date of grant.
An option recipient cannot transfer or assign an option other than by
will, in accordance with the laws of descent and distribution. "Termination for
cause," as defined in the Stock Option Plan, will result in the termination of
any outstanding options.
The Holding Company will receive no monetary consideration for the
granting of options under the Stock Option Plan. Upon the exercise of options,
the Holding Company will receive a payment of cash, common shares of the Holding
Company, or a combination of cash and common shares from option recipients in
exchange for shares issued.
A number of shares equal to 10% of the Common Shares sold in the
Offering is expected to be reserved for issuance by the Holding Company upon the
exercise of options to be granted to certain directors, officers, and employees
of the Holding Company and its subsidiaries from time to time under the Stock
Option Plan. No determination has been made regarding the recipients of awards
under the Stock Option Plan or the number of shares to be awarded to individual
recipients. The Stock Option Committee may grant options under the Stock Option
Plan to the directors, officers, and employees of the Holding Company and the
Bank at such times as they deem most beneficial to the Holding Company on the
basis of the individual participant's responsibility, tenure, and future
potential.
Under OTS regulations, no stock options may be awarded during the first
year after the completion of the Conversion unless the Stock Option Plan is
approved by the shareholders of the Holding Company at an annual or a special
meeting of shareholders held not less than six months following the completion
of the Conversion. If the Stock Option Plan is approved by the Holding Company
shareholders at such meeting and implemented during the first year after the
completion of the Conversion, the following restrictions will apply: (i) the
number of shares which may be subject to options awarded under the Stock Option
Plan to directors who are not full-time employees of the Holding Company may not
exceed 5% per person and 30% in the aggregate of the available shares; (ii) the
number of shares which may be subject to options awarded under the Stock Option
Plan to any individual who is a full-time employee of the Holding Company or its
subsidiaries may not exceed 25% of the available shares; (iii) stock options
must be awarded with an exercise price at least equal to the fair market value
of the common shares of the Holding Company at the time of the award; and (iv)
stock options will become exercisable at the rate of one-fifth per year
commencing no earlier than one year from the date of the award, subject to
acceleration of vesting only in the event of the death or disability of a
participant. The ultimate value of any option granted at fair market value will
depend on future appreciation in the fair market value of the shares to which
the option relates. No decision has been made as to anticipated awards under the
Stock Option Plan.
RECOGNITION AND RETENTION PLAN. After the completion of the Conversion,
the Bank intends to adopt the RRP. The purpose of the RRP is to provide
directors, officers, and certain key employees of the Bank with an ownership
interest in the
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Holding Company in a manner designed to compensate such directors, officers, and
key employees for services to the Bank. The Bank expects to contribute
sufficient funds to enable the RRP to purchase up to 4% of the Common Shares
sold in the Offering. The Bank will receive no monetary consideration from the
recipients for the awards of shares under the RRP.
The RRP Committee will administer the RRP and determine the number of
shares to be granted to eligible participants. Each participant granted shares
under the RRP will be entitled to the benefit of any dividends or other
distributions paid on such shares prior to the shares being earned, although
dividends or other distributions on shares held in the RRP Trust will not be
distributed to the participant until the shares are distributed to the
participant. Compensation expense in the amount of the fair market value of the
RRP shares will be recognized as the shares are earned.
No determination has been made regarding recipients of RRP awards or
the number of shares to be awarded to individual recipients. Under OTS
regulations, no RRP shares may be awarded during the first year after the
completion of the Conversion unless the RRP is approved by the shareholders of
the Holding Company at an annual meeting or a special meeting of shareholders
held not less than six months following the completion of the Conversion. If the
RRP is approved by the Holding Company shareholders at such meeting and
implemented during the first year after the completion of the Conversion, the
following restrictions will apply: (i) the number of shares which may be subject
to awards under the RRP to directors who are not full-time employees of the
Holding Company or its subsidiaries may not exceed 5% per person and 30% in the
aggregate of the available shares; (ii) the number of shares which may be
subject to awards under the RRP to any individual who is a full-time employee of
the Holding Company or its subsidiaries may not exceed 25% of the available
shares; and (iii) RRP awards will be earned at the rate of one-fifth per year
commencing no earlier than one year from the date of the award subject to
acceleration of vesting only in the event of the death or the disability of the
participant.
EMPLOYMENT AGREEMENT
The Bank currently has no employment agreements with any of its
officers. The Bank intends to enter into an employment agreement with Robert C.
Hamilton (the "Employment Agreement"). The Employment Agreement will provide for
a term of three years and a salary of not less than $165,000 and performance
reviews by the Board of Directors not less often than annually at which time the
Employment Agreement may be extended for a period of one year. The Employment
Agreement will also provide for the inclusion of Mr. Hamilton in any formally
established employee benefit, bonus, pension, and profit-sharing plans for which
senior management personnel are eligible and for vacation and sick leave in
accordance with the Bank's prevailing policies.
The Employment Agreement will be terminable by the Bank at any time. In
the event of termination by the Bank for "just cause," as defined in the
Employment Agreement, Mr. Hamilton will have no right to receive any
compensation or other benefits for any period after such termination. In the
event of termination by the Bank other than for just cause, at the end of the
term of the Employment Agreement or in connection with a "change of control," as
defined in the Employment Agreement, Mr. Hamilton will be entitled to a
continuation of salary payments for a period of time equal to the remaining term
of the Employment Agreement and a continuation of benefits substantially equal
to those being provided at the date of termination of employment until the
earliest to occur of the end of the term of the Employment Agreement or the date
on which Mr. Hamilton becomes employed full-time by another employer.
The Employment Agreement also will contain provisions with respect to
the occurrence within one year of a "change of control" of (1) the termination
of Mr. Hamilton's employment for any reason other than just cause, retirement,
or termination at the end of the term of the agreement, or (2) a constructive
termination resulting from change in the capacity or circumstances in which Mr.
Hamilton is employed or a material reduction in his responsibilities, authority,
compensation, or other benefits provided under the Employment Agreement without
Mr. Hamilton's written consent. In the event of any such occurrence, Mr.
Hamilton will be entitled to payment of an amount equal to three times Mr.
Hamilton' annual compensation immediately preceding the termination of his
employment. In addition, Mr. Hamilton will be entitled to continued coverage
under all benefit plans until the earliest of the end of the term of the
Employment Agreement or the date on which he is included in another employer's
benefit plans as a full-time employee. The maximum which Mr. Hamilton may
receive, however, is limited to an amount which will not result in the
imposition of a penalty tax pursuant to Section 280G(b)(3) of the Code.
"Control," as defined in the Employment Agreement, generally refers to the
acquisition by any person or entity of the ownership or power to vote 10% or
more of the voting stock of the Bank or the Holding Company, the control of the
election of a majority of the directors of the Bank or the Holding Company, or
the exercise of a controlling influence over the management or policies of the
Bank or the Holding Company.
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The aggregate payments that would have been made to Mr. Hamilton
pursuant to the Employment Agreement, assuming his termination at September 30,
1997, following a change of control, would have been approximately $495,000.
CERTAIN TRANSACTIONS WITH THE BANK
In accordance with the OTS regulations, the Bank makes loans to
executive officers and directors of the Bank in the ordinary course of business
and on the same terms and conditions, including interest rates and collateral,
as those generally available to the Bank's customers. All outstanding loans to
executive officers and directors comply with such policy, do not involve more
than the normal risk of collectibility or present other unfavorable features and
are current in their payments. Loans to directors and executive officers of the
Bank and their related interests totaled $189,000 at September 30, 1997.
REGULATION
GENERAL
As a savings and loan association incorporated under the laws of Ohio,
the Bank is subject to regulation, examination and oversight by the OTS and the
Superintendent of the Division (the "Ohio Superintendent"). Because the Bank's
deposits are insured by the FDIC, the Bank also is subject to general oversight
by the FDIC. The Bank must file periodic reports with the OTS, the Ohio
Superintendent and the FDIC concerning its activities and financial condition.
Examinations are conducted periodically by federal and state regulators to
determine whether the Bank is in compliance with various regulatory requirements
and is operating in a safe and sound manner. The Bank is a member of the FHLB of
Cincinnati.
The Holding Company will be a savings and loan holding company within
the meaning of the Home Owners Loan Act, as amended (the "HOLA"). Consequently,
the Holding Company will be subject to regulation, examination, and oversight by
the OTS and will be required to submit periodic reports to the OTS. Because the
Holding Company and the Bank are corporations organized under Ohio law, they are
also subject to the provisions of the Ohio Revised Code applicable to
corporations generally.
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS and the Bank may be
regulated under federal law as a bank or be required to change its charter. Such
change in regulation or charter would likely change the range of activities in
which the Bank may engage and would probably subject the Bank to more regulation
by the FDIC. In addition, the Holding Company might become subject to different
holding company regulations, including separate capital requirements. At this
time, the Holding Company cannot predict when or whether Congress may actually
pass legislation regarding the Holding Company's and the Bank's regulatory
requirements or charter. Although such legislation may change the activities in
which either the Holding Company and the Bank may engage, it is not anticipated
that the current activities of the Holding Company or the Bank will be
materially affected by those activity limits.
OHIO SAVINGS AND LOAN LAW
The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings and loan associations in accordance with the laws of
the State of Ohio. Ohio law prescribes the permissible investments and
activities of Ohio savings and loan associations, including the types of lending
that such associations may engage in and the investments in real estate,
subsidiaries, and corporate or government securities that such associations may
make. The ability of Ohio associations to engage in these state-authorized
investments and activities is subject to oversight and approval by the FDIC, if
such investments or activities are not permissible for a federally chartered
savings and loan association.
The Ohio Superintendent also has approval authority over any mergers
involving or acquisitions of control of Ohio savings and loan associations. The
Ohio Superintendent may initiate certain supervisory measures or formal
enforcement actions against Ohio associations. Ultimately, if the grounds
provided by law exist, the Ohio Superintendent may place an Ohio association in
conservatorship or receivership.
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The Ohio Superintendent conducts regular examinations of the Bank
approximately once every eighteen months. Such examinations are usually
conducted jointly with one or both federal regulators. The Ohio Superintendent
imposes assessments on Ohio associations based on their asset size to cover the
cost of supervision and examination.
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all federally chartered
savings and loan associations and all other savings and loan associations the
deposits of which are insured by the FDIC. The OTS issues regulations governing
the operation of savings and loan associations, regularly examines such
associations and imposes assessments on savings associations based on their
asset size to cover the costs of this supervision and examination. The OTS also
may initiate enforcement actions against savings and loan associations and
certain persons affiliated with them for violations of laws or regulations or
for engaging in unsafe or unsound practices. If the grounds provided by law
exist, the OTS may appoint a conservator or receiver for a savings and loan
association.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations evaluate how well and to what extent an institution lends and
invests in its designated service area, with particular emphasis on low- to
moderate-income communities and borrowers in that area. The Bank has received a
"satisfactory" examination rating under those regulations.
REGULATORY CAPITAL REQUIREMENTS. The Bank is required by OTS
regulations to meet certain minimum capital requirements. For information
regarding the Bank's regulatory capital at September 30, 1997, and pro forma
regulatory capital after giving effect to the Conversion, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Liquidity and Capital Resources" and "REGULATORY CAPITAL COMPLIANCE."
Current capital requirements call for tangible capital of 1.5% of
adjusted total assets, core capital (which for the Bank consists solely of
tangible capital) of 3.0% of adjusted total assets and risk-based capital (which
for the Bank consists of core capital and general valuation allowances) of 8.0%
of risk-weighted assets (assets, including certain off-balance sheet items, are
weighted at percentage levels ranging from 0% to 100% depending on the relative
risk).
The OTS has proposed to amend the core capital requirement so that
those associations that do not have the highest examination rating and an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the Bank's examination rating and overall risk. The Bank does
not anticipate that it will be adversely affected if the core capital
requirement regulation is amended as proposed.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio as determined under the methodology of the OTS. If
the measured interest rate risk is above the level deemed normal under the
regulation, the Bank will be required to deduct one-half of such excess exposure
from its total capital when determining its risk-based capital. In general, an
association with less than $300 million in assets and a risk-based capital ratio
in excess of 12% will not be subject to the interest rate risk component, and
the Bank qualifies for such exemption. Pending implementation of the interest
rate risk component, the OTS has the authority to impose a higher individualized
capital requirement on any savings association it deems to have excess interest
rate risk. The OTS also may adjust the risk-based capital requirement on an
individualized basis to take into account risks due to concentrations of credit
and non-traditional activities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset and Liability Management."
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings and
loan associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. The OTS has defined
these capital levels as follows: (i) well-capitalized associations must have
total risk-based capital of at least 10%, core risk-based capital (consisting
only of
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items that qualify for inclusion in core capital) of at least 6% and core
capital of at least 5%; (ii) adequately capitalized associations are those that
meet the regulatory minimum of total risk-based capital of 8%, core risk-based
capital of 4%, and core capital of 4% (except for associations receiving the
highest examination rating, in which case the level is 3%) but are not
well-capitalized; (iii) undercapitalized associations are those that do not meet
regulatory limits, but that are not significantly undercapitalized; (iv)
significantly undercapitalized associations have total risk-based capital of
less than 6%, core risk-based capital of less than 3% or core capital of less
than 3%; and (v) critically undercapitalized associations are those with core
capital of less than 2% of total assets. In addition, the OTS generally can
downgrade an association's capital category, notwithstanding its capital level,
if, after notice and opportunity for hearing, the association is deemed to be
engaging in an unsafe or unsound practice because it has not corrected
deficiencies that resulted in it receiving a less than satisfactory examination
rating on matters other than capital or it is deemed to be in an unsafe or
unsound condition. An undercapitalized association must submit a capital
restoration plan to the OTS within 45 days after it becomes undercapitalized.
Undercapitalized associations will be subject to increased monitoring and asset
growth restrictions and will be required to obtain prior approval for
acquisitions, branching and engaging in new lines of business. Critically
undercapitalized institutions must be placed in conservatorship or receivership
within 90 days of reaching that capitalization level, except under limited
circumstances. The Bank's capital at September 30, 1997, meets the standards for
a well-capitalized institution.
Federal law prohibits a savings and loan association from making a
capital distribution to anyone or paying management fees to any person having
control of the association if, after such distribution or payment, the
association would be undercapitalized. In addition, each company controlling an
undercapitalized association must guarantee that the association will comply
with its capital plan until the association has been adequately capitalized on
an average during each of four preceding calendar quarters and must provide
adequate assurances of performance. The aggregate liability pursuant to such
guarantee is limited to the lesser of (i) an amount equal to 5% of the
association's total assets at the time the association became undercapitalized
or (ii) the amount that is necessary to bring the association into compliance
with all capital standards applicable to such association at the time the
association fails to comply with its capital restoration plan.
LIQUIDITY. OTS regulations require that savings associations maintain
an average daily balance of liquid assets (cash, certain time deposits,
association's acceptances, and specified United States Government, state or
federal agency obligations) equal to a monthly average of not less than 4% of
its net withdrawable savings deposits plus borrowings payable in one year or
less. Monetary penalties may be imposed upon member institutions failing to meet
liquidity requirements. The eligible liquidity of the Bank at September 30,
1997, was approximately $6.6 million, or 13.7%, which exceeded the then
applicable 5% liquidity requirement by approximately $4.2 million. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Liquidity and Capital Resources."
QUALIFIED THRIFT LENDER TEST. Prior to September 30, 1996, the QTL test
required savings associations to maintain a specified level of investments in
assets that are designated as qualifying thrift investments ("QTI"), which are
generally related to domestic residential real estate and manufactured housing
and include stock issued by any FHLB, the FHLMC or the FNMA. Under this test 65%
of an institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business, and 20% of liquid assets) must
consist of QTI on a monthly average basis in 9 out of every 12 months. Congress
created a second QTL test, effective September 30, 1996, pursuant to which a
savings association may also qualify as a QTL thrift if at least 60% of the
institution's assets (on a tax basis) consist of specified assets (generally
loans secured by residential real estate or deposits, educational loans, cash,
and certain governmental obligations). The OTS may grant exceptions to the QTL
test under certain circumstances. If a savings association fails to meet the QTL
test, the association and its holding company become subject to certain
operating and regulatory restrictions. A savings association that fails to meet
the QTL test will not be eligible for new FHLB advances. At September 30, 1997,
the Bank met the QTL test.
LENDING LIMIT. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower or group of related
borrowers to an amount equal to 15% of the association's Lending Limit Capital.
A savings association may lend to one borrower an additional amount not to
exceed 10% of the association's Lending Limit Capital, if the additional amount
is fully secured by certain forms of "readily marketable collateral." Real
estate is not considered "readily marketable collateral." Certain types of loans
are not subject to this limit. In applying this limit, the regulations require
that loans to certain related borrowers be aggregated. An exception to this
limit permits loans of any type to one borrower up to $500,000.
Based on such limits, the Bank was able to lend approximately $1.6
million to one borrower at September 30, 1997. The largest amount the Bank had
outstanding to one borrower at September 30, 1997, was $874,364, which consisted
of nine
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loans, secured by a commercial property, equipment and the borrower's
residences. At September 30, 1997, such loans were performing in accordance with
their terms. See "THE BUSINESS OF THE BANK - Lending Activities -- Loan to One
Borrower Limits."
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors, and principal shareholders and their related interests must conform
to the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders, and their related
interests cannot exceed the Bank's Lending Limit Capital (or 200% of Lending
Limit Capital for qualifying institutions with less than $100 million in
assets). Most loans to directors, executive officers, and principal shareholders
must be approved in advance by a majority of the "disinterested" members of the
board of directors of the Bank with any "interested" director not participating.
All loans to directors, executive officers, and principal shareholders must be
made on terms substantially the same as offered in comparable transactions with
the general public or as offered to all employees in a company-wide benefit
program, and loans to executive officers are subject to additional limitations.
The Bank was in compliance with such restrictions at September 30, 1997.
All transactions between a savings association and its affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with, the savings association. The
Holding Company will be an affiliate of the Bank. Generally, Sections 23A and
23B of the FRA (i) limit the extent to which a savings association or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, (ii) limit
the aggregate of all such transactions with all affiliates to an amount equal to
20% of such capital stock and surplus, and (iii) require that all such
transactions be on terms substantially the same, or at least as favorable to the
association, as those provided in transactions with a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee, and other similar types of transactions. In addition to the
limits in Sections 23A and 23B, a savings association may not make any loan or
other extension of credit to an affiliate unless the affiliate is engaged only
in activities permissible for a bank holding company and may not purchase or
invest in securities of any affiliate except shares of a subsidiary. The Bank
was in compliance with these requirements and restrictions at September 30,
1997.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, according to ratings of associations based on their capital level
and supervisory condition. Capital distributions, for purposes of such
regulation, include, without limitation, payments of cash dividends,
repurchases, and certain other acquisitions by an association of its shares and
payments to stockholders of another association in an acquisition of such other
association.
For purposes of the capital distribution regulations, each institution
is categorized in one of three tiers. Tier 1 consists of associations that,
before and after the proposed capital distribution, meet their fully phased-in
capital requirement. Associations in this category may make capital
distributions during any calendar year equal to the greater of 100% of their net
income, current year-to-date, plus 50% of the amount by which the lesser of such
association's tangible, core or risk-based capital exceeds its fully phased-in
capital requirement for such capital component, as measured at the beginning of
the calendar year, or the amount authorized for a tier 2 association. A tier 2
association meets its current minimum, but not fully phased-in capital
requirement before and after a proposed capital distribution. An association in
this category may make capital distributions up to 75% of its net income over
the most recent four quarters. A Tier 3 association is one which does not meet
its current minimum capital requirement and must obtain OTS approval of any
capital distribution. A tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a tier 2 or tier 3
association. The Bank meets the requirements for a tier 1 association and has
not been notified of any need for more than normal supervision.
The Bank will also be prohibited from declaring or paying any dividends
or from repurchasing any of its stock if, as a result, the net worth of the Bank
would be reduced below the amount required to be maintained for the liquidation
account established in connection with the Conversion. See "THE CONVERSION -
Principal Effects of the Conversion - Liquidation Account." In addition, as a
subsidiary of the Holding Company, the Bank will also be required to give the
OTS 30 days' notice prior to declaring any dividend on its stock. The OTS may
object to the dividend during that 30-day period based on safety and soundness
concerns. Moreover, the OTS may prohibit any capital distribution otherwise
permitted by regulation if the OTS determines that such distribution would
constitute an unsafe or unsound practice. Pursuant to OTS policy, as a condition
to approval of the Conversion, the Bank will be required to state that it will
not undertake a tax-free return of capital for a period of one year following
completion of the Conversion.
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In December 1994, the OTS issued a proposal to amend the capital
distributions limits. Under that proposal, an association which is not owned by
a holding company and which has an examination rating of 1 or 2 could make a
capital distribution without notice to the OTS, if it remains adequately
capitalized, as described above, after the distribution is made. Any other
association seeking to make a capital distribution that would not cause the
association to fall below the capital levels to qualify as adequately
capitalized or better, would have to provide notice to the OTS. Except under
limited circumstances and with OTS approval, no capital distributions would be
permitted if it caused the association to become undercapitalized.
HOLDING COMPANY REGULATION. After the Conversion, the Holding Company
will be a savings and loan holding company within the meaning of the HOLA. As
such, the Holding Company will register with the OTS and will be subject to OTS
regulations, examination, supervision, and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings and loan association or savings and loan holding
company, without prior approval of the OTS, or from acquiring or retaining more
than 5% of the voting shares of a savings and loan association or holding
company thereof, which is not a subsidiary. Under certain circumstances, a
savings and loan holding company is permitted to acquire, with the approval of
the OTS, up to 15% of the previously unissued voting shares of an
undercapitalized savings and loan association for cash without being deemed to
control the association. Except with the prior approval of the OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
The Holding Company will be a unitary savings and loan holding company.
Under current law, there are generally no restrictions on the activities of
unitary savings and loan holding companies and such companies are the only
financial institution holding companies which may engage in commercial,
securities, and insurance activities without limitation. The broad latitude
under current law can be restricted if the OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings and loan association. The OTS
may impose such restrictions as deemed necessary to address such risk, including
limiting (i) payment of dividends by the savings and loan association; (ii)
transactions between the savings and loan association and its affiliates; and
(iii) any activities of the savings and loan association that might create a
serious risk that the liabilities of the holding company and its affiliates may
be imposed on the savings and loan association. Notwithstanding the foregoing
rules as to permissible business activities of a unitary savings and loan
holding company, if the savings and loan association subsidiary of a holding
company fails to meet the QTL, then such unitary holding company would become
subject to the activities restrictions applicable to multiple holding companies.
At September 30, 1997, the Bank met the QTL. See "Qualified Thrift Lender Test."
Congress is considering legislation which may limit the Holding
Company's ability to engage in these activities and the Holding Company cannot
predict if and in what form these proposals might become law. However, such
limits would not impact the Holding Company's initial activity of holding stock
of the Bank.
If the Holding Company were to acquire control of another savings
institution, other than through a merger or other business combination with the
Bank, the Holding Company would become a multiple savings and loan holding
company. Unless the acquisition is an emergency thrift acquisition and each
subsidiary savings and loan association meets the QTL, the activities of the
Holding Company and any of its subsidiaries (other than the Bank or other
subsidiary savings and loan associations) would thereafter be subject to
activity restrictions. The HOLA provides that, among other things, no multiple
savings and loan holding company or subsidiary thereof that is not a savings
institution shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than (i) furnishing or performing management services
for a subsidiary savings institution; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing or liquidating assets owned by or
acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities previously directly
authorized by federal regulation as of March 5, 1987, to be engaged in by
multiple holding companies; or (vii) those activities authorized by the FRB as
permissible for bank holding companies, unless the OTS by regulation prohibits
or limits such activities for savings and loan holding companies, and which have
been approved by the OTS prior to being engaged in by a multiple holding
company.
The OTS may approve an acquisition resulting in the formation of a
multiple savings and loan holding company that controls savings and loan
associations in more than one state only if the multiple savings and loan
holding company involved controls a savings and loan association that operated a
home or branch office in the state of the Bank to be acquired as of March 5,
1987, or if the laws of the state in which the institution to be acquired is
located specifically permit institutions to be acquired
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by state-chartered institutions or savings and loan holding companies located in
the state where the acquiring entity is located (or by a holding company that
controls such state-chartered savings institutions). As under prior law, the OTS
may approve an acquisition resulting in a multiple savings and loan holding
company controlling savings and loan associations in more than one state in the
case of certain emergency thrift acquisitions. Bank holding companies have had
more expansive authority to make interstate acquisitions than savings and loan
holding companies since August 1995.
FDIC REGULATIONS
DEPOSIT INSURANCE. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally insured
banks and thrifts and safeguards the safety and soundness of the banking and
thrift industries. The FDIC administers two separate insurance funds, the Bank
Insurance Fund (the "BIF") for commercial banks and state savings banks and the
SAIF for savings associations. The FDIC is required to maintain designated
levels of reserves in each fund. The Bank's deposit accounts are insured by the
FDIC in the SAIF up to the prescribed limits. The FDIC has examination authority
over all insured depository institutions, including the Bank, and has authority
to initiate enforcement actions against federally insured savings associations
if the FDIC does not believe the OTS has taken appropriate action to safeguard
safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in each
fund. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary based on the risk the
institution poses to its deposit insurance fund. The risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy commercial banks were reduced significantly below
the level paid by healthy savings associations effective in mid-1995.
Assessments paid by healthy savings associations exceeded those paid by healthy
commercial banks by approximately $.19 per $100 in deposits in late 1995. Such
excess equaled approximately $.23 per $100 in deposits beginning in 1996. This
premium disparity had a negative competitive impact on the Bank and other
institutions in the SAIF.
Federal legislation which was effective September 30, 1996, provided for
the recapitalization of the SAIF by means of a special assessment of $.657 per
$100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves
to the level required by law. Certain banks holding SAIF deposits are required
to pay the same special assessment on 80% of deposits at March 31, 1995. In
addition, the cost of prior thrift failures, which had previously been paid only
by SAIF members, will also be paid by BIF members. As a result, BIF assessments
for healthy banks in 1997 were $.013 per $100 in deposits, and SAIF assessments
for healthy institutions in 1997 were $.064 per $100 in deposits.
The Bank had $39.7 million in deposits at March 31, 1995. The Bank paid
a special assessment of $261,000 in November 1996, which was accounted for and
recorded as of September 30, 1996. This assessment is tax-deductible but has
reduced earnings for the year ended June 30, 1997.
FRB REGULATIONS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $49.3
million (subject to an exemption of up to $4.4 million), and of 10% of net
transaction accounts over $49.3 million. At September 30, 1997, the Bank was in
compliance with this reserve requirement.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances. See
"THE BUSINESS OF THE BANK - Deposits and Borrowings." The Bank is a member of
the FHLB of Cincinnati and must maintain an investment in the capital stock of
the FHLB of Cincinnati in an amount equal to the greater of 1% of the aggregate
outstanding principal amount of the Bank's residential mortgage loans, home
purchase contracts, and similar obligations at the beginning of each year, and
5% of its advances from the FHLB. The Bank is in compliance with this
requirement with an investment in stock of the FHLB of Cincinnati of $373,000 at
September 30, 1997.
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Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities representing
a whole interest in such loans; securities issued, insured or guaranteed by the
U.S. Government or an agency thereof; deposits in any FHLB; or other real estate
related collateral (up to 30% of the member association's capital) acceptable to
the applicable FHLB, if such collateral has a readily ascertainable value and
the FHLB can perfect its security interest in the collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance.
TAXATION
FEDERAL TAXATION
The Holding Company and the Bank are each subject to the federal tax
laws and regulations which apply to corporations generally. In addition to the
regular income tax, the Holding Company and the Bank may be subject to an
alternative minimum tax. An alternative minimum tax is imposed at a minimum tax
rate of 20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current earnings"
exceeds its alternative minimum taxable income computed without regard to this
preference item and prior to reduction by net operating losses, is included in
alternative minimum taxable income. Net operating losses can offset no more than
90% of alternative minimum taxable income. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax. Payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years. The Taxpayer Relief Act of 1997 repealed the
alternative minimum tax for certain "small corporations" for tax years beginning
after December 31, 1997. A corporation initially qualifies as a small
corporation if it had average gross receipts of $5,000,000 or less for the three
tax years ending with its first tax year beginning after December 31, 1997. Once
a corporation is recognized as a small corporation, it will continue to be
exempt from the alternative minimum tax for as long as its average gross
receipts for the prior three-year period do not exceed $7,500,000. In
determining if a corporation meets this requirement, the first year that it
achieved small corporation status is not taken into consideration.
Based on the Bank's average gross receipts of $4.35 million for the
three tax years ending on June 30, 1997, the Bank would qualify as a small
corporation exempt from the alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Small Business Act"), which was signed into law on August 21, 1996, certain
thrift institutions, were allowed deductions for bad debts under methods more
favorable than those granted to other taxpayers. Qualified thrift institutions
could compute deductions for bad debts using either the specific charge off
method of Section 166 of the Code, or one of the two reserve methods of Section
593 of the Code. The reserve methods under Section 593 of the Code permitted a
thrift institution annually to elect to deduct bad debts under either (i) the
"percentage of taxable income" method applicable only to thrift institutions, or
(ii) the "experience" method that also was available to small banks. Under the
"percentage of taxable income" method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of its
taxable income (determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the greater
of (i) an amount based on its actual average experience for losses in the
current and five preceding taxable years, or (ii) an amount necessary to restore
the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowable addition to bad debt
reserves for qualifying loans either under the experience method or the
percentage of taxable income method.
The Small Business Act eliminated the percentage of taxable income
reserve method of accounting for bad debts by thrift institutions, effective for
taxable years beginning after 1995. Thrift institutions that would be treated as
small banks are allowed to utilize the experience method applicable to such
institutions, while thrift institutions that are treated as large banks are
required to use only the specific charge off method.
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A thrift institution required to change its method of computing
reserves for bad debts will treat such change as a change in the method of
accounting, initiated by the taxpayer, and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that becomes a
large bank, the amount of the institution's applicable excess reserves generally
is the excess of (i) the balances of its reserve for losses on qualifying real
property loans (generally loans secured by improved real estate) and its reserve
for losses on nonqualifying loans (all other types of loans) as of the close of
its last taxable year beginning before January 1, 1996, over (ii) the balances
of such reserves as of the close of its last taxable year beginning before
January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of a thrift
institution that becomes a small bank, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans and its reserve for losses
on nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or (b) what the thrift's reserves would have been at the close of its
last year beginning before January 1, 1996, had the thrift always used the
experience method.
For taxable years that begin on or after January 1, 1996, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less then its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential real and church property and certain mobile homes), but only to the
extent that the loan is made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Act which require recapture in
the case of certain excessive distributions to shareholders. The pre-1988
reserves may not be utilized for payment of cash dividends or other
distributions to a shareholder (including distributions in dissolution or
liquidation) or for any other purpose (excess to absorb bad debt losses).
Distribution of a cash dividend by a thrift institution to a shareholder is
treated as made: first, out of the institution's post-1951 accumulated earnings
and profits; second, out of the pre-1988 reserves; and third, out of such other
accounts as may be proper. To the extent a distribution by the Bank to the
Holding Company is deemed paid out of its pre-1988 reserves under these rules,
the pre-1988 reserves would be reduced and the Bank's gross income for tax
purposes would be increased by the amount which, when reduced by the income tax,
if any, attributable to the inclusion of such amount in its gross income, equals
the amount deemed paid out of the pre-1988 reserves. As of September 30, 1997,
the Bank's pre-1988 reserves for tax purposes totaled approximately $1,548,000.
The Bank believes it had approximately $8.5 million of accumulated earnings and
profits for tax purposes as of September 30, 1997, which would be available for
dividend distributions, provided regulatory restrictions applicable to the
payment of dividends are met. See "REGULATION - Office of Thrift Supervision --
Limitations on Capital Distributions." No representation can be made as to
whether the Bank will have current or accumulated earnings and profits in
subsequent years.
The tax returns of the Bank have been audited or closed without audit
through fiscal year 1994. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Bank.
OHIO TAXATION
The Holding Company is subject to the Ohio corporation franchise tax,
which, as applied to the Holding Company, is a tax measured by both net earnings
and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000
of computed Ohio taxable income and 8.9% of computed Ohio taxable income in
excess of $50,000 and (ii) 0.582% times taxable net worth. Under these
alternative measures of computing tax liability, the states to which a
taxpayer's adjusted total net income and adjusted total net worth are
apportioned or allocated are determined by complex formulas. The minimum tax is
$50 per year.
A special litter tax is also applicable to all corporations, including
the Holding 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
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is equal to .11% of the first $50,000 of computed Ohio taxable income and .22%
of computed Ohio taxable income in excess of $50,000. If the franchise tax is
paid on the net worth basis, the litter tax is equal to .014% times taxable net
worth.
Ohio corporation franchise tax law is scheduled to change markedly as a
consequences of legislative reforms enacted July 1, 1997. Tax liability,
however, continues to be measured by both net income and net worth. In general,
tax liability will be the greater of (i) 5.1% on the first $50,000 of computed
Ohio taxable income and 8.5% of computed Ohio taxable income in excess of
$50,000 or (ii) 0.40% of taxable net worth. Under these alternative measures of
computing tax liability, the states to which total net income and total net
worth will be apportioned or allocated will continue to be determined by complex
formulas, but the formulas change. The minimum tax will still be $50 per year
and maximum tax liability as measured by net worth will be limited to $150,000
per year. The special litter taxes remain in effect. Various other changes in
the tax law may affect the Holding Company.
The Bank is a "financial institution" for State of Ohio tax purposes.
As such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of the Bank's
apportioned book net worth, determined in accordance with GAAP, less any
statutory deduction. This rate of tax is scheduled to decrease in each of the
years 1990 and 2000. As a "financial institution," the Bank is not subject to
any tax based upon net income or net profits imposed by the State of Ohio.
THE CONVERSION
THE OTS AND THE DIVISION HAVE APPROVED THE PLAN, SUBJECT TO THE
APPROVAL OF THE PLAN BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON THE PLAN AND
SUBJECT TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS AND
THE DIVISION. OTS AND DIVISION APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN.
GENERAL
On November 12, 1997, the Board of Directors of the Bank unanimously
adopted the Plan and recommended that the voting members of the Bank approve the
Plan at the Special Meeting. During and upon completion of the Conversion, the
Bank will continue to provide the services presently offered to depositors and
borrowers, will maintain its existing offices, and will retain its existing
management and employees.
Based on the current Valuation Range, between 1,445,000 and 1,955,000
Common Shares are expected to be offered in the Subscription Offering and the
Community Offering at a price of $10 per share. Applicable regulations permit
the Holding Company to offer additional Common Shares in an amount not to exceed
15% above the maximum of the Valuation Range, which would permit the issuance of
up to 2,248,250 Common Shares with an aggregate purchase price of $22,482,500.
Federal regulations require, with certain exceptions, that shares offered in
connection with the Conversion must be sold up to at least the minimum point of
the Valuation Range in order for the Conversion to become effective. The actual
number of Common Shares sold in connection with the Conversion will be
determined upon completion of the Offering based on the final valuation of the
Bank, as converted. See "Pricing and Number of Common Shares to be Sold."
The Common Shares will be offered in the Subscription Offering to the
ESOP and certain present and former depositors of the Bank. Any Common Shares
not subscribed for in the Subscription Offering will be offered to the general
public in the Community Offering in a manner which will seek to achieve the
widest distribution of the Common Shares, but which will give preference to
natural persons residing in Coshocton County, Ohio. Under OTS regulations, the
Community Offering must be completed within 45 days after completion of the
Subscription Offering, unless such period is extended by the Bank with the
approval of the OTS and the Division. If the Community Offering is determined
not to be feasible, an occurrence that is not currently anticipated, the Boards
of Directors of the Holding Company and the Bank will consult with the OTS and
the Division to determine an appropriate alternative method of selling
unsubscribed Common Shares up to the minimum of the Valuation Range. No
alternative sales methods are currently planned.
OTS and Ohio regulations require the completion of the Conversion
within 24 months after the date of the approval of the Plan by the voting
members of the Bank. The commencement and completion of the Conversion will be
subject to market conditions and other factors beyond the Bank's control. Due to
changing economic and market conditions, no assurance can be given as to the
length of time that will be required to complete the sale of the Common Shares.
If delays
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are experienced, significant changes may occur in the estimated pro forma market
value of the Bank. In such circumstances, the Bank may also incur substantial
additional printing, legal and accounting expenses in completing the Conversion.
In the event the Conversion is not successfully completed, the Bank will be
required to charge all Conversion expenses against current earnings.
REASONS FOR THE CONVERSION
The principal factors considered by the Bank's Board of Directors in
reaching the decision to pursue a mutual-to-stock conversion were the numerous
competitive advantages which the stock form of organization offers, including
growth opportunities, employee retention through the use of stock-based benefit
plans, and increased capital levels.
If the Bank is to continue to grow and prosper, the mutual form of
organization is the least desirable form from a competitive standpoint. The
opportunities for a mutual to expand through mutual-to-mutual mergers or
acquisitions are limited. Although the Bank does not have any specific
acquisitions planned at this time, the Conversion will position the Bank to take
advantage of any acquisition opportunities which may present themselves. Because
a conversion to stock form is a time-consuming and complex process, the Bank
cannot wait until an acquisition is imminent to embark on the conversion
process.
As an increasing number of the Bank's competitors convert to stock form
and acquire the ability to use stock-based compensation programs, the Bank, in
mutual form, would be at a disadvantage when it comes to attracting and
retaining qualified management. The Bank believes that the ESOP, the Stock
Option Plan and the RRP are important tools in achieving such goals. See
"MANAGEMENT - Stock Benefit Plans."
PRINCIPAL EFFECTS OF THE CONVERSION
VOTING RIGHTS. Deposit holders who are members of the Bank in its
mutual form will have no voting rights in the Bank as converted and will not
participate, therefore, in the election of directors or otherwise control the
Bank's affairs. Voting rights in the Holding Company will be held exclusively by
its shareholders, and voting rights in the Bank will be held exclusively by the
Holding Company as the sole shareholder of the Bank. Each holder of the Holding
Company's common shares will be entitled to one vote for each share owned on any
matter to be considered by the Holding Company's shareholders. See "DESCRIPTION
OF AUTHORIZED SHARES."
DEPOSIT ACCOUNTS AND LOANS. Deposit accounts in the Bank, as converted,
will be equivalent in amount, interest rate and other terms to the present
deposit accounts in the Bank, and the existing FDIC insurance on such accounts
will not be affected by the Conversion. The Conversion will not affect the terms
of loan accounts or the rights and obligations of borrowers under their
individual contractual arrangements with the Bank.
TAX CONSEQUENCES. The consummation of the Conversion is expressly
conditioned on receipt by the Bank of a private letter ruling from the IRS or an
opinion of counsel to the effect that the Conversion will constitute a tax-free
reorganization as defined in Section 368(a) of the Code. The Bank intends to
proceed with the Conversion based upon an opinion received from its special
counsel, Vorys, Sater, Seymour and Pease LLP, to the following effect:
(1) The Conversion constitutes a reorganization within the
meaning of Section 368(a)(1)(F) of the Code, and no gain or loss will
be recognized by the Bank in its mutual form or in its stock form as a
result of the Conversion. The Bank in its mutual form and the Bank in
its stock form will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code;
(2) No gain or loss will be recognized by the Bank upon the
receipt of money from the Holding Company in exchange for the capital
stock of the Bank, as converted;
(3) The assets of the Bank will have the same basis in its
hands immediately after the Conversion as they had in its hands
immediately prior to the Conversion, and the holding period of the
assets of the Bank after the Conversion will include the period during
which the assets were held by the Bank before the Conversion;
(4) No gain or loss will be recognized by the deposit account
holders of the Bank upon the issuance to them, in exchange for their
respective withdrawable deposit accounts in the Bank immediately prior
to the Conversion, of withdrawable deposit accounts in the Bank
immediately after the Conversion, in the same dollar
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amount as their withdrawable deposit accounts in the Bank immediately
prior to the Conversion, plus, in the case of Eligible Account Holders
and Supplemental Eligible Account Holders, the interests in the
Liquidation Account of the Bank, as described below;
(5) The basis of the withdrawable deposit accounts in the Bank
held by its deposit account holders immediately after the Conversion
will be the same as the basis of their deposit accounts in the Bank
immediately prior to the Conversion. The basis of the interests in the
Liquidation Account received by the Eligible Account Holders and
Supplemental Eligible Account Holders will be zero. The basis of the
nontransferable subscription rights received by Eligible Account
Holders, Supplemental Eligible Account Holders and Other Eligible
Members will be zero (assuming that at distribution such rights have no
ascertainable fair market value);
(6) No gain or loss will be recognized by Eligible Account
Holders, Supplemental Eligible Account Holders or Other Eligible
Members upon the distribution to them of nontransferable subscription
rights to purchase Common Shares (assuming that at distribution such
rights have no ascertainable fair market value), and no taxable income
will be realized by such Eligible Account Holders, Supplemental
Eligible Account Holders or Other Eligible Members as a result of their
exercise of such nontransferable subscription rights;
(7) The basis of the Common Shares purchased by members of the
Bank pursuant to the exercise of subscription rights will be the
purchase price thereof (assuming that such rights have no ascertainable
fair market value and that the purchase price is not less than the fair
market value of the shares on the date of such exercise), and the
holding period of such shares will commence on the date of such
exercise. The basis of the Common Shares purchased other than by the
exercise of subscription rights will be the purchase price thereof
(assuming in the case of the other subscribers that the opportunity to
buy in the Subscription Offering has no ascertainable fair market
value), and the holding period of such shares will commence on the day
after the date of the purchase;
(8) For purposes of Section 381 of the Code, the Bank will be
treated as if there had been no reorganization. The taxable year of the
Bank will not end on the effective date of the Conversion. Immediately
after the Conversion, the Bank in its stock form will succeed to and
take into account the tax attributes of the Bank in its mutual form
immediately prior to the Conversion, including the Bank's earnings and
profits or deficit in earnings and profits;
(9) The bad debt reserves of the Bank in its mutual form
immediately prior to the Conversion will not be required to be restored
to the gross income of the Bank in its stock form as a result of the
Conversion and immediately after the Conversion such bad debt reserves
will have the same character in the hands of the Bank in its stock form
as they would have had if there had been no Conversion. The Bank in its
stock form will succeed to and take into account the dollar amounts of
those accounts of the Bank in its mutual form which represent bad debt
reserves in respect of which the Bank in its mutual form has taken a
bad debt deduction for taxable years ending on or before the
Conversion; and
(10) Regardless of book entries made for the creation of the
Liquidation Account, the Conversion will not diminish the accumulated
earnings and profits of the Bank available for the subsequent
distribution of dividends within the meaning of Section 316 of the
Code. The creation of the Liquidation Account on the records of the
Bank will have no effect on its taxable income, deductions for
additions to reserves for bad debts under Section 593 of the Code or
distributions to stockholders under Section 593(e) of the Code.
For Ohio tax purposes, the tax consequences of the Conversion
will be as follows:
(1) The Bank is a "financial institution" for State of Ohio tax
purposes, and the Conversion will not change such status;
(2) The Bank is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of the
Bank's equity capital determined in accordance with GAAP, and the Conversion
will not change such status;
(3) As a "financial institution," the Bank is not subject to any tax
based upon net income or net profit imposed by the State of Ohio, and the
Conversion will not change such status;
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(4) The Conversion will not be a taxable transaction to the Bank in its
mutual or stock form for purposes of the Ohio corporate franchise tax. As a
consequence of the Conversion, however, the annual Ohio corporate franchise tax
liability of the Bank will increase if the taxable net worth of the Bank (i.e.,
book net worth computed in accordance with GAAP at the close of the Bank's
taxable year for federal income tax purposes) increases thereby; and
(5) The Conversion will not be a taxable transaction to any deposit
account holder or borrower member of the Bank in its mutual or stock form for
purposes of the Ohio corporate franchise tax and the Ohio personal income tax.
The Bank has received an opinion from Keller to the effect that the
subscription rights have no ascertainable fair market value because the rights
are received by specified persons at no cost, may not be transferred and are of
short duration. The IRS could challenge the assumption that the subscription
rights have no ascertainable fair market value.
Each Eligible Account Holder, Supplemental Eligible Account Holder and
Other Eligible Member is urged to consult his or her own tax advisor with
respect to the effect of such tax consequences on his or her own particular
facts and circumstances.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each depositor in the Bank would receive a
pro rata share of any assets of the Bank remaining after payment of the claims
of all creditors, including the claims of all depositors to the withdrawable
value of their deposit accounts. A depositor's pro rata share of such remaining
assets would be the same proportion of such assets as the value of such
depositor's accounts bears to the total aggregate value of all deposits in the
Bank at the time of liquidation.
In the event of a complete liquidation of the Bank in its stock form
after the Conversion, each depositor would have a claim of the same general
priority as the claims of all other general creditors of the Bank. Except as
described below, each depositor's claim would be solely in the amount of the
balance in such depositor's account plus accrued interest. The depositor would
have no interest in the assets of the Bank above that amount. Such assets would
be distributed to the Holding Company as the sole shareholder of the Bank.
For the purpose of granting a limited priority claim to the assets of
the Bank in the event of a complete liquidation thereof to Eligible Account
Holders and Supplemental Eligible Account Holders who continue to maintain
deposit accounts at the Bank after the Conversion, the Bank will, at the time of
Conversion, establish a liquidation account in an amount equal to the net worth
of the Bank as of September 30, 1997 (the "Liquidation Account"). The
Liquidation Account will not operate to restrict the use or application of any
of the regulatory capital of the Bank.
Each Eligible Account Holder and Supplemental Eligible Account Holder
will have a separate inchoate interest (the "Subaccount") in a portion of the
Liquidation Account for Qualifying Deposits held on the Eligibility Record Date
or the Supplemental Eligibility Record Date.
The balance of each initial Subaccount shall be an amount determined by
multiplying the amount in the Liquidation Account by a fraction, the numerator
of which is the closing balance in the account holder's account as of the close
of business on the Eligibility Record Date or the Supplemental Eligibility
Record Date, as the case may be, and the denominator of which is the total
amount of all Qualifying Deposits of Eligible Account Holders and Supplemental
Eligible Account Holders on the corresponding record date. The balance of each
Subaccount may be decreased but will never be increased. If, at the close of
business on the last day of each fiscal year of the Holding Company subsequent
to the respective record dates, the balance in the deposit account to which a
Subaccount relates is less than the lesser of (i) the deposit balance in such
deposit account at the close of business on the last day of any other annual
closing date subsequent to the Eligibility Record Date or the Supplemental
Eligibility Record Date, or (ii) the amount of the Qualifying Deposit as of the
Eligibility Record Date or the Supplemental Eligibility Record Date, the balance
of the Subaccount for such deposit account shall be adjusted proportionately to
the reduction in such deposit account balance. In the event of any such downward
adjustment, such Subaccount balance shall not be subsequently increased
notwithstanding any increase in the deposit balance of the related deposit
account. If any deposit account is closed, its related Subaccount shall be
reduced to zero upon such closing.
In the event of a complete liquidation of the converted Bank (and only
in such event), each Eligible Account Holder and Supplemental Eligible Account
Holder shall receive from the Liquidation Account a distribution equal to the
current balance in each of such account holder's Subaccounts before any
liquidation distribution may be made to the Holding
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Company as the sole shareholder of the Bank. Any assets remaining after
satisfaction of such liquidation rights and the claims of the Bank's creditors
would be distributed to the Holding Company as the sole shareholder of the Bank.
No merger, consolidation, purchase of bulk assets or similar combination or
transaction with another financial institution, the deposits of which are
insured by the FDIC, will be deemed to be a complete liquidation for this
purpose and, in any such transaction, the Liquidation Account shall be assumed
by the surviving institution.
COMMON SHARES. SHARES ISSUED UNDER THE PLAN CANNOT AND WILL NOT BE
INSURED BY THE FDIC. For a description of the characteristics of the Common
Shares, see "DESCRIPTION OF AUTHORIZED SHARES."
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the
Boards of Directors of the Holding Company and the Bank will be final. The Plan
may be amended by the Boards of Directors of the Holding Company and the Bank at
any time with the concurrence of the OTS and the Division. If the Bank and the
Holding Company determine, upon advice of counsel and after consultation with
the OTS and the Division, that any such amendment is material, subscribers will
be notified of the amendment and will be provided the opportunity to affirm,
increase, decrease or cancel their subscriptions. Any person who does not
affirmatively elect to continue his subscription or elects to rescind his
subscription before the date specified in the notice will have all of his funds
promptly refunded with interest. Any person who elects to decrease his
subscription will have the appropriate portion of his funds promptly refunded
with interest.
CONDITIONS AND TERMINATION
The completion of the Conversion requires the approval of the Plan and
the adoption of the Amended Articles of Incorporation and the Amended
Constitution by the voting members of the Bank at the Special Meeting and the
completion of the sale of the requisite amount of Common Shares within 24 months
following the date of such approval. If these conditions are not satisfied, the
Plan will automatically terminate and the Bank will continue its business in the
mutual form of organization. The Plan may be voluntarily terminated by the Board
of Directors at any time before the Special Meeting and at any time thereafter
with the approval of the OTS and the Division.
SUBSCRIPTION OFFERING
THE SUBSCRIPTION OFFERING WILL EXPIRE AT 12:00 NOON, EASTERN STANDARD
TIME, ON MARCH __, 1998. SUBSCRIPTION RIGHTS NOT EXERCISED BEFORE 12:00 NOON,
EASTERN STANDARD TIME, ON MARCH __, 1998, WILL BE VOID, WHETHER OR NOT THE BANK
HAS BEEN ABLE TO LOCATE EACH PERSON ENTITLED TO SUCH SUBSCRIPTION RIGHTS.
Nontransferable subscription rights to purchase Common Shares are being
issued at no cost to all eligible persons and entities in accordance with the
preference categories established by the Plan, as described below. Each
subscription right may be exercised only by the person to whom it is issued and
only for his or her own account. EACH PERSON SUBSCRIBING FOR COMMON SHARES MUST
REPRESENT TO THE BANK THAT HE OR SHE IS PURCHASING SUCH SHARES FOR HIS OR HER
OWN ACCOUNT AND THAT HE OR SHE HAS NO AGREEMENT OR UNDERSTANDING WITH ANY OTHER
PERSON FOR THE SALE OR TRANSFER OF THE COMMON SHARES. ANY PERSON WHO ATTEMPTS TO
TRANSFER HIS OR HER SUBSCRIPTION RIGHTS MAY BE SUBJECT TO PENALTIES AND
SANCTIONS, INCLUDING LOSS OF THE SUBSCRIPTION RIGHTS.
The number of Common Shares which a person who has subscription rights
may purchase will be determined, in part, by the total number of Common Shares
to be issued and the availability of Common Shares for purchase under the
preference categories set forth in the Plan and certain other limitations. See
"Limitations on Purchases of Common Shares." The sale of any Common Shares
pursuant to subscriptions received is contingent upon approval of the Plan by
the voting members of the Bank at the Special Meeting.
The preference categories and preliminary purchase limitations which
have been established by the Plan, in accordance with applicable regulations,
for the allocation of Common Shares are as follows:
(a) Each Eligible Account Holder shall receive, without
payment therefor, a nontransferable right to purchase in the
Subscription Offering up to the greater of (i) 15,000 Common Shares,
(ii) .10% of the total number of Common Shares sold in connection with
the Conversion, and (iii) 15 times the product (rounded down to the
next whole number) obtained by multiplying the total number of Common
Shares sold in connection with the
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Conversion by a fraction, the numerator of which is the amount of the
Eligible Account Holder's Qualifying Deposit and the denominator of
which is the total amount of Qualifying Deposits of all Eligible
Account Holders, in each case on the Eligibility Record Date, subject
to the overall purchase limitations set forth in Section 10 of the Plan
and subject to adjustment by the Board of Directors of the Holding
Company and the Bank as set forth in Section 10 of the Plan. If the
exercise of subscription rights by Eligible Account Holders results in
an over-subscription, Common Shares will be allocated among subscribing
Eligible Account Holders in a manner which will, to the extent
possible, make the total allocation of each subscriber equal 100 shares
or the amount subscribed for, whichever is less. Any Common Shares
remaining after such allocation has been made will be allocated among
the subscribing Eligible Account Holders whose subscriptions remain
unfilled in the proportion which the amount of their respective
Qualifying Deposits on the Eligibility Record Date bears to the total
Qualifying Deposits of all Eligible Account Holders on such date.
Notwithstanding the foregoing, Common Shares in excess of 1,955,000,
the maximum of the Valuation Range, may be sold to the ESOP before
fully satisfying the subscriptions of Eligible Account Holders. No
fractional shares will be issued. For purposes of this paragraph (a),
increases in the Qualifying Deposits of directors and executive
officers of the Bank during the twelve months preceding the Eligibility
Record Date shall not be considered.
(b) The ESOP shall receive, without payment therefor, a
nontransferable right to purchase in the Subscription Offering an
aggregate amount of up to 10% of the Common Shares sold in the
Conversion, provided that shares remain available after satisfying the
subscription rights of Eligible Account Holders up to the maximum of
the Valuation Range pursuant to paragraph (a) above. Although the Plan
and OTS regulations permit the ESOP to purchase up to 10% of the Common
Shares, the Holding Company anticipates that the ESOP will purchase 8%
of the Common Shares. If the ESOP is unable to purchase all or part of
the Common Shares for which it subscribes, the ESOP may purchase Common
Shares on the open market or may purchase authorized but unissued
Common Shares. If the ESOP purchases authorized but unissued Common
Shares, such purchases could have a dilutive effect on the interests of
the Holding Company's shareholders. See "RISK FACTORS - Dilutive Impact
of Benefit Plans on Net Earnings and Shareholders' Equity."
(c) Provided that shares remain available after satisfying the
subscription rights of Eligible Account Holders and the ESOP pursuant
to paragraphs (a) and (b) above each Supplemental Eligible Account
Holder will receive, without payment therefor, a nontransferable right
to purchase up to the greater of (i) 15,000 Common Shares, (ii) .10% of
the total number of Common Shares sold in connection with the
Conversion, and (iii) 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of Common Shares
sold in connection with the Conversion by a fraction, the numerator of
which is the amount of the Supplemental Eligible Account Holder's
Qualifying Deposit and the denominator of which is the total amount of
Qualifying Deposits of all Supplemental Eligible Account Holders, in
each case on the Supplemental Eligibility Record Date, subject to the
overall purchase limitations set forth in Section 10 of the Plan and
subject to adjustment by the Board of Directors of the Holding Company
and the Bank as set forth in Section 10 of the Plan. If the exercise of
subscription rights by Supplemental Eligible Account Holders results in
an oversubscription, Common Shares will be allocated among subscribing
Supplemental Eligible Account Holders in a manner which will, to the
extent possible, make the total allocation of each subscriber equal 100
shares or the amount subscribed for, whichever is less. Any Common
Shares remaining after such allocation has been made will be allocated
among the subscribing Supplemental Eligible Account Holders whose
subscriptions remain unfilled in the proportion which the amount of
their respective Qualifying Deposits on the Supplemental Eligibility
Record Date bears to the total Qualifying Deposits of all Supplemental
Eligible Account Holders on such date. No fractional shares will be
issued.
(d) Provided that shares remain available after satisfying the
subscription rights of Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders pursuant to paragraphs (a), (b)
and (c) above, each Other Eligible Member, other than an Eligible
Account Holder or Supplemental Eligible Account Holder, shall receive,
without payment therefor, a nontransferable right to purchase up to the
greater of (i) 15,000 Common Shares, and (ii) .10% of the total number
of Common Shares sold in connection with the Conversion, subject to
adjustment by the Boards of Directors of the Bank and the Holding
Company. In the event of an oversubscription by Other Eligible Members,
the available Common Shares will be allocated among subscribing Other
Eligible Members in the same proportion that their subscriptions bear
to the total amount of subscriptions by all Other Eligible Members;
provided, however, that, to the extent sufficient Common Shares are
available, each subscribing Other Eligible Member shall receive 25
Common Shares before the remaining available Common Shares are
allocated.
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The Board of Directors may reject any one or more subscriptions if,
based upon the Board of Directors' interpretation of applicable regulations,
such subscriber is not entitled to the shares for which he or she has subscribed
or if the sale of shares subscribed for would be in violation of any applicable
statutes, regulations, or rules. In connection with the exercise of subscription
rights arising from a deposit account in which two or more persons have an
interest, the aggregate maximum number of Common Shares which the persons having
an interest in such account may purchase in the Subscription Offering in
relation to such account is 15,000 Common Shares.
The Bank will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons having subscription
rights reside. However, no such person will be offered or receive any Common
Shares under the Plan who resides in a foreign country or in a state of the
United States with respect to which each of the following apply: (i) a small
number of persons otherwise eligible to subscribe for shares under the Plan
resides in such country or state; (ii) under the securities laws of such country
or state, the granting of subscription rights or the offer or sale of Common
Shares to such persons would require the Holding Company or its officers or
directors to register as a broker or dealer or to register or otherwise qualify
its securities for sale in such country or state; and (iii) such registration or
qualification would be impracticable for reasons of cost or otherwise.
The term "resident," as used herein with respect to the Subscription
Offering, means any person who, on the date of submission of a Stock Order Form,
maintained a bona fide residence within a jurisdiction in which the Common
Shares are being offered for sale. If a person is a business entity, the
person's residence shall be the location of the principal place of business. If
the person is a personal benefit plan, the residence of the beneficiary shall be
the residence of the plan. In the case of all other benefit plans, the residence
of the trustee shall be the residence of the plan. In all cases, the
determination of a subscriber's residency shall be in the sole discretion of the
Bank and the Holding Company.
COMMUNITY OFFERING
To the extent Common Shares remain available after the satisfaction of
all subscriptions received in the Subscription Offering, the Bank is hereby
offering Common Shares in the Community Offering subject to the limitations set
forth below. If subscriptions are received in the Subscription Offering for up
to 2,248,250 Common Shares, Common Shares may not be available in the Community
Offering. All sales of the Common Shares in the Community Offering will be at
the same price per share as in the Subscription Offering.
THE COMMUNITY OFFERING WILL BE TERMINATED AT 12:00, NOON, EASTERN
STANDARD TIME, ON MARCH ___, 1998, UNLESS EXTENDED BY THE BANK AND THE HOLDING
COMPANY WITH THE APPROVAL OF THE OTS AND THE DIVISION, IF NECESSARY. IN
ACCORDANCE WITH THE PLAN, THE OFFERING MAY NOT BE EXTENDED BEYOND
______________, 1998.
In the event shares are available for the Community Offering, each
person, together with any Associate or groups Acting in Concert, may purchase in
the Community Offering up to 15,000 Common Shares. If an insufficient number of
Common Shares is available to fill all of the orders received in the Community
Offering, the available Common Shares will be allocated in a manner to be
determined by the Boards of Directors of the Holding Company and the Bank,
subject to the following:
(i) Preference will be given to natural persons who maintain a
bona fide residence within Coshocton County, Ohio, the county in which
the offices of the Bank are located;
(ii) Orders received in the Community Offering will first be
filled up to 2% of the total number of Common Shares offered, with any
remaining shares allocated on an equal number of shares per order basis
until all orders have been filled; and
(iii) The right of any person to purchase Common Shares in the
Community Offering is subject to the right of the Holding Company and
the Bank to accept or reject such purchases in whole or in part.
LIMITATIONS ON PURCHASES OF COMMON SHARES
The Plan provides for certain additional limitations to be placed upon
the purchase of Common Shares. To the extent Common Shares are available, the
minimum number of Common Shares that may be purchased by any party is 25, or
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$250. No fractional shares will be issued. Purchases in the Offering are further
subject to the limitation that no person, together with his or her Associates
and other persons Acting in Concert with him or her, may purchase more than
30,000 Common Shares in the Offering. In connection with the exercise of
subscription rights arising from a deposit account in which two or more persons
have an interest, the aggregate maximum number of Common Shares which the
persons having an interest in such account may purchase in the Subscription
Offering in relation to such account is 15,000 Common Shares. Such limitations
do not apply to the ESOP. Subject to applicable regulations, the purchase
limitation may be increased or decreased after the commencement of the Offering
by the Boards of Directors.
"Acting in Concert" is defined as "knowing participation in a joint
activity or independent conscious parallel action towards a common goal whether
or not pursuant to an express agreement" or "a combination or pooling of voting
or other interests in the securities of an issuer for a common purpose pursuant
to any contract, understanding, relationship, agreement or other arrangement,
whether written or otherwise." Persons shall be presumed to be Acting in Concert
with each other, subject to rebuttal through a filing with the OTS, if: (i) both
are purchasing Common Shares in the Conversion and (a) are certain executive
officers, including the president, chief executive officer, chief operating
officer or vice president, directors, trustees, partners, persons who perform,
or whose nominees or representatives perform, similar policy making functions at
a company (other than the Bank or the Holding Company), a principal business
unit or subsidiary of a company, a partnership, a joint venture or a similar
organization; (b) are persons who directly or indirectly own or control 10% or
more of the stock of a company (other than the Bank or the Holding Company); or
(c) constitute a group under the beneficial ownership reporting rules under
Section 13 or the proxy rules under Section 14 of the Exchange Act; or (ii) one
person provides credit to the other for the purchase of Common Shares or is
instrumental in obtaining that credit. Companies (other than the Bank or the
Holding Company), partnerships, joint ventures and similar organizations shall
be presumed to be acting in concert with their executive officers, directors,
trustees, trusts for which they serve as trustee, partners, agents who perform,
or whose nominees or representatives perform, similar policy making functions
and persons who directly or indirectly own or control 10% or more of their stock
if both are purchasing Common Shares in the Conversion. In addition, if a person
is presumed to be Acting in Concert with another person, company or similar
organization, then such person is presumed to Act in Concert with anyone else
who is, or is presumed to be, Acting in Concert with such other person, company
or similar organization.
For purposes of the Plan, (i) the directors of the Bank or the Holding
Company are not deemed to be Acting in Concert solely by reason of their
membership on the Board of Directors of the Bank or the Holding Company; (ii) an
associate of a person (an "Associate") is (a) any corporation or organization
(other than the Bank or the Holding Company) of which such person is an officer,
partner or, directly or indirectly, the beneficial owner of 10% or more of any
class of equity securities; (b) any trust or other estate in which such person
has a substantial beneficial interest or as to which such person serves as
trustee or in a similar fiduciary capacity; and (c) any relative or spouse of
such person, or relative of such spouse, who either has the same home as such
person or who is a director or officer of the Bank or the Holding Company.
Purchases of Common Shares in the Offering are also subject to the
change in control regulations of the OTS which restrict direct and indirect
purchases of 10% or more of the stock of any savings association by any person
or group of persons acting in concert, under certain circumstances. See
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK AND RELATED
ANTI-TAKEOVER PROVISIONS - Federal Law and Regulation."
After the Conversion, Common Shares, except for Common Shares purchased
by affiliates of the Holding Company and the Bank, will be freely transferable,
subject to OTS and Division regulations.
PLAN OF DISTRIBUTION
The offering of the Common Shares is made only pursuant to this
Prospectus, which is available at the offices of the Bank. See "ADDITIONAL
INFORMATION." Officers and directors of the Bank will be available to answer
questions about the Conversion and may also hold informational meetings for
interested persons. Such officers and directors will not be permitted to make
statements about the Holding Company or the Bank unless such information is also
set forth in this Prospectus, nor will they render investment advice. The
Holding Company will rely on Rule 3a4-1 under the Securities Exchange Act of
1934 (the "Exchange Act"), and sales of Common Shares will be conducted within
the requirements of Rule 3a4-1, which will permit officers, directors and
employees of the Holding Company and the Bank to participate in the sale of
Common Shares. No officer, director or employee of the Holding Company or the
Bank will be compensated in connection with his participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the Common Shares.
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To assist the Holding Company and the Bank in marketing the Common
Shares, the Holding Company and the Bank have retained Webb, a broker-dealer
registered with the SEC and a member of the National Association of Securities
Dealers, Inc. ("NASD"). Webb will assist the Bank in (i) training and educating
the Bank's employees regarding the mechanics and regulatory requirements of the
conversion process; (ii) conducting information meetings for subscribers and
other potential purchasers; and (iii) keeping records of all stock
subscriptions. For providing these services, the Bank has agreed to pay Webb (a)
a management fee of $25,000, all of which has been paid, and (b) a success of
1.3% of the aggregate dollar amount of Common Shares sold in the Subscription
Offering and the Community Offering, excluding shares sold by Selected Brokers,
if any, and shares purchased by the ESOP and directors, officers, and employees
of the Bank and members of their immediate families.
The Bank has also agreed to reimburse Webb for its reasonable legal
fees and disbursements. The Bank and the Holding Company have also agreed to
indemnify Webb, under certain circumstances, against liabilities and expenses
(including legal fees) arising out of or based upon untrue statements or
omissions contained in the materials used in the Offering or in various
documents submitted to regulatory authorities regarding the Conversion,
including liabilities under the Securities Act of 1933, as amended (the "Act"),
unless such untrue statement or omission, or alleged untrue statement or
omission, was made in reliance upon certain information furnished to the Bank by
Webb in writing expressly for use in the Summary Proxy Statement or this
Prospectus.
If Common Shares remain available after the satisfaction of all
subscriptions received in the Subscription Offering, Webb may enter into an
agreement with other NASD member firms ("Selected Brokers") to assist in the
sale of Common Shares in the Community Offering. If Selected Brokers are used,
Webb will receive commissions of no more than 5.5% of the aggregate purchase
price of the Common Shares sold in the Community Offering by the Selected
Brokers, and Webb will pay to the Selected Brokers a portion of the 5.5%
commission pursuant to selected dealer agreements. During the Community
Offering, Selected Brokers may only solicit indications of interest from their
customers to place orders with the Bank as of a certain date (the "Order Date")
for the purchase of Common Shares. When and if the Bank believes that enough
indications of interest and orders have been received in the Community Offering
to consummate the Conversion, Webb will request, as of the Order Date, Selected
Brokers to submit orders to purchase shares for which they have previously
received indications of interest from the customers. Selected Brokers will send
confirmations of the orders to such customers on the next business day after the
Order Date. Selected Brokers will debit the accounts of their customers on the
date which will be three business days from the Order Date (the "Settlement
Date"). On the Settlement Date, funds received by Selected Brokers will be
remitted to the Bank. It is anticipated that the Conversion will be consummated
on the Settlement Date. However, if consummation is delayed after payment has
been received by the Bank from Selected Brokers, funds will earn interest at the
current passbook savings account rate, which is currently 2.50%, with an annual
percentage yield of 2.53%, until the completion of the offering. Funds will be
returned promptly in the event the Conversion is not consummated.
EFFECT OF EXTENSION OF COMMUNITY OFFERING
If the Community Offering extends beyond ____________, 1998, persons
who have subscribed for Common Shares in the Subscription Offering or in the
Community Offering will receive a written notice that prior to a date specified
in the notice, they have the right to affirm, increase, decrease or rescind
their subscriptions for Common Shares. Persons who do not affirmatively elect to
continue their subscription or who elect to rescind their subscriptions during
any such extension will have all of their funds promptly refunded with interest.
Persons who elect to decrease their subscriptions will have the appropriate
portion of their funds promptly refunded with interest.
USE OF STOCK ORDER FORMS
Subscriptions for Common Shares in the Subscription Offering and in the
Community Offering may be made only by completing and submitting a Stock Order
Form. Any person who desires to subscribe for Common Shares in the Subscription
Offering must do so by delivering to the Bank by mail or in person, prior to
12:00, noon, Eastern Standard Time, on March _____, 1998, a properly executed
and completed Stock Order Form, together with full payment of the subscription
price of $10 for each Common Share for which subscription is made. ANY STOCK
ORDER FORM WHICH IS NOT RECEIVED BY THE BANK PRIOR TO 12:00, NOON, EASTERN
STANDARD TIME, ON MARCH ______, 1998, OR FOR WHICH FULL PAYMENT HAS NOT BEEN
RECEIVED BY THE BANK PRIOR TO SUCH TIME, WILL NOT BE ACCEPTED. PHOTOCOPIES,
TELECOPIES OR OTHER REPRODUCTIONS OF STOCK ORDER FORMS WILL NOT BE accepted. See
"ADDITIONAL INFORMATION."
AN EXECUTED STOCK ORDER FORM, ONCE RECEIVED BY THE HOLDING COMPANY, MAY
NOT BE MODIFIED, AMENDED OR RESCINDED WITHOUT THE CONSENT OF THE HOLDING
COMPANY, UNLESS (I) THE COMMUNITY OFFERING IS NOT COMPLETED BY
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__________, 1998, OR (II) THE FINAL VALUATION OF THE BANK, AS CONVERTED, IS LESS
THAN $14,950,000 OR MORE THAN $22,482,500. IF EITHER OF THOSE EVENTS OCCUR,
PERSONS WHO HAVE SUBSCRIBED FOR COMMON SHARES IN THE SUBSCRIPTION OFFERING OR
ORDERED COMMON SHARES IN THE COMMUNITY OFFERING WILL RECEIVE WRITTEN NOTICE THAT
THEY HAVE A RIGHT TO AFFIRM, INCREASE, DECREASE OR RESCIND THEIR SUBSCRIPTIONS
OR ORDERS PRIOR TO A DATE SPECIFIED IN THE NOTICE. ANY PERSON WHO DOES NOT
AFFIRMATIVELY ELECT TO CONTINUE HIS SUBSCRIPTION OR ELECTS TO RESCIND HIS
SUBSCRIPTION DURING ANY SUCH EXTENSION WILL HAVE ALL OF HIS FUNDS PROMPTLY
REFUNDED WITH INTEREST. ANY PERSON WHO ELECTS TO DECREASE HIS SUBSCRIPTION
DURING ANY SUCH EXTENSION WILL HAVE THE APPROPRIATE PORTION OF HIS FUNDS
PROMPTLY REFUNDED WITH INTEREST. IN ADDITION, IF THE PURCHASE LIMITATIONS ARE
INCREASED, PERSONS WHO HAVE SUBSCRIBED FOR THE MAXIMUM AMOUNT WILL BE GIVEN THE
OPPORTUNITY TO INCREASE THEIR SUBSCRIPTIONS.
PAYMENT FOR COMMON SHARES
Payment of the subscription price for all Common Shares for which
subscription is made must accompany a completed Stock Order Form in order for
subscriptions to be valid. Payment for Common Shares may be made (i) in cash, if
delivered in person; (ii) by check, bank draft, or money order made payable to
the Bank; or (iii) by authorization of withdrawal from deposit accounts in the
Bank (other than non-self-directed IRAs). No payments by wire transfer will be
accepted. The Bank cannot lend money or otherwise extend credit to any person to
purchase Common Shares.
Payments made in cash or by check, bank draft, or money order will be
placed in a segregated savings account insured by the FDIC up to applicable
limits until the Conversion is completed or terminated. Interest will be paid by
the Bank on such account at the then current passbook savings account rate,
which is currently 2.50% with an annual percentage yield of 2.53%, from the date
payment is received until the Conversion is completed or terminated. Payments
made by check will not be deemed to have been received until the check has
cleared for payment.
Instructions for authorizing withdrawals from deposit accounts,
including certificates of deposit, are provided in the Stock Order Form. Once a
withdrawal has been authorized, none of the designated withdrawal amount may be
used by a subscriber for any purpose other than to purchase Common Shares,
unless the Conversion is terminated. All sums authorized for withdrawal will
continue to earn interest at the contract rate for such account or certificate
until the completion or termination of the Conversion. Interest penalties for
early withdrawal applicable to certificate accounts will be waived in the case
of withdrawals authorized for the purchase of Common Shares. If a partial
withdrawal from a certificate account results in a balance less than the
applicable minimum balance requirement, the certificate will be canceled and the
remaining balance will earn interest at the Bank's passbook rate subsequent to
the withdrawal.
In order to utilize funds in an IRA maintained at the Bank, the funds
must be transferred to a self-directed IRA that permits the funds to be invested
in stock. There will be no early withdrawal or IRS penalties for such transfer.
The beneficial owner of the IRA must direct the trustee of the account to use
funds from such account to purchase Common Shares in connection with the
Conversion. THIS CANNOT BE DONE THROUGH THE MAIL. Persons who are interested in
utilizing IRAs at the Bank to subscribe for Common Shares should contact the
Conversion Information Center at (740) 623-8678 for instructions and assistance.
Subscriptions will not be filled by the Bank until subscriptions have
been received in the Offering for up to 1,445,000 Common Shares, the minimum
point of the Valuation Range. If the Conversion is terminated, all funds
delivered to the Bank for the purchase of Common Shares will be returned with
interest, and all charges to deposit accounts will be rescinded. Subscribers and
other purchasers will be notified by mail, promptly upon completion of the sale
of the Common Shares, of the number of shares for which their subscriptions have
been accepted. The funds on deposit with the Bank for the purchase of Common
Shares will be withdrawn and paid to the Holding Company in exchange for the
Common Shares. Certificates representing Common Shares will be delivered
promptly thereafter. The Common Shares will not be insured by the FDIC.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes but may pay for such Common Shares upon consummation of
the Conversion.
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SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth certain information regarding the
subscription rights intended to be exercised by the directors and executive
officers of the Bank and the Holding Company and their Associates and persons
with whom they may be deemed to be Acting in Concert:
<TABLE>
<CAPTION>
Name Total shares(1) Percent of total offering(2) Aggregate purchase price(1)
- ---- ------------ ------------------------- ------------------------
<S> <C> <C> <C>
Neal J. Caldwell 30,000 1.76% $ 300,000
Charles H. Durmis 30,000 1.76 300,000
Robert C. Hamilton 30,000 1.76 300,000
Robert D. Mauch 15,000 0.88 150,000
Douglas L. Randles 30,000 1.76 300,000
Preston W. Bair 30,000 1.76 300,000
-------- ---- ------------
All directors and executive
officers as a group (6 persons) 165,000 9.68 $1,650,000
======= ==== ==========
<FN>
- -----------------------------
(1) Includes intended purchases by Associates of directors and executive
officers, to the extent known.
(2) Assumes that 1,700,000 Common Shares, the mid-point of the Valuation
Range, will be sold in connection with the Conversion at $10 per share
and that a sufficient number of Common Shares will be available to
satisfy the intended purchases by directors and executive officers. See
"Pricing and Number of Common Shares to be Sold."
</TABLE>
All purchases by executive officers and directors of the Bank are being
made for investment purposes only and with no present intent to resell.
PRICING AND NUMBER OF COMMON SHARES TO BE SOLD
The aggregate offering price of the Common Shares will be based on the
pro forma market value of the shares as determined by an independent appraisal
of the Bank, as converted, and the Holding Company. Keller, a firm which
evaluates and appraises financial institutions, has been retained by the Bank to
prepare an appraisal of the estimated pro forma market value of the Bank as
converted, and the Holding Company. Keller will receive a fee of $17,000 for its
appraisal and one update and will not be reimbursed for out-of-pocket expenses.
Keller was selected by the Board of Directors of the Bank because
Keller has extensive experience in the valuation of thrift institutions,
particularly in the mutual-to-stock conversion context. The Board of Directors
reviewed the credentials of Keller's appraisal personnel and obtained references
and recommendations from other companies which have engaged Keller. Keller is
certified by the OTS as a mutual-to-stock conversion appraiser. The Bank and
Keller have no relationships which would affect Keller's independence.
The appraisal was prepared by Keller in reliance upon the information
contained herein. Keller also considered the following factors, among others:
the economic and demographic conditions in the Bank's primary market area; the
quality and depth of the Bank's management and personnel; certain historical
financial and other information relating to the Bank; a comparative evaluation
of the operating and financial statistics of the Bank with those of other thrift
institutions; the aggregate size of the Offering; the impact of the Conversion
on the Bank's regulatory capital and earnings potential; the trading market for
stock of comparable thrift institutions and thrift holding companies; and
general conditions in the markets for such stocks. The Boards of Directors of
the Holding Company and the Bank reviewed and deemed appropriate the assumptions
and methodology used by Keller in preparing the appraisal.
The Pro Forma Value of the Bank, as converted, determined by Keller, is
$17,000,000 as of November 28. 1997. The Valuation Range established in
accordance with the Plan is $14,450,000 to $19,550,000 which, based upon a per
share offering price of $10, will result in the sale of between 1,445,000 and
1,955,000 Common Shares. Applicable regulations permit the Holding Company to
offer additional Common Shares in an amount not to exceed 15% above the maximum
of the Valuation Range, which would permit the issuance of up to 2,248,250
Common Shares. The total number of Common Shares sold in the Conversion will be
based on the Valuation Range.
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If, due to changing market conditions, the final valuation is less than
$14,450,000 or more than $22,482,500, subscribers will be given the right to
affirm, increase, decrease or rescind their subscriptions. Any person who does
not affirmatively elect to continue his subscription or elects to rescind his
subscription before the date specified in the notice will have all of his funds
promptly refunded with interest. Any person who elects to decrease his
subscription will have the appropriate portion of his funds promptly refunded
with interest.
THE APPRAISAL BY KELLER IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON SHARES
OR VOTING TO APPROVE THE CONVERSION. IN PREPARING THE VALUATION, KELLER HAS
RELIED UPON AND ASSUMED THE ACCURACY AND COMPLETENESS OF THE AUDITED FINANCIAL
STATEMENTS AND STATISTICAL INFORMATION PROVIDED BY THE BANK. KELLER DID NOT
INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY
THE BANK, NOR DID KELLER VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE
BANK OR THE HOLDING COMPANY. THE VALUATION CONSIDERS THE BANK ONLY AS A GOING
CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE
OF THE BANK. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON
ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO
CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING
COMMON SHARES WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT THE CONVERSION
PURCHASE PRICE.
A copy of the complete appraisal is on file and open for inspection at
the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552; at the
Central Regional Office of the OTS, 200 West Madison Street, Suite 1300,
Chicago, Illinois 60606; at the offices of the Division, 77 S. High Street,
Columbus, Ohio 43215; and at the offices of the Bank.
RESTRICTIONS ON REPURCHASE OF COMMON SHARES
OTS regulations generally prohibit the Holding Company from
repurchasing any of its capital stock for three years following the date of
completion of the Conversion, except as part of an open-market stock repurchase
program during the second and third years following the Conversion involving no
more than 5% of the outstanding capital stock during a twelve-month period. The
OTS may permit a repurchase during the first year following the completion of
the Conversion or may permit the Holding Company to exceed the 5% limits in the
second and third years if exceptional circumstances are established. In
addition, following any repurchase during the three years after the completion
of the Conversion, the Bank's regulatory capital must equal or exceed all
regulatory capital requirements. Before the commencement of a repurchase
program, the Holding Company must provide notice to the OTS, and the OTS may
disapprove the program if the OTS determines that it would adversely affect the
financial condition of the Bank or if it determines that there is no valid
business purpose for such repurchase. Such repurchase restrictions would not
prohibit the ESOP or the RRP from purchasing Common Shares during the first year
following the Conversion.
RESTRICTIONS ON TRANSFER OF COMMON SHARES BY DIRECTORS AND OFFICERS
Common Shares purchased by directors and executive officers of the
Holding Company and their Associates will be subject to the restriction that
such shares may not be sold for a period of one year following completion of the
Conversion, except in the event of the death of the shareholder. The
certificates evidencing Common Shares issued by the Holding Company to directors
and executive officers will bear a legend giving appropriate notice of the
restriction imposed upon them. In addition, the Holding Company will give
appropriate instructions to the transfer agent for the Holding Company's common
shares in respect of the applicable restriction on transfer of any restricted
shares. Any shares issued as a stock dividend, stock split or otherwise in
respect of restricted shares will be subject to the same restrictions.
Subject to certain exceptions, for a period of three years following
the Conversion, no director or officer of the Holding Company or the Bank, or
any of their Associates, may purchase any common shares of the Holding Company
without the prior written approval of the OTS, except through a broker-dealer
registered with the SEC. This restriction will not apply, however, to negotiated
transactions involving more than 1% of a class of outstanding common shares of
the Holding Company or shares acquired by any stock benefit plan of the Holding
Company or the Bank.
The Common Shares, like the stock of most public companies, are subject
to the registration requirements of the Act. Accordingly, the Common Shares may
be offered and sold only in compliance with such registration requirements or
pursuant to an applicable exemption from registration. Common Shares received in
the Conversion by persons who are not
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"affiliates" of the Holding Company may be resold without registration. Common
Shares received by affiliates of the Holding Company will be subject to resale
restrictions. An "affiliate" of the Holding Company, for purposes of Rule 144,
is a person who directly, or indirectly through one or more intermediaries,
controls, or is controlled by or is under common control with, the Holding
Company. Directors and executive officers of a company are generally presumed to
be affiliates of that company. Rule 144 generally requires that there be
publicly available certain information concerning the Holding Company and that
sales subject to Rule 144 be made in routine brokerage transactions or through a
market maker. If the conditions of Rule 144 are satisfied, each affiliate (or
group of persons acting in concert with one or more affiliates) is generally
entitled to sell in the public market, without registration, in any three-month
period, a number of shares which does not exceed the greater of (i) 1% of the
number of outstanding shares of the Holding Company or (ii) if the shares are
admitted to trading on a national securities exchange or reported through the
automated quotation system of a registered securities association, such as The
Nasdaq Stock Market, the average weekly reported volume of trading during the
four weeks preceding the sale.
RIGHTS OF REVIEW
Any person aggrieved by a final action of the OTS which approves, with
or without conditions, or disapproves the Plan may obtain review of such action
by filing in the Court of Appeals of the United States for the circuit in which
the principal office or residence of such person is located or in the United
States Court of Appeals for the District of Columbia, a written petition praying
that the final action of the OTS be modified, terminated, or set aside. Such
petition must be filed within 30 days after the date of mailing of proxy
materials to the voting members of the Bank or within 30 days after the date of
publication in the Federal Register of notice of approval of the Plan by the
OTS, whichever is later.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
AND THE BANK AND ANTI-TAKEOVER PROVISIONS
GENERAL
Federal law and regulations, Ohio law, the Articles of Incorporation
and Code of Regulations of the Holding Company, the Amended Articles of
Incorporation and Amended Constitution of the Bank, and certain employee benefit
plans to be adopted by the Holding Company and the Bank contain certain
provisions which may deter or prohibit a change of control of the Holding
Company and the Bank. Such provisions are intended to encourage any acquiror to
negotiate the terms of an acquisition with the Board of Directors of the Holding
Company, thereby reducing the vulnerability of the Holding Company to takeover
attempts and certain other transactions which have not been negotiated with and
approved by the Board of Directors.
Anti-takeover devices and provisions may, however, have the effect of
discouraging sudden and other hostile takeover attempts which are not approved
by the Board of Directors, even under circumstances in which shareholders may
deem such takeovers to be in their best interests or in which shareholders may
receive a substantial premium for their shares over then current market prices.
As a result, shareholders who might desire to participate in such a transaction
may not have an opportunity to participate by virtue of such devices and
provisions. Such provisions may also benefit management by discouraging changes
of control in which incumbent management would be removed from office. The
following is a summary of certain provisions of such laws, regulations and
documents.
FEDERAL LAW AND REGULATION
FEDERAL DEPOSIT INSURANCE ACT. The Federal Deposit Insurance Act (the
"FDIA") provides that no person, acting directly or indirectly or in concert
with one or more persons, shall acquire control of any insured savings
association or holding company unless 60 days' prior written notice has been
given to the OTS, and the OTS has not issued a notice disapproving the proposed
acquisition. Control, for purposes of the FDIA, means the power, directly or
indirectly, to direct the management or policies of an insured institution or to
vote 25% or more of any class of securities of such institution. This provision
of the FDIA is implemented by the OTS in accordance with the Regulations for
Acquisition of Control of an Insured Institution, 12 C.F.R. Part 574 (the
"Control Regulations"). Control, for purposes of the Control Regulations, exists
in situations in which the acquiring party has direct or indirect voting control
of at least 25% of the institution's voting shares or controls in any manner the
election of a majority of the directors of such institution or the Director of
the OTS determines that such person exercises a controlling influence over the
management or policies of such institution. In addition, control is presumed to
exist, subject to rebuttal, if the acquiring party (which includes a group
"acting in concert") has voting control
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of at least 10% of the institution's voting stock and any of eight control
factors specified in the Control Regulations exists. There are also rebuttable
presumptions in the Control Regulations concerning whether a group "acting in
concert" exists, including presumed action in concert among members of an
"immediate family." The Control Regulations apply to acquisitions of Common
Shares in connection with the Conversion and to acquisitions after the
Conversion.
CHANGE IN CONTROL OF CONVERTED ASSOCIATIONS. A regulation of the OTS
provides that, for a period of three years after the date of the completion of
the Conversion, no person shall, directly or indirectly, offer to acquire or
acquire beneficial ownership of more than 10% of any class of equity security of
the Holding Company or the Bank without the prior written approval of the OTS.
In addition to the actual ownership of more than 10% of a class of equity
securities, a person shall be deemed to have acquired beneficial ownership of
more than 10% of the equity securities of the Holding Company or the Bank if the
person holds any combination of stock and revocable and/or irrevocable proxies
of the Holding Company under circumstances that give rise to a conclusive
control determination or rebuttable control determination under the Control
Regulations. Such circumstances include (i) holding any combination of voting
shares and revocable and/or irrevocable proxies representing more than 25% of
any class of voting stock of the Holding Company enabling the acquirer (a) to
elect one-third or more of the directors, (b) to cause the Holding Company or
the Bank's shareholders to approve the acquisition or corporate reorganization
of the Holding Company, or (c) to exert a controlling influence on a material
aspect of the business operations of the Holding Company or the Bank, and (ii)
acquiring any combination of voting shares and irrevocable proxies representing
more than 25% of any class of voting shares.
The three-year restriction does not apply (i) to any offer with a view
toward public resale made exclusively to the Holding Company or the Bank or any
underwriter or selling group acting on behalf of the Holding Company or the
Bank, (ii) unless made applicable by the OTS by prior written advice, to any
offer or announcement of an offer which, if consummated, would result in the
acquisition by any person, together with all other acquisitions by any such
person of the same class of securities during the preceding 12-month period, of
not more than 1% of the class of securities, or (iii) to any offer to acquire or
the acquisition of beneficial ownership of more than 10% of any class of equity
security of the Holding Company or the Bank by a corporation whose ownership is
or will be substantially the same as the ownership of the Holding Company or the
Bank if made more than one year following the date of the Conversion. The
foregoing restriction does not apply to the acquisition of the capital stock of
the Holding Company or the Bank by one or more tax-qualified employee stock
benefit plans, provided that the plan or plans do not have the beneficial
ownership in the aggregate of more than 25% of any class of equity security of
the Holding Company or the Bank.
HOLDING COMPANY RESTRICTIONS. Federal law generally prohibits a savings
and loan holding company, without prior approval of the Director of the OTS,
from (i) acquiring control of any other savings association or savings and loan
holding company, (ii) acquiring substantially all of the assets of a savings
association or holding company thereof, or (iii) acquiring or retaining more
than 5% of the voting shares of a savings association or holding company thereof
which is not a subsidiary.
Under certain circumstances, a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
the previously unissued voting shares of an undercapitalized savings association
for cash without such savings association being deemed to be controlled by the
Holding Company. Except with the prior approval of the Director of the OTS, no
director or officer of the savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's voting shares
may acquire control of any savings institution, other than a subsidiary
institution or any other savings and loan holding company.
OHIO LAW
MERGER MORATORIUM STATUTE. Ohio has a merger moratorium statute
regulating certain takeover bids affecting certain public corporations which
have significant ties to Ohio. The statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between such an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder") for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) one of the exceptions referred to above applies, (2)
the holders of at least two-thirds of the voting
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shares, and of at least a majority of the voting shares not beneficially owned
by the Interested Shareholder, approve the business combination at a meeting
called for such purpose, or (3) the business combination meets certain statutory
criteria designed to ensure that the issuing public corporation's remaining
shareholders receive fair consideration for their shares.
An Ohio corporation, under certain circumstances, may "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. The
statute still prohibits for 12 months, however, any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. The
Articles of Incorporation of the Holding Company do not opt out of the
protection afforded by Chapter 1704.
CONTROL SHARE ACQUISITION STATUTE. Section 1701.831 of the Ohio Revised
Code (the "Control Share Acquisition Statute") requires that certain
acquisitions of voting securities which would result in the acquiring
shareholder owning 20%, 33-1/3% or 50% of the outstanding voting securities of
the Holding Company (a "Control Share Acquisition") must be approved in advance
by the holders of at least a majority of the outstanding voting shares
represented at a meeting at which a quorum is present and a majority of the
portion of the outstanding voting shares represented at such a meeting,
excluding the voting shares owned by the acquiring shareholder. The Control
Share Acquisition Statute was intended, in part, to protect shareholders of Ohio
corporations from coercive tender offers.
TAKEOVER BID STATUTE. Ohio law also contains a statute regulating
takeover bids for any Ohio corporation. Such statute provides that no offeror
may make a takeover bid unless (i) at least 20 days prior thereto the offeror
announces publicly the terms of the proposed takeover bid and files with the
Ohio Division of Securities (the "Securities Division") and provides the target
company with certain information in respect of the offeror, his ownership of the
company's shares and his plans for the company, and (ii) within ten days
following such filing either (a) no hearing is required by the Securities
Division, (b) a hearing is requested by the target company within such time but
the Securities Division finds no cause for hearing exists, or (c) a hearing is
ordered and upon such hearing the Securities Division adjudicates that the
offeror proposes to make full, fair and effective disclosure to offerees of all
information material to a decision to accept or reject the offer.
The takeover bid statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before making
any such purchase, failed to announce his intention to gain control of the
target company or otherwise failed to make full and fair disclosure of such
intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Ohio takeover bid statute is preempted by federal regulation.
ARTICLES OF INCORPORATION OF THE HOLDING COMPANY
ABILITY OF THE BOARD OF DIRECTORS TO ISSUE ADDITIONAL SHARES. The
Articles of Incorporation of the Holding Company permit the Board of Directors
of the Holding Company to issue additional common shares. The ability of the
Board of Directors to issue such additional shares may create impediments to
gaining, or otherwise discourage persons from attempting to gain, control of the
Holding Company.
MATTERS REQUIRING ENLARGED SHAREHOLDER VOTE. Article Sixth of the
Articles of Incorporation of the Holding Company provides that, in the event the
Board of Directors recommends against the approval of any of the following
matters, the holders of at least 80% of the voting shares of the Holding Company
are required to approve any such matters:
(1) A proposed amendment to the Articles of Incorporation
of the Holding Company;
(2) A proposed Amendment to the Code of Regulations of
the Holding Company;
(3) A proposal to change the number of directors by
action of the shareholders;
(4) An agreement of merger or consolidation providing for
the proposed merger or consolidation of the Holding
Company with or into one or more other corporations;
(5) A proposed combination or majority share acquisition
involving the issuance of shares of the Holding
Company and requiring shareholder approval;
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(6) A proposal to sell, exchange, transfer or otherwise
dispose of all, or substantially all, of the assets,
with or without the goodwill, of the Holding Company;
or
(7) A proposed dissolution of the Holding Company.
ELIMINATION OF CUMULATIVE VOTING. Section 1701.55 of the Ohio Revised
Code provides that shareholders of a for profit corporation which is not a
savings and loan association and which is incorporated under Ohio law must
initially be granted the right to cumulate votes in the election of directors.
The right to cumulate votes in the election of directors will exist at a meeting
of shareholders if notice in writing is given by any shareholder to the
President, a Vice President or the Secretary of an Ohio corporation, not less
than 48 hours before a meeting at which directors are to be elected, that the
shareholder desires that the voting for the election of directors shall be
cumulative and if an announcement of the giving of such notice is made upon the
convening of such meeting by the Chairman or Secretary or by or on behalf of the
shareholder giving such notice. If cumulative voting is invoked, each
shareholder would have a number of votes equal to the number of directors to be
elected, multiplied by the number of shares owned by him, and would be entitled
to distribute his votes among the candidates as he sees fit.
Section 1701.69 of the Ohio Revised Code provides that an Ohio
corporation may eliminate cumulative voting in the election of directors after
the expiration of 90 days after the date of initial incorporation by filing with
the Ohio Secretary of State an amendment to the articles of incorporation
eliminating cumulative voting. The Articles of Incorporation of the Holding
Company have been amended to eliminate cumulative voting. The elimination of
cumulative voting may make it more difficult for shareholders to elect as
directors persons whose election is not supported by the Board of Directors of
the Holding Company.
EMPLOYEE BENEFIT PLANS
The Stock Option Plan, the ESOP and the RRP also may be deemed to have
certain anti-takeover effects. See "DESCRIPTION OF AUTHORIZED SHARES" and
"MANAGEMENT Employee Stock Ownership Plan; - Stock Option Plan; and -
Recognition and Retention Plan."
DESCRIPTION OF AUTHORIZED SHARES
GENERAL
The Articles of Incorporation of the Holding Company authorize the
issuance of 9,j500,000 common shares, and 500,000 preferred shares. Neither the
common shares nor the preferred shares authorized by the Holding Company's
Articles of Incorporation have par value. Upon receipt by the Holding Company of
the purchase price therefor and subsequent issuance thereof, each Common Share
issued in the Conversion will be fully paid and nonassessable. Notwithstanding
the foregoing, until payments are received by the Holding Company from the ESOP
in accordance with the terms of a loan agreement to be entered into by and
between the Holding Company and the ESOP, Common Shares issued to the ESOP for
which payment in money has not been received will not be fully paid and
non-assessable. The Common Shares will represent nonwithdrawable capital and
will not and cannot be insured by the FDIC. Each Common Share will have the same
relative rights and will be identical in all respects to every other Common
Share.
None of the preferred shares of the Holding Company will be issued in
connection with the Conversion. The Board of Directors of the Holding Company is
authorized, without shareholder approval, to issue preferred shares and to fix
and state the designations, preferences or other special rights of such shares
and the qualifications, limitations and restrictions thereof. The preferred
shares may rank prior to the common shares as to dividend rights, liquidation
preferences or both. Each holder of preferred shares will be entitled to one
vote for each preferred share held of record on all matters submitted to a vote
of shareholders. The issuance of preferred shares and any conversion rights
which may be specified by the Board of Directors for the preferred shares could
adversely affect the voting power of holders of the common shares.
The Board of Directors has no present intention to issue any of the preferred
shares.
The following is a summary description of the rights of the common
shares of the Holding Company, including the material express terms of such
shares as set forth in the Holding Company's Articles of Incorporation.
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<PAGE> 85
LIQUIDATION RIGHTS
In the event of the complete liquidation or dissolution of the Holding
Company, the holders of the Common Shares will be entitled to receive all assets
of the Holding Company available for distribution, in cash or in kind, after
payment or provision for payment of (i) all debts and liabilities of the Holding
Company, (ii) any accrued dividend claims, and (iii) any interests in the
Liquidation Account payable as a result of a liquidation of the Bank. See "THE
CONVERSION - Liquidation Account."
VOTING RIGHTS
The holders of the Common Shares will possess exclusive voting rights
in the Holding Company. Each holder of Common Shares will be entitled to one
vote for each share held of record on all matters submitted to a vote of holders
of common shares. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND
THE BANK AND ANTI-TAKEOVER PROVISIONS - Articles of Incorporation of the Holding
Company -- Elimination of Cumulative Voting."
DIVIDENDS
The holders of the Common Shares will be entitled to the payment of
dividends when, as and if declared by the Board of Directors and paid out of
funds, if any, available under applicable laws and regulations for the payment
of dividends. The payment of dividends is subject to federal and state statutory
and regulatory restrictions. See "DIVIDEND POLICY," "REGULATION - Office of
Thrift Supervision -- Limitations on Capital Distributions" and "TAXATION -
Federal Taxation" for a description of restrictions on the payment of cash
dividends.
PREEMPTIVE RIGHTS
After the consummation of the Conversion, no shareholder of the Holding
Company will have, as a matter of right, the preemptive right to purchase or
subscribe for shares of any class, now or hereafter authorized, or to purchase
or subscribe for securities or other obligations convertible into or
exchangeable for such shares or which by warrants or otherwise entitle the
holders thereof to subscribe for or purchase any such share.
RESTRICTIONS ON ALIENABILITY
See "THE CONVERSION - Restrictions on Repurchase of Common Shares" for
a description of the limitations on the repurchase of stock by the Holding
Company; "THE CONVERSION - Restrictions on Transfer of Common Shares by
Directors and Officers" for a description of certain restrictions on the
transferability of Common Shares purchased by officers and directors; and
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK AND
ANTI-TAKEOVER PROVISIONS" for information regarding regulatory restrictions on
acquiring Common Shares.
REGISTRATION REQUIREMENTS
The Holding Company will register its common shares pursuant to Section
12(g) of the Exchange Act prior to or promptly upon the completion of the
Conversion and will not deregister such shares for a period of three years
following the completion of the Conversion. Upon such registration, the proxy
and tender offer rules, insider trading restrictions, annual and periodic
reporting and other requirements of the Exchange Act will apply to the Holding
Company.
LEGAL MATTERS
Certain legal matters pertaining to the Common Shares and the federal
and Ohio tax consequences of the Conversion are being passed upon for the
Holding Company and the Bank by Vorys, Sater, Seymour and Pease LLP, Cincinnati,
Ohio. Certain legal matters are being passed upon for Webb by its counsel,
Silver, Freedman & Taff, L.L.P., Washington, D.C.
-80-
<PAGE> 86
EXPERTS
Keller has consented to the publication herein of the summary of its
opinion as to the estimated pro forma market value of the Bank as converted and
to the use of its name and statements with respect to it appearing herein.
The financial statements of the Bank as of June 30, 1997 and 1996, and
for each of the three years in the period ended June 30, 1997, have been
included herein in reliance upon the report of Crowe, Chizek and Company LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on
Form S-1 (File No. 333-42483) under the Act with respect to the Common Shares
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. Such information may be
inspected at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies may be obtained from the SEC at
prescribed rates. Such information may also be inspected on the SEC's internet
website, at www.sec.gov.
The Bank has filed an Application for Conversion (the "Application")
with the OTS and the Division. This Prospectus omits certain information
contained in the Application. The Application may be inspected at the offices of
the OTS, 1700 G Street, N.W., Washington, D.C. 20552; at the Central Regional
Office of the OTS, 200 West Madison, Suite 1300, Chicago, Illinois 60606; and at
the offices of the Division, 77 S. High Street, Columbus, Ohio 43215.
<PAGE> 87
THE HOME LOAN SAVINGS BANK
Coshocton, Ohio
FINANCIAL STATEMENTS
CONTENTS
REPORT OF INDEPENDENT AUDITORS ...................................... F-2
FINANCIAL STATEMENTS
BALANCE SHEETS ................................................ F-3
STATEMENTS OF INCOME .......................................... F-4
STATEMENTS OF MEMBERS' EQUITY ................................. F-5
STATEMENTS OF CASH FLOWS ...................................... F-6
NOTES TO FINANCIAL STATEMENTS ................................. F-8
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.
<PAGE> 88
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Home Loan Savings Bank
Coshocton, Ohio
We have audited the accompanying balance sheets of The Home Loan Savings Bank
(formerly The Home Loan & Savings Company) as of June 30, 1997 and 1996, and
related statements of income, members' equity and cash flows for each of the
three years in the period ended June 30, 1997. These financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Home Loan Savings Bank as
of June 30, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 1997 in conformity with
generally accepted accounting principles.
Crowe, Chizek and Company LLP
Columbus, Ohio
July 25, 1997
- -------------------------------------------------------------------------------
F-2
<PAGE> 89
THE HOME LOAN SAVINGS BANK
BALANCE SHEETS
September 30, 1997 (unaudited) and June 30, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, June 30,
------------- --------
1997 1997 1996
---- ---- ----
(unaudited)
ASSETS
<S> <C> <C> <C>
Cash and due from banks $ 1,711,546 $ 1,765,821 $ 2,150,422
Interest-bearing deposits in other banks 222,556 165,228 573,017
Overnight deposits -- 1,250,000 3,000,000
Federal funds sold 250,000 1,500,000 --
------------ ------------ ------------
Total cash and cash equivalents 2,184,102 4,681,049 5,723,439
Interest-bearing time deposits 39,366 38,796 40,669
Securities available for sale at fair value 4,517,892 5,004,296 1,743,506
Securities held to maturity (Fair value of
$2,255,547 in 1996) -- -- 2,251,731
Loans, net of allowance for loan losses 51,773,320 49,300,124 44,293,916
Premises and equipment, net 509,219 524,061 525,798
Federal Home Loan Bank stock 372,600 366,000 341,400
Accrued interest receivable 302,902 287,014 260,429
Other assets 153,269 199,505 185,468
------------ ------------ ------------
Total assets $ 59,852,670 $ 60,400,845 $ 55,366,356
============ ============ ============
LIABILITIES
Deposits $ 48,207,603 $ 49,235,430 $ 44,883,857
Accrued interest payable 535,522 460,029 424,467
Accrued expenses and other liabilities 517,404 335,122 289,936
------------ ------------ ------------
Total liabilities 49,260,529 50,030,581 45,598,260
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY
Retained earnings - substantially restricted 10,579,402 10,366,232 9,770,984
Net unrealized gain (loss) on available-for-sale
securities, net of tax 12,739 4,032 (2,888)
------------ ------------ ------------
Total members' equity 10,592,141 10,370,264 9,768,096
------------ ------------ ------------
Total liabilities and members' equity $ 59,852,670 $ 60,400,845 $ 55,366,356
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-3
<PAGE> 90
THE HOME LOAN SAVINGS BANK
STATEMENTS OF INCOME
Three months ended September 30, 1997 and 1996 (unaudited)
and years ended June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
September 30, Years ended June 30,
------------- --------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 1,137,188 $ 1,015,948 $ 4,162,822 $ 3,755,408 $ 3,142,843
Securities 74,490 71,222 265,148 331,584 428,716
Dividends on Federal Home
Loan Bank stock 6,688 6,007 24,721 22,924 23,852
Interest-bearing deposits and
federal funds sold 35,584 38,981 156,639 148,960 101,373
------------ ------------ ------------ ------------- ------------
Total interest income 1,253,950 1,132,158 4,609,330 4,258,876 3,696,784
INTEREST EXPENSE
Deposits 516,919 436,776 1,930,924 1,703,208 1,331,404
------------ ------------ ------------ ------------- ------------
NET INTEREST INCOME 737,031 695,382 2,678,406 2,555,668 2,365,380
Provision for loan losses 30,000 1,500 6,000 -- 2,319
------------ ------------ ------------ ------------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 707,031 693,882 2,672,406 2,555,668 2,363,061
NONINTEREST INCOME
Service charges and other fees 33,910 33,801 139,297 119,461 113,999
Other income 9,437 8,716 35,491 45,907 35,002
------------ ------------ ------------ ------------- ------------
Total noninterest income 43,347 42,517 174,788 165,368 149,001
NONINTEREST EXPENSE
Salaries and employee benefits 234,659 210,739 889,697 786,868 751,554
Occupancy and equipment 34,452 36,324 140,893 129,315 100,752
State franchise taxes 36,900 35,100 138,490 126,389 113,958
Computer processing 23,880 20,859 94,951 92,854 93,373
SAIF deposit insurance
premiums 7,468 285,973 320,920 93,368 90,607
Legal, audit and supervisory
exam fees 18,076 15,538 75,817 57,334 68,896
Director fees 19,275 21,030 78,160 72,810 66,250
Other expense 40,398 34,587 203,866 173,050 132,854
------------ ------------ ------------ ------------- ------------
Total noninterest expense 415,108 660,150 1,942,794 1,531,988 1,418,244
------------ ------------ ------------ ------------- ------------
INCOME BEFORE INCOME TAXES 335,270 76,249 904,400 1,189,048 1,093,818
Income tax expense 122,100 27,400 309,152 419,515 377,600
------------ ------------ ------------ ------------- ------------
NET INCOME $ 213,170 $ 48,849 $ 595,248 $ 769,533 $ 716,218
============ ============ ============ ============= ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements
F-4
<PAGE> 91
THE HOME LOAN SAVINGS BANK
STATEMENTS OF MEMBERS' EQUITY
Three months ended September 30, 1997 (unaudited) and
years ended June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Excess of Additional
Unrealized Pension
Gain (Loss) Liability over
on Securities Unrecognized Total
Retained Available Prior Members'
Earnings for Sale Service Cost Equity
-------- -------- ------------ ------
<S> <C> <C> <C> <C>
BALANCE AT JULY 1, 1994 $ 8,285,233 $ -- $ (16,922) $ 8,268,311
Net income 716,218 -- -- 716,218
Change in excess of additional pension
liability over unrecognized prior
service cost -- -- 16,922 16,922
Net change in unrealized gain (loss)
on available-for-sale securities -- 3,750 -- 3,750
-------------- ----------- ----------- ---------------
BALANCE AT JUNE 30, 1995 9,001,451 3,750 -- 9,005,201
Net income 769,533 -- -- 769,533
Net change in unrealized gain (loss)
on available-for-sale securities -- (6,638) -- (6,638)
-------------- ----------- ----------- ---------------
BALANCE AT JUNE 30, 1996 9,770,984 (2,888) -- 9,768,096
Net income 595,248 -- -- 595,248
Net change in unrealized gain (loss)
on available-for-sale securities -- 6,920 -- 6,920
-------------- ----------- ----------- ---------------
BALANCE AT JUNE 30, 1997 10,366,232 4,032 -- 10,370,264
Net income for the three months
ended September 30, 1997
(unaudited) 213,170 -- -- 213,170
Net change in unrealized gains (loss)
on available for sale securities
(unaudited) -- 8,707 -- 8,707
-------------- ----------- ----------- ---------------
BALANCE AT SEPTEMBER 30, 1997
(UNAUDITED) $ 10,579,402 $ 12,739 $ -- $ 10,592,141
============= =========== =========== ===============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements
F-5
<PAGE> 92
THE HOME LOAN SAVINGS BANK
STATEMENTS OF CASH FLOWS
Three months ended September 30, 1997 and 1996 (unaudited)
and years ended June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
September 30, Years ended June 30,
------------- --------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 213,170 $ 48,849 $ 595,248 $ 769,533 $ 716,218
Adjustments to reconcile net
income to net cash from
operating activities:
Depreciation 21,150 19,200 79,329 67,370 57,317
Securities amortization
and accretion (403) 326 2,908 (7,119) (11,555)
Provision for loan losses 30,000 1,500 6,000 -- 2,319
FHLB stock dividends (6,600) (6,000) (24,600) (22,800) (23,600)
Deferred taxes (61,531) (91,429) 11,334 6,722 (9,272)
Loss on disposition of assets -- -- -- 12,201 --
Net change in accrued
interest receivable and
other assets 86,823 12,119 (55,519) (120,250) (13,471)
Net change in accrued
expenses and other
liabilities 257,775 298,519 80,748 153,634 217,995
Net change in deferred
loan fees 5,201 6,025 3,283 (9,589) 25,753
------------ ------------ ------------ ------------- ------------
Net cash from operating
activities 545,585 289,109 698,731 849,702 961,704
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from maturities 500,000 -- 500,000 500,000 750,000
Purchases -- (1,001,523) (3,751,484) (1,497,363) (494,609)
Securities held to maturity:
Proceeds from maturities -- 250,000 2,250,000 3,250,000 3,499,719
Purchases -- -- -- -- (1,745,316)
Purchase of time deposits in
other financial institutions -- -- (38,796) (40,669) --
Maturities of time deposits in
other financial institutions -- -- 40,669 -- --
Net change in loans (2,508,397) (1,584,600) (5,015,491) (5,128,693) (3,401,958)
Premises and equipment
expenditures (6,308) (2,645) (77,592) (109,247) (18,215)
------------- ------------- ------------ ------------- ------------
Net cash from investing
activities (2,014,705) (2,338,768) (6,092,694) (3,025,972) (1,410,379)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (1,027,827) 607,613 4,351,573 5,340,441 (15,041)
------------- ------------ ------------ ------------- ------------
Net change in cash and cash
equivalents (2,496,947) (1,442,046) (1,042,390) 3,164,171 (463,716)
Cash and cash equivalents at
beginning of period 4,681,049 5,723,439 5,723,439 2,559,268 3,022,984
------------ ------------ ------------ ------------- ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,184,102 $ 4,281,393 $ 4,681,049 $ 5,723,439 $ 2,559,268
============ ============ ============ ============= ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-6
<PAGE> 93
THE HOME LOAN SAVINGS BANK
STATEMENTS OF CASH FLOWS
Three months ended September 30, 1997 and 1996 (unaudited)
and years ended June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
September 30, Years ended June 30,
------------- --------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow
information
Cash paid during the period for
Interest $ 441,425 $ 455,510 $ 1,895,362 $ 1,556,285 $ 1,231,129
Income taxes 52,849 -- 244,818 417,583 377,000
Noncash transaction
Excess of additional pension
liability $ -- $ -- $ -- $ -- $ (16,922)
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements
F-7
<PAGE> 94
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited)
and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: The Bank is a mutually-owned, state-chartered savings and
loan association engaged in the business of residential and consumer banking
with operations conducted through its main and branch offices located in
Coshocton, Ohio. This community and the contiguous areas are the source of
substantially all the Bank's loan and deposit activities. The majority of the
Bank's income is derived from residential and consumer lending activities and
investments.
USE OF ESTIMATES: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect amounts
reported in the financial statements and disclosures provided, and future
results could differ. The collectibility of loans, fair values of financial
instruments and status of contingencies are particularly subject to change.
CASH FLOW REPORTING: Cash and cash equivalents are defined as cash, due from
banks, overnight deposits and federal funds sold. Net cash flows are reported
for customer loan and deposit transactions and interest-bearing deposits with
other banks.
SECURITIES: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in members' equity,
net of tax. Securities are classified as trading when held for short-term
periods in anticipation of market gains and are carried at fair value.
Securities are written down to fair value when a decline in fair value is not
temporary.
Realized gains or losses on sales are determined based on the amortized cost of
the specific security sold. Interest and dividend income includes amortization
of purchase premiums and discounts using the interest method.
LOANS: Loans are reported at the principal balance outstanding, net of deferred
fees and costs and the allowance for loan losses. Interest income is accrued
over the term of the loans based on the principal balance outstanding and
includes amortization of net deferred loan fees and costs over the contractual
loan term using the interest method.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days. Payments received on such loans are
reported as principal reductions.
- --------------------------------------------------------------------------------
(Continued)
F-8
<PAGE> 95
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged off.
Effective July 1, 1995, the Bank adopted provisions of Statement of Financial
Accounting Standards ("SFAS") Nos. 114 and 118, which modify accounting for
impaired loans. The effect of adopting and applying these standards was not
material in any period.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer and credit card loans, and on an
individual basis for other loans. If a loan is impaired, a valuation allowance
is created with a corresponding charge to provision for loan losses so the loan
is reported, net, at the present value of estimated future cash flows using the
loan's existing rate. Loans are evaluated for impairment when payments are
delayed, typically 90 days or more, or when the internal grading system
indicates a doubtful classification.
CONCENTRATION OF CREDIT RISK: The Bank grants primarily single-family
residential mortgage loans to customers in Coshocton County, Ohio. The ability
of these customers to honor their contracts is dependent, to a certain extent,
on the economic conditions of Coshocton County. The Bank evaluates each
customer's creditworthiness on a case-by-case basis at the time of application.
Residential real estate loans comprise approximately 72% (unaudited), 72% and
75% of the Bank's loan portfolio as of September 30, 1997, June 30, 1997 and
1996.
PREMISES AND EQUIPMENT: Asset cost is reported net of accumulated depreciation.
Depreciation expense is calculated using primarily the straight-line method over
the estimated useful lives of the assets which range from 10 to 20 years for
buildings and improvements and 5 to 10 years for furniture and equipment.
These assets are reviewed for impairment when events indicate the carrying
amount may not be recoverable.
REAL ESTATE OWNED: Real estate acquired in settlement of loans is initially
reported at estimated fair value at acquisition. After acquisition, a valuation
allowance reduces the reported amount to the lower of the initial amount or fair
value less costs to sell. Expenses, gains and losses on disposition and changes
in the valuation allowance are reported in net gain or loss on other real
estate.
- --------------------------------------------------------------------------------
(Continued)
F-9
<PAGE> 96
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES: Income tax expense is the sum of current-year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred tax
assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax basis of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
RECLASSIFICATIONS: In connection with the Bank's initial public offering, the
Bank reclassified certain items for all periods presented to correspond with the
September 30, 1997 presentation.
INTERIM FINANCIAL INFORMATION: The unaudited balance sheet as of September 30,
1997 and the related unaudited statements of income, members' equity and cash
flows for the three months ended September 30, 1997 and 1996 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 Bank in accordance with generally
accepted accounting principles.
NOTE 2 - SECURITIES
The amortized cost and fair values of securities were as follows:
<TABLE>
<CAPTION>
September 30, 1997 (unaudited)
------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury notes $ 4,498,589 $ 20,173 $ 870 $ 4,517,892
=============== ========== =========== ==============
<CAPTION>
June 30, 1997
-------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- ------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury notes $ 4,998,188 $ 10,477 $ 4,369 $ 5,004,296
=============== ========== =========== ==============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-10
<PAGE> 97
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
June 30, 1996
-------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury notes $ 1,747,881 $ 1,446 $ 5,821 $ 1,743,506
=============== ========== =========== ==============
HELD TO MATURITY
U.S. Treasury notes $ 2,251,731 $ 5,985 $ 2,169 $ 2,255,547
=============== ========== =========== ==============
</TABLE>
The amortized cost and fair values of securities at September 30, 1997
(unaudited), by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
AVAILABLE FOR SALE
Due in one year or less $ 2,254,186 $ 2,256,017
Due after one year through five years 2,244,403 2,261,875
-------------- ---------------
$ 4,498,589 $ 4,517,892
============== ===============
</TABLE>
The amortized cost and fair values of securities at June 30, 1997, by
contractual maturity, are shown below.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
AVAILABLE FOR SALE
Due in one year or less $ 1,498,961 $ 1,500,391
Due after one year through five years 3,499,227 3,503,905
-------------- ---------------
$ 4,998,188 $ 5,004,296
============== ===============
</TABLE>
Actual maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
During the three months ended September 30, 1997 (unaudited), a U.S. Treasury
security classified as available for sale was sold within ninety days of its
maturity. Proceeds from this transaction are reflected as a maturity in the
Statement of Cash Flows. The gain on this transaction was $121 (unaudited). No
other securities were sold during the three months ended September 30, 1997 and
1996.
- --------------------------------------------------------------------------------
(Continued)
F-11
<PAGE> 98
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
During the year ended June 30, 1995, a U.S. Treasury security classified as held
to maturity with a carrying value of $499,718 was sold within ninety days of its
maturity. Proceeds from this transaction are reflected as a maturity in the
Statement of Cash Flows. The loss on this transaction was $188. No other
securities were sold during fiscal 1995, 1996 or 1997.
A security with par value of $1,000,000 was pledged to secure public deposits
and for other purposes as of June 30, 1997. No securities were pledged as
collateral as of September 30, 1997 (unaudited) or June 30, 1996.
NOTE 3 - LOANS
Loans were as follows:
<TABLE>
<CAPTION>
September 30, June 30,
------------- --------
1997 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Residential real estate loans:
1 - 4 family $ 36,827,019 $ 35,155,726 $ 32,881,991
Home equity 826,287 728,416 979,108
Nonresidential real estate 3,686,202 3,297,105 2,970,666
Real estate construction 341,291 553,833 407,526
Land 559,388 570,542 349,827
-------------- -------------- ---------------
Total real estate loans 42,240,187 40,305,622 37,589,118
Consumer and other loans
Home improvement 4,150,571 3,701,588 2,671,881
Automobile 2,677,625 2,505,823 2,054,489
Commercial 1,702,856 1,645,091 949,636
Deposit 234,389 219,264 245,289
Credit card 403,269 346,704 330,892
Other 1,200,108 1,047,289 1,436,125
-------------- -------------- ---------------
Total consumer and other 10,368,818 9,465,759 7,688,312
-------------- -------------- ---------------
Total loans 52,609,005 49,771,381 45,277,430
Less:
Allowance for loan losses (148,222) (119,218) (117,513)
Loans in process (575,464) (245,240) (762,485)
Net deferred loan fees and costs (111,999) (106,799) (103,516)
-------------- -------------- ---------------
$ 51,773,320 $ 49,300,124 $ 44,293,916
============== ============== ===============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-12
<PAGE> 99
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Three months ended
September 30, Years ended June 30,
------------- --------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Beginning balance $ 119,218 $ 117,513 $ 117,513 $ 117,513 $ 120,705
Provision for losses 30,000 1,500 6,000 -- 2,319
Loans charged off (1,441) -- (4,500) -- (6,955)
Recoveries of previous
charge-offs 445 -- 205 -- 1,444
------------ ------------ ------------ ------------ -------------
Ending balance $ 148,222 $ 119,013 $ 119,218 $ 117,513 $ 117,513
============ ============ ============ ============ =============
</TABLE>
No loans were on nonaccrual status at September 30, 1997 (unaudited), June 30,
1997 or 1996. The Bank had no loans that were required to be evaluated for
impairment on an individual basis at September 30, 1997 and 1996 or during the
three months then ended (unaudited) or at June 30, 1997 and 1996 or during the
years then ended.
In the ordinary course of business, the Bank has and expects to continue to have
transactions, including borrowings, with its executive 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 Bank. A summary of activity on related party loans,
excluding credit card loans, is as follows. Credit limits may not exceed $5,000
on credit card loans to executive officers and directors.
<TABLE>
<CAPTION>
Three months ended Year ended
September 30, June 30,
------------- --------
1997 1997
---- ----
(unaudited)
<S> <C> <C>
Balance at beginning of period $ 191,772 $ 200,829
Principal repayments 2,545 9,057
-------------- ---------------
Balance at end of period $ 189,227 $ 191,772
============== ===============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-13
<PAGE> 100
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
At September 30, 1997 and 1996 (unaudited), the Bank serviced loans of
approximately $19,000 and $45,000 (unaudited) for the Federal Home Loan Mortgage
Corporation (FHLMC). At June 30, 1997, 1996 and 1995, the Bank serviced loans of
approximately $26,000, $56,000 and $115,000 for the FHLMC. The Bank retained a
5% interest in this package of loans sold to the FHLMC in 1983.
NOTE 4 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable was as follows:
<TABLE>
<CAPTION>
September 30, June 30,
------------- --------
1997 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Securities $ 48,008 $ 60,224 $ 42,455
Loans 254,894 226,790 217,974
------------ ------------ ------------
$ 302,902 $ 287,014 $ 260,429
============ ============ ============
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment were as follows:
<TABLE>
<CAPTION>
September 30, June 30,
------------- --------
1997 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Land $ 80,434 $ 80,434 $ 80,434
Buildings and improvements 663,384 662,470 642,302
Furniture and equipment 446,690 441,296 383,872
------------ ------------ ------------
Total cost 1,190,508 1,184,200 1,106,608
Accumulated depreciation (681,289) (660,139) (580,810)
------------- ------------ ------------
$ 509,219 $ 524,061 $ 525,798
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-14
<PAGE> 101
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
Deposits consisted of the following:
<TABLE>
<CAPTION>
September 30, June 30,
------------- --------
1997 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Noninterest-bearing demand deposits $ 876,869 $ 1,069,333 $ 873,406
NOW and money market accounts 7,366,002 7,650,333 7,521,907
Savings accounts 11,582,586 11,294,755 12,137,375
Certificates of deposit 28,382,146 29,221,009 24,351,169
--------------- ---------------- ---------------
$ 48,207,603 $ 49,235,430 $ 44,883,857
=============== ================ ===============
</TABLE>
The aggregate amount of certificates of deposit accounts with balances of
$100,000 or more at September 30, 1997 (unaudited), June 30, 1997 and 1996 was
$1,121,731, $2,481,642 and $931,670. Deposits more than $100,000 are not insured
by the FDIC.
At September 30, 1997 (unaudited), the scheduled maturities of certificates of
deposit were as follows:
<TABLE>
<CAPTION>
<S> <C>
Years ended September 30, 1998 $ 16,066,106
1999 7,758,144
2000 4,557,896
---------------
$ 28,382,146
==============
</TABLE>
At June 30, 1997, the scheduled maturities of certificates of deposits were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Years ended June 30, 1998 $ 17,375,929
1999 7,598,042
2000 4,247,038
---------------
$ 29,221,009
===============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-15
<PAGE> 102
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS (Continued)
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Three months ended
September 30, Years ended June 30,
------------- --------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
NOW and money
market accounts $ 38,171 $ 39,355 $ 153,416 $ 151,981 $ 168,396
Savings accounts 71,396 75,352 295,281 294,192 321,196
Certificates of
deposit 407,352 322,069 1,482,227 1,257,035 841,812
------------ ------------- -------------- -------------- --------------
$ 516,919 $ 436,776 $ 1,930,924 $ 1,703,208 $ 1,331,404
============ ============= ============== ============== ==============
</TABLE>
NOTE 7 - SAVINGS ASSOCIATION INSURANCE FUND RECAPITALIZATION
Included in SAIF deposit insurance premium expense in the Statement of Income
for the year ended June 30, 1997 and for the three months ended September 30,
1996 (unaudited) is $260,917 for a special assessment resulting from legislation
passed and enacted into law on September 30, 1996 to recapitalize the Savings
Association Insurance Fund of the Federal Deposit Insurance Corporation. Thrifts
such as the Bank paid a one-time assessment in November 1996 of $0.657 for each
$100 in deposits as of March 31, 1995. Because of the recapitalization, the Bank
began paying lower deposit insurance premiums in January 1997.
NOTE 8 - INCOME TAXES
The provision for federal income tax consisted of the following components:
<TABLE>
<CAPTION>
Three months ended
September 30, Years ended June 30,
------------- --------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Current tax expense $ 183,631 $ 118,829 $ 297,818 $ 412,793 $ 386,872
Deferred tax expense (61,531) (91,429) 11,334 6,722 (9,272)
------------- ------------ ------------- ------------ ------------
$ 122,100 $ 27,400 $ 309,152 $ 419,515 $ 377,600
============ =========== ============= ============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-16
<PAGE> 103
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES (Continued)
The sources of gross deferred tax assets and gross deferred tax liabilities are
as follows:
<TABLE>
<CAPTION>
September 30, June 30,
------------- --------
1997 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 50,395 $ 40,534 $ 39,954
Deferred loan fees 38,080 36,227 35,195
Accrued benefits 96,672 77,995 67,525
Unrealized loss on securities available for sale -- -- 1,488
----------- ------------ -------------
Total deferred tax assets 185,147 154,756 144,162
----------- ------------ -------------
Deferred tax liabilities:
Depreciation 7,889 10,439 9,097
Federal Home Loan Bank stock 70,835 68,591 60,227
Accrual to cash 3,486 34,322 19,568
Security discount accretion 1,434 1,434 2,478
Unrealized gain on securities available for sale 6,563 2,077 --
----------- ------------ -------------
Total deferred tax liabilities 90,207 116,863 91,370
----------- ------------ -------------
Net deferred tax asset $ 94,940 $ 37,893 $ 52,792
=========== ============ =============
</TABLE>
The Bank has sufficient taxes paid in current and prior years to warrant
recording the fully deferred tax asset without a valuation allowance.
The difference between the financial statement income tax expense and amounts
computed by applying the statutory federal income tax rate to income before
income taxes is as follows:
<TABLE>
<CAPTION>
Three months ended
September 30, Years ended June 30,
------------- --------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Income taxes computed
at the statutory tax
rate on pretax income $ 113,992 $ 25,924 $ 307,496 $ 404,276 $ 371,898
Add tax effect of:
Nondeductible
expenses and other 8,108 1,476 1,656 15,239 5,702
------------ ------------ ------------- ------------ ------------
$ 122,100 $ 27,400 $ 309,152 $ 419,515 $ 377,600
============ ============ ============= ============ ============
Statutory tax rate 34.0% 34.0% 34.0% 34.0% 34.0%
==== ==== ==== ==== ====
Effective tax rate 36.4% 35.9% 34.2% 35.3% 34.5%
==== ==== ==== ==== ====
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-17
<PAGE> 104
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES (Continued)
Prior to the enactment of legislation discussed below, thrifts which met certain
tests relating to composition of assets had been permitted to establish reserves
for bad debts and to make annual additions thereto which could, within specified
formula limits, be taken as a deduction in computing taxable income for federal
income tax purposes. The amount of the bad debt reserve deductions for
"nonqualifying loans" was computed under the experience method. The amount of
the bad debt reserve deduction for "qualifying real property loans" could be
computed under either the experience method or the percentage of taxable income
method, based on an annual election.
In August 1996, legislation was enacted repealing the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for federal
income tax purposes. Therefore, small thrifts such as the Bank must recapture
that portion of the reserve exceeding the amount that could have been taken
under the experience method for tax years beginning after December 31, 1987. The
legislation also requires thrifts to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1997, provided the institution meets certain residential
lending requirements. At September 30, 1997 (unaudited) and June 30, 1997, the
Bank had no bad debt reserves subject to recapture for federal income tax
purposes.
The Bank, in accordance with SFAS No. 109, has not recorded a deferred tax
liability of approximately $526,000 related to approximately $1,548,000 of
cumulative qualifying and supplemental reserves, included in retained earnings,
arising prior to June 30, 1988, the end of the Bank's base year for purposes of
calculating the bad debt deduction for tax purposes. If this portion of retained
earnings is used in the future for any purposes other than to absorb bad debts,
it will be added to future taxable income.
NOTE 9 - PENSION PLAN
Effective July 1, 1995, the Bank amended its defined benefit pension plan and
transferred plan assets into a multiple employer trust. As a result, separate
pension data disclosures are no longer available. The Plan is administered by
trustees of the Financial Institutions Retirement Fund. The cost of the Plan is
set annually as an established percentage of wages. No changes were made
regarding benefits the participants will receive under the multiemployer plan.
The Bank recognizes pension expense equal to contributions made to the Plan.
Contributions of $12,166 and $22,148 were made for the three months ended
September 30, 1997 and 1996 (unaudited). Contributions of $84,552 and $87,561
were made for the years ended June 30, 1997 and 1996.
- --------------------------------------------------------------------------------
(Continued)
F-18
<PAGE> 105
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 9 - PENSION PLAN (Continued)
Through June 30, 1995, the Bank maintained a noncontributory defined benefit
pension plan covering substantially all employees. The Plan's funds were
invested in certificates of deposit of the Bank with varying maturities and
interest rates and life insurance policies, as selected by the trustees. The
amount of benefit was computed based upon average monthly compensation and
number of years of employment. The Bank's funding policy was to contribute
annually the maximum amount that could be deducted for federal income tax
purposes.
Net pension cost included the following components:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Service cost - benefits earned during the period $ 68,735
Interest cost on projected benefit obligation 42,122
Actual return on plan assets 1,396
Net amortization and deferral (8,442)
------------
$ 103,811
============
</TABLE>
Significant assumptions used:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Expected long-term rate of return on assets 7.50%
Discount rate 5.75
Rate of increase in compensation levels 5.00
</TABLE>
The unrecognized transition amount was being amortized over 26 years on a
straight-line basis.
NOTE 10 - PROFIT-SHARING PLAN
The Bank has a profit-sharing plan covering officers of the Bank. Beginning
January 1, 1996, up to 10% of pretax income excluding nonrecurring items and
extraordinary gains or losses not related to operations and before deductions of
awards under this plan and the deferred compensation agreement is contributed.
The total contribution is allocated to the officers based upon fixed percentages
established by the Board of Directors. No incentive awards are payable unless a
minimum return on assets is exceeded. Before January 1, 1996, the contribution
was based on the Bank's return on average assets for the year then ended. The
Plan's expense amounted to $38,740 and $32,175 for the three months ended
September 30, 1997 and 1996 (unaudited). The Plan's expense totaled $128,037,
$104,000 and $90,990 for the years ended June 30, 1997, 1996 and 1995.
- --------------------------------------------------------------------------------
F-19
(Continued)
<PAGE> 106
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 10 - PROFIT-SHARING PLAN (Continued)
In 1994, the Bank entered a deferred compensation agreement with an officer of
the Bank. The agreement entitles the officer to 5% of the annual increase in
equity, not including extraordinary items, for a five-year period ending June
30, 1998. The officer is entitled to receive this compensation on June 30, 1998.
At September 30, 1997 (unaudited), June 30, 1997 and 1996, the Bank had accrued
$155,750, $146,000 and $108,000 related to this agreement. Expense recognized
under this agreement was $9,750 and $9,000 for the three months ended September
30, 1997 and 1996 (unaudited) and $38,000, $36,000 and $36,000 for the years
ended June 30, 1997, 1996 and 1995.
NOTE 11 - COMMITMENTS, OFF-BALANCE-SHEET RISK
AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the financial
statements, including claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
effect on financial condition or results of operations.
Some financial instruments are used in the normal course of business to meet the
financing needs of customers and to reduce exposure to interest rate changes.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. These involve, to varying degrees,
credit and interest-rate risk more than the amount reported in the financial
statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. The amount of
collateral obtained, if deemed necessary, on extension of credit is based upon
management's credit evaluation and generally consists of residential or
commercial real estate.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements. Standby letters of credit and financial guarantees
written are conditional commitments to guarantee a customer's performance to a
third party.
- --------------------------------------------------------------------------------
(Continued)
F-20
<PAGE> 107
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS, OFF-BALANCE-SHEET RISK
AND CONTINGENCIES (Continued)
A summary of the notional or contractual amounts of financial instruments with
off-balance-sheet risk follows:
<TABLE>
<CAPTION>
September 30, June 30,
------------- --------
1997 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Lines of credit - variable rate $ 1,590,000 $ 1,595,000 $ 799,000
1-4 family residential real estate - variable rate 722,000 446,000 920,000
Commercial real estate - variable rate 600,000 700,000 --
Credit card arrangements - fixed rate 689,000 671,000 618,000
</TABLE>
Fixed rate commitments had an interest rate of 13.90% at September 30, 1997
(unaudited), June 30, 1997 and 1996. The interest rates on variable rate
commitments range from 8.00% to 9.25% at September 30, 1997 (unaudited), 8.00%
to 9.50% at June 30, 1997, and 7.00% to 11.25% at June 30, 1996.
NOTE 12 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal regulatory agencies. Failure to meet minimum capital requirements
can initiate certain mandatory actions that, if undertaken, could have a direct
material affect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about the Bank's components, risk weightings and other factors. At September 30,
1997 (unaudited), June 30, 1997 and 1996, management believes the Bank complies
with all regulatory capital requirements. Based on the computed regulatory
capital ratios, the Bank is considered well capitalized under the Federal
Deposit Insurance Act at September 30, 1997 (unaudited), June 30, 1997 and 1996.
No conditions or events have occurred after September 30, 1997 (unaudited) that
management believes have changed the Bank's category.
- --------------------------------------------------------------------------------
(Continued)
F-21
<PAGE> 108
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 12 - REGULATORY MATTERS (Continued)
The Bank's actual capital levels (in thousands) and minimum required levels
were:
<TABLE>
<CAPTION>
Minimum
Required To Be
Minimum Required Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1997 (UNAUDITED)
Total capital (to risk-weighted assets) $ 10,727 30.2% $ 2,846 8.0% $ 3,557 10.0%
Tier 1 (core) capital (to
risk-weighted assets) $ 10,579 29.7% $ 1,423 4.0% $ 2,134 6.0%
Tier 1 (core) capital (to adjusted
total assets) $ 10,579 17.7% $ 1,795 3.0% $ 2,992 5.0%
Tangible capital (to adjusted total assets) $ 10,579 17.7% $ 898 1.5% N/A
JUNE 30, 1997
Total capital (to risk-weighted assets) $ 10,485 30.7% $ 2,736 8.0% $ 3,420 10.0%
Tier 1 (core) capital (to
risk-weighted assets) $ 10,366 30.3% $ 1,368 4.0% $ 2,052 6.0%
Tier 1 (core) capital (to adjusted
total assets) $ 10,366 17.2% $ 1,812 3.0% $ 3,020 5.0%
Tangible capital (to adjusted total assets) $ 10,366 17.2% $ 906 1.5% N/A
JUNE 30, 1996
Total capital (to risk-weighted assets) $ 9,888 32.7% $ 2,416 8.0% $ 3,020 10.0%
Tier 1 (core) capital (to
risk-weighted assets) $ 9,771 32.4% $ 1,208 4.0% $ 1,812 6.0%
Tier 1 (core) capital (to adjusted
total assets) $ 9,771 17.6% $ 1,661 3.0% $ 2,768 5.0%
Tangible capital (to adjusted total assets) $ 9,771 17.6% $ 830 1.5% N/A
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-22
<PAGE> 109
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 12 - REGULATORY MATTERS (Continued)
The following is a reconciliation of the Bank's equity reported in the financial
statements under generally accepted accounting principles to the Office of
Thrift Supervision regulatory capital requirements in thousands of dollars:
<TABLE>
<CAPTION>
Tier 1 Total
Tangible Core Risk-Based
SEPTEMBER 30, 1997 (UNAUDITED) Capital Capital Capital
------- ------- -------
<S> <C> <C> <C>
Total equity as reported in
the financial statements $ 10,592 $ 10,592 $ 10,592
Net unrealized (gain) loss on
securities available for sale (13) (13) (13)
General allowance for loan losses -- -- 148
----------- ----------- -----------
Regulatory capital $ 10,579 $ 10,579 $ 10,727
=========== =========== ===========
JUNE 30, 1997
Total equity as reported in
the financial statements $ 10,370 $ 10,370 $ 10,370
Net unrealized (gain) loss on
securities available for sale (4) (4) (4)
General allowance for loan losses -- -- 119
----------- ----------- -----------
Regulatory capital $ 10,366 $ 10,366 $ 10,485
=========== =========== ===========
JUNE 30, 1996
Total equity as reported in
the financial statements $ 9,768 $ 9,768 $ 9,768
Net unrealized (gain) loss on
securities available for sale 3 3 3
General allowance for loan losses -- -- 117
----------- ----------- -----------
Regulatory capital $ 9,771 $ 9,771 $ 9,888
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-23
<PAGE> 110
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying values and the estimated fair values of the Bank's financial
instruments at September 30, 1997 (unaudited), June 30, 1997 and 1996 are shown
below. Items that are not financial instruments are not included.
<TABLE>
<CAPTION>
September 30, 1997
(unaudited)
-----------
Carrying Estimated
Amount Fair Value
------ ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,184,102 $ 2,184,000
Interest-bearing time deposits 39,366 39,000
Securities available for sale 4,517,892 4,518,000
Securities held to maturity -- --
Loans, net of allowance for
loan losses 51,773,320 52,726,000
Federal Home Loan Bank stock 372,600 373,000
Accrued interest receivable 302,902 303,000
Financial liabilities:
Demand, savings and money
market deposit amounts (19,825,457) (19,825,000)
Certificates of deposit (28,382,146) (28,434,000)
Accrued interest payable (535,522) (536,000)
<CAPTION>
June 30
-------
1997 1996
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,681,049 $ 4,681,000 $ 5,723,439 $ 5,723,000
Interest-bearing time deposits 38,796 39,000 40,669 41,000
Securities available for sale 5,004,296 5,004,000 1,743,506 1,744,000
Securities held to maturity -- -- 2,251,731 2,256,000
Loans, net of allowance for
loan losses 49,300,124 50,038,000 44,293,916 44,141,000
Federal Home Loan Bank stock 366,000 366,000 341,400 341,000
Accrued interest receivable 287,014 287,000 260,429 260,000
Financial Liabilities
Demand, savings and money
market deposit accounts (20,014,421) (20,014,000) (20,532,688) (20,533,000)
Certificates of deposit (29,221,009) (29,184,000) (24,351,169) (24,515,000)
Accrued interest payable (460,029) (460,000) (424,467) (424,000)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-24
<PAGE> 111
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities. Estimated
fair value for loans is based on the rates charged at year end for new loans
with similar maturities, applied until the loan is assumed to reprice or be
paid. Estimated fair value for time deposits is based on the rates paid at year
end for new deposits, applied until maturity. Estimated fair value for other
financial instruments and off-balance-sheet loan commitments are considered
nominal.
NOTE 14 - ADOPTION OF PLAN OF CONVERSION (UNAUDITED)
On November 12, 1997, the Board of Directors of the Bank, subject to regulatory
approval and approval by the members of the Bank, unanimously adopted a Plan of
Conversion from a state chartered mutual savings and loan association to a state
chartered stock savings and loan association with the concurrent formation of a
holding company. The Holding Company will acquire 100% of the Bank's common
stock. The conversion is expected to be accomplished through amendment of the
Bank's charter and the sale of the holding company's common stock in an amount
equal to the pro forma market value of the Bank after giving effect to the
conversion. A subscription offering of the shares of the holding company's
common stock will be offered to the Bank's depositors, then to an employee stock
benefit plan and then to 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 the conversion, the Bank will establish a liquidation account in
an amount equal to its regulatory capital as of the latest practicable date
before 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 Bank 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 Bank may
not pay dividends that would reduce stockholders' equity below the required
liquidation account balance.
- --------------------------------------------------------------------------------
(Continued)
F-25
<PAGE> 112
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 and 1996 (unaudited) and June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 14 - ADOPTION OF PLAN OF CONVERSION (UNAUDITED) (Continued)
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 that 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 September 30, 1997, no costs have been deferred or
expensed.
- --------------------------------------------------------------------------------
F-26
<PAGE> 113
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE HOLDING COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, ANY SECURITY, OTHER THAN THE
COMMON SHARES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM DELIVERY OF
THIS PROSPECTUS WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS TO ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY..............................................1
SELECTED FINANCIAL INFORMATION AND OTHER
DATA.........................................................6
RISK FACTORS....................................................8
USE OF PROCEEDS................................................11
MARKET FOR COMMON SHARES.......................................12
DIVIDEND POLICY................................................12
REGULATORY CAPITAL COMPLIANCE..................................13
CAPITALIZATION.................................................14
PRO FORMA DATA.................................................15
SUMMARY STATEMENTS OF INCOME...................................23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..................................................23
THE BUSINESS OF THE BANK.......................................35
MANAGEMENT.....................................................50
REGULATION.....................................................56
TAXATION.......................................................62
THE CONVERSION.................................................64
RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY AND THE BANK AND
ANTI-TAKEOVER PROVISIONS....................................76
DESCRIPTION OF AUTHORIZED SHARES...............................79
REGISTRATION REQUIREMENTS......................................80
LEGAL MATTERS..................................................80
EXPERTS........................................................81
ADDITIONAL INFORMATION.........................................81
FINANCIAL STATEMENTS..........................................F-1
UNTIL 25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS OBLIGATION IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
Up to 1,955,00 Common Shares
HOME LOAN FINANCIAL CORPORATION
------------
PROSPECTUS
------------
CHARLES WEBB & COMPANY
A Division of Keefe, Bruyette & Woods, Inc.
February __, 1998
<PAGE> 114
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
- -------- -------------------------------------------
* Legal Fees and expenses............................$110,000
* Postage.............................................$10,000
* Printing and EDGARIZING.............................$40,000
* Appraisal Fees and expenses.........................$17,000
* Accounting Fees and expenses........................$60,000
* Blue sky filing fees and expenses....................$5,000
* Federal filing fees.................................$15,000
* Conversion Agent Fees...............................$11,000
* Other Expenses.......................................$5,000
** Underwriting Fees and expenses.....................$279,000
Total estimated expenses........................$552,000
========
- -----------------------------
* Estimated.
** To assist the Holding Company and the Bank in marketing the Common
Shares, the Holding Company and the Bank have retained Charles Webb &
Company ("Webb"), a division of Keefe, Bryette & Woods, Inc. Webb is a
broker-dealer registered with the SEC and a member of the NASD.
For its services, Webb has received a management fee of $25,000 and
will receive a marketing fee of 1.3% of the aggregate purchase price of
the Common Shares sold other than (i) Common Shares purchased by the
directors, officers and employees of the Bank and the Holding Company
and members of their immediate families, (ii) Common Shares purchased
by the ESOP, and (iii) Common Shares sold by Selected Brokers
(hereinafter defined).
Depending on market conditions, the Common Shares, if any, not
initially subscribed for in the Subscription Offering or the Community
Offering may be offered for sale to the general public on a best
efforts basis in a syndicated community offering by a selling group of
broker-dealers ("Selected Brokers") to be formed by Webb. If Selected
Brokers are employed, the Selected Brokers will be paid a commission
not to exceed 5.5% of the aggregate purchase price received for Common
Shares sold by such Selected Brokers.
The estimated underwriting fees are based on the following assumptions:
(i) 2,248,250 Common Shares will be sold in the Offering; (ii)
approximately 150,000 Common Shares sold in the Offering will be
purchased by directors, officers and employees of the Bank and the
Holding Company and the members of their immediate families; (iii)
179,860 Common Shares sold in the Offering will be purchased by the
ESOP; and (iv) the remaining 2,068,390 Common Shares sold in the
Offering will be sold to persons other than the ESOP and the Bank's
directors, executive officers and employees and members of their
immediate families, with sales commissions of 1.3% of the aggregate
dollar amount of such Common Shares.
The Bank will also reimburse Webb for all reasonable fees and expenses
of its legal counsel, not to exceed $30,000.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
- -------- ------------------------------------------
(a) OHIO REVISED CODE
Division (E) of Section 1701.13 of the Ohio Revised Code
governs indemnification by a corporation and provides as follows:
(E)(1) A corporation may indemnify or agree to indemnify any
person who was or is a party or is threatened to be made a party, to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, other than an action by or in the
right of the corporation, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer,
II-1
<PAGE> 115
employee, or agent of another corporation, domestic or foreign, nonprofit or for
profit, partnership, joint venture, trust, or other enterprise, against
expenses, including attorney's fees, judgments, fines, and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, or conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
(2) A corporation may indemnify or agree to indemnify any person
who was or is a party or is threatened to be made a party, to any threatened,
pending, or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, trustee, officer, employee or
agent of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise, against expenses,
including attorney's fees, actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any of the following:
(a) Any claim, issue, or matter as to which such person is
adjudged to be liable for negligence or misconduct in the performance
of his duty to the corporation unless, and only to the extent that
the court of common pleas or the court in which such action or suit
was brought determines upon application that, despite the
adjudication of liability, but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity
for such expenses as the court of common pleas or such other court
shall deem proper;
(b) Any action or suit in which the only liability asserted
against a director is pursuant to section 1701.95 of the Revised
Code.
(3) To the extent that a director, trustee, officer, employee, or
agent has been successful on the merits or otherwise in defense of any action,
suit, or proceeding referred to in divisions (E)(1) and (2) of this section, or
in defense of any claim, issue, or matter therein, he shall be indemnified
against expenses, including attorney's fees, actually and reasonably incurred by
him in connection with the action, suit, or proceeding.
(4) Any indemnification under divisions (E)(1) and (2) of this
section, unless ordered by a court, shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director, trustee, officer, employee, or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in divisions
(E)(1) and (2) of this section. Such determination shall be made as follows:
(a) By a majority vote of a quorum consisting of directors of
the indemnifying corporation who were not and are not parties to or
threatened with any such action, suit, or proceeding;
(b) If the quorum described in division (E)(4)(a) of this
section is not obtainable or if a majority vote of a quorum of
disinterested directors so directs, in a written opinion by
independent legal counsel other than an attorney, or a firm having
associated with it an attorney, who has been retained by or who has
performed services for the corporation or any person to be
indemnified within the past five years;
(c) By the shareholders; or
(d) By the court of common pleas or the court in which such
action, suit, or proceeding was brought.
Any determination made by the disinterested directors under division
(E)(4)(a) or by independent legal counsel under division (E)(4)(b) of this
section shall be promptly communicated to the person who threatened or brought
the action or suit by or in the right of the corporation under division (E)(2)
of this section, and within ten days after receipt of such notification, such
person shall have the right to petition the court of common pleas or the court
in which action or suit was brought to review the reasonableness of such
determination.
II-2
<PAGE> 116
(5)(a) Unless at the time of a director's act or omission that is the
subject of an action, suit, or proceeding referred to in divisions (E)(1) and
(2) of this section, the articles or the regulations of a corporation state by
specific reference to this division that the provisions of this division do not
apply to the corporation and unless the only liability asserted against a
director in an action, suit, or proceeding referred to in divisions (E)(1) and
(2) of this section is pursuant to section 1701.95 of the Revised Code,
expenses, including attorney's fees, incurred by a director in defending the
action, suit, or proceeding shall be paid by the corporation as they are
incurred, in advance of the final disposition of the action, suit, or proceeding
upon receipt of an undertaking by or on behalf of the director in which he
agrees to do both of the following:
(i) Repay such amount if it is proved by clear and convincing
evidence in a court of competent jurisdiction that his action or
failure to act involved an act or omission undertaken with deliberate
intent to cause injury to the corporation or undertaken with reckless
disregard for the best interests of the corporation;
(ii) Reasonably cooperate with the corporation concerning the
action, suit, or proceeding.
(b) Expenses, including attorney's fees, incurred by a director,
trustee, officer, employee, or agent in defending any action, suit, or
proceeding referred to in divisions (E)(1) and (2) of this section, may be paid
by the corporation as they are incurred, in advance of the final disposition of
the action, suit, or proceeding as authorized by the directors in the specific
case upon receipt of an undertaking by or on behalf of the director, trustee,
officer, employee, or agent to repay such amount, if it ultimately is determined
that he is not entitled to be indemnified by the corporation.
(6) The indemnification authorized by this section shall not be
exclusive of, and shall be in addition to, any other rights granted to those
seeking indemnification under the articles, the regulations or any agreement,
vote of shareholders or disinterested directors, or otherwise, both as to action
in their official capacities and as to action in another capacity while holding
their offices and positions, and shall continue as to a person who has ceased to
be a director, trustee, officer, employee, or agent and shall inure to the
benefit of the heirs, executors, and administrators of such a person.
(7) A corporation may purchase and maintain insurance or furnish
similar protection, including but not limited to trust funds, letters of credit,
or self-insurance, on behalf of or for any person who is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, or agent
of another corporation, domestic or foreign, nonprofit or profit, partnership,
joint venture, trust, or other enterprise, against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to indemnify
him against such liability under this section. Insurance may be purchased from
or maintained with a person in which the corporation has a financial interest.
(8) The authority of a corporation to indemnify persons pursuant to
divisions (E)(1) and (2) of this section does not limit the payment of expenses
as they are incurred, indemnification, insurance, or other protection that may
be provided pursuant to divisions (E)(5), (6), and (7) of this section.
Divisions (E)(1) and (2) of this section do not create any obligation to repay
or return payments made by the corporation pursuant to division (E)(5), (6), or
(7).
(9) As used in this division, references to "corporation" include all
constituent corporations in a consolidation or merger and the new or surviving
corporation, so that any person who is or was a director, officer, employee, or
agent of such a constituent corporation, or is or was serving at the request of
such constituent corporation as a director, trustee, officer, employee, or agent
of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise, shall stand in the same
position under this section with respect to the new or surviving corporation as
he would if he had served the new or surviving corporation in the same capacity.
II-3
<PAGE> 117
(b) THE HOLDING COMPANY'S CODE OF REGULATIONS
Article Five of The Holding Company's Code of Regulations
provides for the indemnification of officers and directors as follows:
SECTION 5.01. MANDATORY INDEMNIFICATION. The corporation shall
indemnify any officer or director of the corporation who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(including, without limitation, any action threatened or instituted by or in the
right of the corporation), by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee or agent of
another corporation (domestic or foreign, nonprofit or for profit), partnership,
joint venture, trust or other enterprise, against expenses (including, without
limitation, attorneys' fees, filing fees, court reporters' fees and transcript
costs), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, he had no reasonable cause to believe his conduct was unlawful. A
person claiming indemnification under this Section 5.01 shall be presumed, in
respect of any act or omission giving rise to such claim for indemnification, to
have acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any
criminal matter, to have had no reasonable cause to believe his conduct was
unlawful, and the termination of any action, suit or proceeding by judgment,
order, settlement or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, rebut such presumption.
SECTION 5.02. COURT-APPROVED INDEMNIFICATION. Anything
contained in the Regulations or elsewhere to the contrary notwithstanding:
(A) the corporation shall not indemnify any officer
or director of the corporation who was a party to any completed action or suit
instituted by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, trustee, officer, employee or agent of another corporation
(domestic or foreign, nonprofit or for profit), partnership, joint venture,
trust or other enterprise, in respect of any claim, issue or matter asserted in
such action or suit as to which he shall have been adjudged to be liable for
acting with reckless disregard for the best interests of the corporation or
misconduct (other than negligence) in the performance of his duty to the
corporation unless and only to the extent that the Court of Common Pleas of
Coshocton County, Ohio, or the court in which such action or suit was brought
shall determine upon application that, despite such adjudication of liability,
and in view of all the circumstances of the case, he is fairly and reasonably
entitled to such indemnity as such Court of Common Pleas or such other court
shall deem proper; and
(B) the corporation shall promptly make any such
unpaid indemnification as is determined by a court to be proper as contemplated
by this Section 5.02.
SECTION 5.03. INDEMNIFICATION FOR EXPENSES. Anything contained
in the Regulations or elsewhere to the contrary notwithstanding, to the extent
that an officer or director of the corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in Section
5.01, or in defense of any claim, issue or matter therein, he shall be promptly
indemnified by the corporation against expenses (including, without limitation,
attorneys' fees, filing fees, court reporters' fees and transcript costs)
actually and reasonably incurred by him in connection therewith.
SECTION 5.04 DETERMINATION REQUIRED. Any indemnification
required under Section 5.01 and not precluded under Section 5.02 shall be made
by the corporation only upon a determination that such indemnification of the
officer or director is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 5.01. Such determination may
be made only (A) by a majority vote of a quorum consisting of directors of the
corporation who were not and are not parties to, or threatened with, any such
action, suit or proceeding, or (B) if such a quorum is not obtainable or if a
majority of a quorum of disinterested directors so directs, in a written opinion
by independent legal counsel other than an attorney, or a firm having associated
with it an attorney, who has been retained by or who has performed services for
the corporation, or any person to be indemnified, within the past five years, or
(C) by the shareholders, or (D) by the Court of Common Pleas of Coshocton
County, Ohio, or (if the corporation is a party thereto) the court in which such
action, suit or proceeding was brought, if any; any such determination may be
made by a court under division (D) of this Section 5.04 at any time including,
without limitation, any time before, during or after the time when any such
determination may be requested of, be under consideration by or have been denied
or disregarded by the disinterested directors under division (A) or by
independent legal counsel under division (B) or by the shareholders under
division (C) of this Section 5.04; and no failure for any reason to
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<PAGE> 118
make any such determination, and no decision for any reason to deny any such
determination, by the disinterested directors under division (A) or by
independent legal counsel under division (B) or by shareholders under division
(C) of this Section 5.04 shall be evidence in rebuttal of the presumption
recited in Section 5.01. Any determination made by the disinterested directors
under division (A) or by independent legal counsel under division (B) of this
Section 5.04 to make indemnification in respect of any claim, issue or matter
asserted in an action or suit threatened or brought by or in the right of the
corporation shall be promptly communicated to the person who threatened or
brought such action or suit, and within ten (10) days after receipt of such
notification such person shall have the right to petition the Court of Common
Pleas of Coshocton County, Ohio, or the court in which such action or suit was
brought, if any, to review the reasonableness of such determination.
SECTION 5.05. ADVANCES FOR EXPENSES. Expenses (including,
without limitation, attorneys' fees, filing fees, court reporters' fees and
transcript costs) incurred in defending any action, suit or proceeding referred
to in Section 5.01 shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding to or on behalf of the officer or
director promptly as such expenses are incurred by him, but only if such officer
or director shall first agree, in writing, to repay all amounts so paid in
respect of any claim, issue or other matter asserted in such action, suit or
proceeding in defense of which he shall not have been successful on the merits
or otherwise:
(A) if it shall ultimately be determined as provided
in Section 5.04 that he is not entitled to be indemnified by the corporation as
provided under Section 5.01; or
(B) if, in respect of any claim, issue or other
matter asserted by or in the right of the corporation in such action or suit, he
shall have been adjudged to be liable for acting with reckless disregard for the
best interests of the corporation or misconduct (other than negligence) in the
performance of his duty to the corporation, unless and only to the extent that
the Court of Common Pleas of Coshocton County, Ohio, or the court in which such
action or suit was brought shall determine upon application that, despite such
adjudication of liability, and in view of all the circumstances, he is fairly
and reasonably entitled to all or part of such indemnification.
SECTION 5.06. ARTICLE FIVE NOT EXCLUSIVE. The indemnification
provided by this Article Five shall not be deemed exclusive of any other rights
to which any person seeking indemnification may be entitled under the Articles
or the Regulations or any agreement, vote of shareholders or disinterested
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be an officer or director of the corporation and shall
inure to the benefit of the heirs, executors, and administrators of such a
person.
SECTION 5.07. INSURANCE. The corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, trustee, officer, employee, or agent of another
corporation (domestic or foreign, nonprofit or for profit), partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the obligation or the power to
indemnify him against such liability under the provisions of this Article Five.
SECTION 5.08. CERTAIN DEFINITIONS. For purposes of this
Article Five, and as examples and not by way of limitation:
(A) A person claiming indemnification under this
Article 5 shall be deemed to have been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Section 5.01, or in
defense of any claim, issue or other matter therein, if such action, suit or
proceeding shall be terminated as to such person, with or without prejudice,
without the entry of a judgment or order against him, without a conviction of
him, without the imposition of a fine upon him and without his payment or
agreement to pay any amount in settlement thereof (whether or not any such
termination is based upon a judicial or other determination of the lack of merit
of the claims made against him or otherwise results in a vindication of him);
and
(B) References to an "other enterprise" shall include
employee benefit plans; references to a "fine" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references to
"serving at the request of the corporation" shall include any service as a
director, officer, employee or agent of the corporation which imposes duties on,
or involves services by, such director, officer, employee or agent with respect
to an employee benefit plan, its participants or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the corporation" within the meaning of that term as used in this Article Five.
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<PAGE> 119
SECTION 5.09. VENUE. Any action, suit or proceeding to
determine a claim for indemnification under this Article Five may be maintained
by the person claiming such indemnification, or by the corporation, in the Court
of Common Pleas of Coshocton County, Ohio. The corporation and (by claiming such
indemnification) each such person consent to the exercise of jurisdiction over
its or his person by the Court of Common Pleas of Coshocton County, Ohio, in any
such action, suit or proceeding.
(c) INSURANCE POLICIES
The Bank currently maintains a directors' and officers'
liability policy providing for insurance of directors and officers for liability
incurred in connection with performance of their duties as directors and
officers. Such policy does not, however, provide insurance for losses resulting
from willful or criminal misconduct.
(d) INDEMNIFICATION AGREEMENTS
(i) AGREEMENT WITH KELLER & CO., INC.
The Bank has agreed to indemnify Keller & Co., Inc.
("Keller"), the firm retained by the Bank to provide the appraisal of the pro
forma market value of the Bank, as converted, and the Holding Company, in
connection with certain matters related to the appraisal. The Bank will
indemnify Keller, its affiliates and the respective directors, officers, agents
and employees of Keller for certain costs and expenses, including reasonable
legal fees, in connection with claims or litigation arising out of any untrue
statement or alleged untrue statement of a material fact contained in the
financial statements or other information supplied to Keller by the Bank or by
an omission or alleged omission by the Bank to state a material fact in the
information so provided, except where Keller has been negligent or at fault.
(ii) AGREEMENT WITH WEBB
In general, the agreement with Webb (the "Agency Agreement")
provides that the Bank will indemnify and hold harmless Webb's directors,
officers, employees, agents and any controlling person against any and all loss,
liability, claim, damage or expense (including the reasonable fees and
disbursements of counsel) arising out of any untrue statement, or alleged untrue
statement, of a material fact contained in the Summary Proxy Statement or the
Prospectus, any application to regulatory authorities, any "blue sky"
application, or any other related document prepared or executed by or on behalf
of the Bank with its consent in connection with, or in contemplation of, the
transactions contemplated by the Agency Agreement, or any omission therefrom of
a material fact required to be stated therein, unless such untrue statement or
omission, or alleged untrue statement or omission, was made in reliance upon,
and in conformity with, written information regarding Webb furnished to the Bank
by Webb expressly for use in the Summary Proxy Statement or the Prospectus.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
- -------- ----------------------------------------
No securities of the Holding Company have been sold by the Holding
Company without registration pursuant to the Act, except as follows:
On December 5, 1997, in connection with the incorporation of the
Holding Company, 100 common shares, without par value, of the Holding Company
(the "Securities") were sold for an aggregate purchase price of $100 pursuant to
Section 4(2) of the Act in a transaction not involving any public offering. The
Securities were sold to Robert C. Hamilton, the President of the Holding
Company, who had access to all material information about the Holding Company.
The Securities were offered without the use of any form of general solicitation
or advertising. No underwriter was involved in the transaction, and no
commission, discount or other remuneration was paid or given in connection with
the sale of the Securities. Under the terms of the Subscription Agreement
between the Holding Company and Mr. Hamilton, the Securities will be repurchased
by the Holding Company for $100 on the effective date of the Conversion.
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<PAGE> 120
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
- -------- -------------------------------------------
(a) EXHIBITS
The exhibits filed as a part of this Registration Statement
are as follows:
1.2 Form of Agency Agreement with Charles Webb & Company
10.3 Home Loan Financial Corporation Employee Stock Ownership Plan
and Trust (proposed)
23.1 Consent Crowe, Chizek and Company LLP
(b) FINANCIAL STATEMENT SCHEDULES:
No financial statement schedules are filed because the
required information is not applicable or is included in the consolidated
financial statements or related notes.
ITEM 17. UNDERTAKINGS.
- -------- -------------
(a) The undersigned, the Holding Company, hereby under
takes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Act;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the Registration
Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any
liability under the Act, each such post-effective amendment
shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers and controlling persons of the
Holding Company, pursuant to the foregoing provisions or otherwise, the Holding
Company has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Holding
Company of expenses incurred or paid by a director, officer or controlling
person of the Holding Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Holding Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-7
<PAGE> 121
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, duly authorized to do so, in the City of Coshocton, State of Ohio,
on January 31, 1998.
HOME LOAN FINANCIAL CORPORATION
By: Robert C. Hamilton
its President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed below by the following
persons in the capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Neal J. Caldwell Director January 31, 1998
* Charles H. Durmis Director January 31, 1998
Robert C. Hamilton Director, Chairman and President January 31, 1998
* Robert D. Mauch Director January 31, 1998
* Douglas L. Randles Director January 31, 1998
* Preston W. Bair Treasurer, Secretary, Principal Financial January 31, 1998
Officer and Principal Accounting Officer
* By Power of Attorney
Robert C. Hamilton, Attorney-in-fact
</TABLE>
II-8
<PAGE> 122
Registration No. 333-42483
HOME LOAN FINANCIAL CORPORATION
PRE-EFFECTIVE AMENDMENT NO. 1 TO
REGISTRATION STATEMENT ON FORM S-1
INDEX TO EXHIBITS
-----------------
EXHIBIT
NUMBER DESCRIPTION
------ -----------
1.2 Form of Agency Agreement with Charles Webb & Company
10.3 Home Loan Financial Corporation Employee Stock Ownership Plan
and Trust (proposed)
23.1 Consent of Crowe, Chizek and Company LLP
<PAGE> 1
EXHIBIT 1.2
HOME LOAN FINANCIAL CORPORATION
2,248,250 Shares
COMMON SHARES
(No Par Value)
Subscription Price $10.00 Per Share
AGENCY AGREEMENT
January 27, 1998
Charles Webb & Company, a Division of
Keefe, Bruyette & Woods, Inc.
211 Bradenton Drive
Dublin, Ohio 43017-5034
Ladies and Gentlemen:
Home Loan Financial Corporation, an Ohio corporation (the "Company"),
and The Home Loan Savings Bank, Coshocton, Ohio, a mutual savings and loan
association incorporated under Ohio law (the "Bank") (references to the "Bank"
include the Bank in the mutual or stock form, as indicated by the context), with
its deposit accounts insured by the Savings Association Insurance Fund ("SAIF")
administered by the Federal Deposit Insurance Corporation ("FDIC")), hereby
confirm their agreement with Charles Webb & Company, a Division of Keefe,
Bruyette & Woods, Inc. ("Webb", "KBW" or "the Agent"), as follows:
SECTION 1. THE OFFERING. The Bank, in accordance with its plan of
conversion adopted by its Board of Directors (the "Plan"), intends to convert
from a mutual savings and loan association incorporated under Ohio law to a
stock savings and loan association incorporated under Ohio law, and will issue
all of its issued and outstanding capital stock to the Company. In addition,
pursuant to the Plan, the Company will offer and sell up to 2,248,250 of its
common shares, no par value per share (the "Shares" or "Common Shares"), in a
subscription offering (the "Subscription Offering") to (1) depositors of the
Bank with Qualifying Deposits (as defined in the Plan) as of September 30, 1996
("Eligible Account Holders"), (2) the Home Loan Financial Corporation Employee
Stock Ownership Plan (the "ESOP"), (3) depositors of the Bank with Qualifying
Deposits as of December 31, 1997 ("Supplemental Eligible Account Holders") and
(4) the Bank's Other Eligible Members (as defined in the Plan). Subject to the
prior subscription rights of the above-listed parties, the Company is offering
for sale in a community offering (the "Community Offering" and when referred to
together with the Subscription Offering, the "Subscription and Community
Offering") conducted concurrently with the Subscription Offering, the Shares not
subscribed for or ordered in the Subscription Offering to members of the general
<PAGE> 2
public to whom a copy of the Prospectus (as hereinafter defined) is delivered
with a preference given to natural persons who reside in Coshocton County, Ohio.
It is anticipated that shares not subscribed for in the Subscription and
Community Offering will be offered to certain members of the general public on a
best efforts basis through a selected dealers agreement (the "Syndicated
Community Offering") (the Subscription Offering, Community Offering and
Syndicated Community Offering are collectively referred to as the "Offering").
It is acknowledged that the purchase of Shares in the Offering is subject to the
maximum and minimum purchase limitations as described in the Plan and that the
Company and the Bank may reject, in whole or in part, any orders received in the
Community Offering or Syndicated Community Offering. Collectively, these
transactions are referred to herein as the "Conversion."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (File No. 333-42483) (the
"Registration Statement") containing a prospectus relating to the Offering for
the registration of the Shares under the Securities Act of 1933 (the "1933
Act"), and has filed such amendments thereof and such amended prospectuses as
may have been required to the date hereof. The term "Registration Statement"
shall include any documents incorporated by reference therein and all financial
schedules and exhibits thereto, as amended, including post-effective amendments.
The prospectus, as amended, on file with the Commission at the time the
Registration Statement initially became effective is hereinafter called the
"Prospectus," except that if any Prospectus is filed by the Company pursuant to
Rule 424(b) or (c) of the rules and regulations of the Commission under the 1933
Act (the "1933 Act Regulations") differing from the prospectus on file at the
time the Registration Statement initially becomes effective, the term
"Prospectus" shall refer to the prospectus filed pursuant to Rule 424(b) or (c)
from and after the time said prospectus is filed with the Commission.
In accordance with Title 12, Part 563b of the Code of Federal
Regulations (the "Conversion Regulations") and the laws and regulations of the
State of Ohio and the Division of Financial Institutions of the Department of
Commerce of the State of Ohio (the "Division"), the Bank has filed with the
Office of Thrift Supervision (the "OTS") and the Superintendent of the Division
an Application for Conversion (the "Conversion Application"), including the
Prospectus and the Conversion Valuation Appraisal Report prepared by Keller &
Company (the "Appraisal") and has filed such amendments thereto as may have been
required by the OTS and the Division. The Conversion Application has been
approved by the OTS and the Superintendent of the Division and the related
Prospectus has been authorized for use by the OTS and the Superintendent of the
Division. In addition, the Company has filed with the OTS its application on
Form H-(e)1-S (the "Holding Company Application") to become a registered savings
and loan holding company under the Home Owners' Loan Act, as amended ("HOLA");
and it has been approved.
SECTION 2. RETENTION OF AGENT; COMPENSATION; SALE AND DELIVERY OF THE
SHARES. Subject to the terms and conditions herein set forth, the Company and
the Bank hereby appoint the Agent as their exclusive financial advisor and
marketing agent (i) to utilize its best efforts to solicit subscriptions for
Common Shares and to advise and assist the Company and the Bank with respect to
the Company's sale of the Shares in the Offering and (ii) to participate in the
2
<PAGE> 3
Offering in the areas of market making, research coverage and in syndicate
formation (if necessary).
On the basis of the representations, warranties, and agreements herein
contained, but subject to the terms and conditions herein set forth, the Agent
accepts such appointment and agrees to consult with and advise the Company and
the Bank as to the matters set forth in the letter agreement, dated October 31,
1997, between the Bank and Webb (a copy of which is attached hereto as Exhibit
A). It is acknowledged by the Company and the Bank that the Agent shall not be
required to purchase any Shares or be obligated to take any action which is
inconsistent with all applicable laws, regulations, decisions or orders.
The obligations of the Agent pursuant to this Agreement (other than
those set forth in Section 2(a) and (d) hereof) shall terminate upon the
completion or termination or abandonment of the Plan by the Company or upon
termination of the Offering, but in no event later than 45 days after the
completion of the Subscription Offering (the "End Date"). All fees or expenses
due to the Agent but unpaid will be payable to the Agent in next day funds at
the earlier of the Closing Date (as hereinafter defined) or the End Date. In the
event the Offering is extended beyond the End Date, the Company, the Bank and
the Agent may agree to renew this Agreement under mutually acceptable terms.
In the event the Company is unable to sell a minimum of 1,445,000
Shares within the period herein provided, this Agreement shall terminate and the
Company shall refund to any persons who have subscribed for any of the Shares
the full amount which it may have received from them plus accrued interest, as
set forth in the Prospectus; and none of the parties to this Agreement shall
have any obligation to the other parties hereunder, except as set forth in this
Section 2 and in Sections 6, 8 and 9 hereof.
In the event the Offering is terminated for any reason not attributable
to the action or inaction of the Agent, the Agent shall be paid the fees due to
the date of such termination pursuant to subparagraphs (a) and (d) below.
If all conditions precedent to the consummation of the Conversion,
including, without limitation, the sale of all Shares required by the Plan to be
sold, are satisfied, the Company agrees to issue, or have issued, the Shares
sold in the Offering and to release for delivery certificates for such Shares on
the Closing Date (as hereinafter defined) against payment to the Company by any
means authorized by the Plan; provided, however, that no funds shall be released
to the Company until the conditions specified in Section 7 hereof shall have
been complied with to the reasonable satisfaction of the Agent and their
counsel. The release of Shares against payment therefor shall be made on a date
and at a place acceptable to the Company, the Bank and the Agent. Certificates
for shares shall be delivered directly to the purchasers in accordance with
their directions. The date upon which the Company shall release or deliver the
Shares sold in the Offering, in accordance with the terms herein, is called the
"Closing Date."
The Agent shall receive the following compensation for its services
hereunder:
3
<PAGE> 4
(a) A management fee of $25,000; payable in four consecutive
monthly installments of $6,250. Such fees shall be deemed to
have been earned when due. Should the Conversion be terminated
for any reason not attributable to the action or inaction of
the Agent, the Agent shall have earned and be entitled to be
paid fees accruing through the stage at which the termination
occurred, including any accrued legal fees expended by the
Agent.
(b) A Success Fee of 1.30% of the aggregate Purchase Price of
Common Shares sold in the Subscription Offering and Community
Offering, excluding shares purchased by the Bank's officers,
directors, or employees (or members of their immediate
families) plus any ESOP, tax-qualified or stock-based
compensation plans (except IRA's) or similar plans created by
the Bank or the Company for some or all of its directors or
employees. The management fee described in subparagraph 2(a)
shall be applied and credited against the Success Fee
described in this subparagraph 2(b).
(c) If any of the Common Shares remain available after the
Subscription Offering, at the request of the Bank, Webb will
seek to form a syndicate of registered broker-dealers
("Selected Dealers") to assist in the sale of such Common
Shares 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 Shares among the
Selected Dealers in a fashion which best meets the
distribution objectives of the Bank and the Plan. Webb will be
paid a fee not to exceed 5.5% of the aggregate Purchase Price
of the Shares sold by the Selected Dealers. Webb will pass
onto the Selected 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 Selected Dealers shall be
transmitted by Webb to such Selected Dealers. The decision to
utilize Selected Dealers will be made by the Bank upon
consultation with Webb. In any event, with respect to any
purchases of Shares, fees paid pursuant to this subparagraph
2(c) shall be in lieu of, and not in addition to, payment
pursuant to subparagraph 2(a) and 2(b).
(d) The Agent will not request reimbursement for any out-of-pocket
expenses relating to travel, lodging and meal expenses. The
Bank and Company shall reimburse the Agent for fees and
expenses of counsel up to $30,000. The Bank will bear the
expenses of the Offering customarily borne by issuers
including, without limitation, OTS, SEC, "Blue Sky," and NASD
filings and registration fees; the fees of the Bank's
accountants, conversion agent, attorneys, appraiser, transfer
agent and registrar, printing, mailing and marketing expenses
associated with the conversion; and the fees set forth under
this Section 2.
Full payment of Agent's actual and accountable expenses, advisory fees
and compensation shall be made in next day funds on the earlier of the Closing
Date or a determination by the Bank to terminate or abandon the Plan.
4
<PAGE> 5
SECTION 3. PROSPECTUS; OFFERING. The Shares are to be initially offered
in the Offering at the Purchase Price as defined and set forth on the cover page
of the Prospectus.
SECTION 4. REPRESENTATIONS AND WARRANTIES. The Company and the Bank
jointly and severally represent and warrant to and agree with the Agent as
follows:
(a) The Registration Statement which was prepared by the Company
and the Bank and filed with the Commission was declared
effective by the Commission on ___________, 1998. At the time
the Registration Statement, including the Prospectus contained
therein (including any amendment or supplement), became
effective, the Registration Statement contained all statements
that were required to be stated therein in accordance with the
1933 Act and the 1933 Act Regulations, complied in all
material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and the Registration Statement,
including the Prospectus contained therein (including any
amendment or supplement thereto), and any information
regarding the Company or the Bank contained in Sales
Information (as such term is defined in Section 8 hereof)
authorized by the Company or the Bank for use in connection
with the Offering, did not contain an untrue statement of a
material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading, and at the time any Rule 424(b) or (c) Prospectus
was filed with the Commission and at the Closing Date referred
to in Section 2, the Registration Statement, including the
Prospectus contained therein (including any amendment or
supplement thereto), and any information regarding the Company
or the Bank contained in Sales Information (as such term is
defined in Section 8 hereof) authorized by the Company or the
Bank for use in connection with the Offering will contain all
statements that are required to be stated therein in
accordance with the 1933 Act and the 1933 Act Regulations and
will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that the
representations and warranties in this Section 4(a) shall not
apply to statements or omissions made in reliance upon and in
conformity with written information furnished to the Company
or the Bank by the Agent or its counsel expressly regarding
the Agent for use in the Prospectus under the caption "The
Conversion-Plan of Distribution" or statements in or omissions
from any Sales Information or information filed pursuant to
state securities or blue sky laws or regulations regarding the
Agent.
(b) The Conversion Application which was prepared by the Company
and the Bank and filed with the OTS and the Division was
approved by the OTS on ___________, 1998 and by the
Superintendent of the Division (or his
5
<PAGE> 6
duly-qualified appointee) on ______________, 1998 and the
related Prospectus has been authorized for use by the OTS and
the Superintendent of the Division. At the time of the
approval of the Conversion Application, including the
Prospectus (including any amendment or supplement thereto), by
the OTS and the Superintendent of the Division and at all
times subsequent thereto until the Closing Date, the
Conversion Application, including the Prospectus (including
any amendment or supplement thereto), will comply in all
material respects with the Conversion Regulations, except to
the extent waived in writing by the OTS and the Superintendent
of the Division. The Conversion Application, including the
Prospectus (including any amendment or supplement thereto),
does not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in
this Section 4(b) shall not apply to statements or omissions
made in reliance upon and in conformity with written
information furnished to the Company or the Bank by the Agent
or its counsel expressly regarding the Agent for use in the
Prospectus contained in the Conversion Application under the
caption "The Conversion-Plan of Distribution" or statements in
or omissions from any sales information or information filed
pursuant to state securities or blue sky laws or regulations
regarding the Agent. The Holding Company Application for
approval pursuant to the HOLA and the regulations promulgated
thereunder (the "Control Act Regulations") has been prepared
by the Bank and the Company in material conformity with the
requirements of the Control Act Regulations and has been filed
with and approved by the OTS. A conformed copy of the Holding
Company Application has been delivered to the Agent.
(c) The Company has filed with the OTS the Holding Company
Application, and such Application was deemed complete by the
OTS. As of the Closing Date, approval of the Company's
acquisition of the Bank will have been obtained from the OTS.
(d) No order has been issued by the OTS, the Division, or the FDIC
(hereinafter any reference to the FDIC shall include the SAIF)
preventing or suspending the use of the Prospectus, and no
action by or before any such government entity to revoke any
approval, authorization or order of effectiveness related to
the Conversion is, to the best knowledge of the Company or the
Bank, pending or threatened.
(e) At the Closing Date, the Plan will have been adopted by the
Boards of Directors of both the Company and the Bank and
approved by the members of the Bank, and the offer and sale of
the Shares will have been conducted in all material respects
in accordance with the Plan, the
6
<PAGE> 7
Conversion Regulations, and all other applicable laws,
regulations, decisions and orders, including all terms,
conditions, requirements and provisions precedent to the
Conversion imposed upon the Company or the Bank by the OTS,
the Division, the Commission, or any other regulatory
authority and in the manner described in the Prospectus. No
person has sought to obtain review of the final action of the
OTS in approving the Plan or in approving the Conversion or
the Holding Company Application pursuant to the HOLA or any
other statute or regulation.
(f) The Bank has been organized and is a validly existing savings
and loan association incorporated under Ohio law in mutual
form of organization and upon the Conversion will become a
duly organized and validly existing savings and loan
association incorporated under Ohio law in permanent capital
stock form of organization, in both instances duly authorized
to conduct its business and own its property as described in
the Registration Statement and the Prospectus; the Bank has
obtained all material licenses, permits and other governmental
authorizations currently required for the conduct of its
business; all such licenses, permits and governmental
authorizations are in full force and effect, and the Bank is
in all material respects complying with all laws, rules,
regulations and orders applicable to the operation of its
business; the Bank is existing under the laws of the State of
Ohio and the regulation of the Division and is duly qualified
as a foreign corporation to transact business and is in good
standing in each jurisdiction in which its ownership of
property or leasing of property or the conduct of its business
requires such qualification, unless the failure to be so
qualified in one or more of such jurisdictions would not have
a material adverse effect on the condition, financial or
otherwise, or the business, operations or income of the Bank.
The Bank does not own equity securities or any equity interest
in any other business enterprise except as described in the
Prospectus or as would not be material to the operations of
the Bank. Upon completion of the sale by the Company of the
Shares contemplated by the Prospectus, (i) all of the
authorized and outstanding capital stock of the Bank will be
owned by the Company and (ii) the Company will have no direct
subsidiaries other than the Bank. The Conversion will have
been effected in all material respects in accordance with all
applicable statutes, regulations, decisions and orders; and,
except with respect to the filing of certain post-sale,
post-Conversion reports, and documents in compliance with the
1933 Act Regulations, the OTS's and the Division's resolutions
or letters of approval, all terms, conditions, requirements
and provisions with respect to the Conversion imposed by the
Commission, the OTS, the Division and the FDIC, if any, will
have been complied with by the Company and the Bank in all
material respects or appropriate waivers will have been
obtained and all material notice and waiting periods will have
been satisfied, waived or elapsed.
7
<PAGE> 8
(g) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State
of Ohio with corporate power and authority to own, lease and
operate its properties and to conduct its business as
described in the Registration Statement and the Prospectus,
and at the Closing Date the Company will be qualified to do
business as a foreign corporation in each jurisdiction in
which the conduct of its business requires such qualification,
except where the failure to so qualify would not have a
material adverse effect on the condition, financial or
otherwise, or the business, operations or income of the
Company. The Company has obtained all material licenses,
permits and other governmental authorizations currently
required for the conduct of its business; all such licenses,
permits and governmental authorizations are in full force and
effect, and the Company is in all material respects complying
with all laws, rules, regulations and orders applicable to the
operation of its business.
(h) The Bank has no subsidiaries.
(i) The Bank is a member of the Federal Home Loan Bank of
Cincinnati ("FHLB-Cincinnati"). The deposit accounts of the
Bank are insured by the FDIC up to the applicable limits, and
no proceedings for the termination or revocation of such
insurance are pending or, to the best knowledge of the Company
or the Bank, threatened. Upon consummation of the Conversion,
the liquidation account for the benefit of Eligible Account
Holders will be duly established in accordance with the
requirements of the Conversion Regulations.
(j) The Company and the Bank have good and marketable title to all
real property and good title to all other assets material to
the business of the Company and the Bank, taken as a whole,
and to those properties and assets described in the
Registration Statement and Prospectus as owned by them, free
and clear of all liens, charges, encumbrances or restrictions,
except such as are described in the Registration Statement and
Prospectus, or are not material to the business of the Company
and the Bank, taken as a whole; and all of the leases and
subleases material to the business of the Company and the
Bank, taken as a whole, under which the Company or the Bank
hold properties, including those described in the Registration
Statement and Prospectus, are in full force and effect.
(k) The Company and the Bank have received an opinion of their
special counsel, Vorys, Sater, Seymour and Pease LLP, with
respect to the federal and Ohio income tax consequences of the
Conversion; all material aspects of the opinion of Vorys,
Sater, Seymour and Pease LLP are accurately summarized in the
Registration Statement and will be accurately summarized in
the Prospectus; and further represent and warrant that the
8
<PAGE> 9
facts upon which such opinion is based are truthful, accurate
and complete.
(l) The Company and the Bank have all such power, authority,
authorizations, approvals and orders as may be required to
enter into this Agreement, to carry out the provisions and
conditions hereof and to issue and sell the Shares to be sold
by the Company as provided herein and as described in the
Prospectus, except approval or confirmation by the OTS of the
final appraisal of the Bank. The consummation of the
Conversion, the execution, delivery and performance of this
Agreement and the consummation of the transactions herein
contemplated have been duly and validly authorized by all
necessary corporate action on the part of the Company and the
Bank and this Agreement has been validly executed and
delivered by the Company and the Bank and is the valid, legal
and binding agreement of the Company and the Bank enforceable
in accordance with its terms (except as the enforceability
thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization or similar laws relating to or affecting the
enforcement of creditors' rights generally or the rights of
creditors of savings and loan holding companies, the accounts
of whose subsidiaries are insured by the FDIC, or by general
equity principles, regardless of whether such enforceability
is considered in a proceeding in equity or at law, and except
to the extent, if any, that the provisions of Sections 8 and 9
hereof may be unenforceable as against public policy).
(m) Neither the Company nor the Bank are in violation of any
directive received from the OTS, the Division, the FDIC, or
any other agency to make any material change in the method of
conducting their businesses so as to comply in all material
respects with all applicable statutes and regulations
(including, without limitation, regulations, decisions,
directives and orders of the OTS, the Division and the FDIC)
and, except as may be set forth in the Registration Statement
and the Prospectus, there is no suit or proceeding or charge
or action before or by any court, regulatory authority or
governmental agency or body, pending or, to the knowledge of
the Company or the Bank, threatened, which might materially
and adversely affect the Conversion, the performance of this
Agreement or the consummation of the transactions contemplated
in the Plan and as described in the Registration Statement and
the Prospectus or which might result in any material adverse
change in the condition (financial or otherwise), earnings,
capital or properties of the Company or the Bank, or which
would materially affect their properties and assets.
(n) The financial statements, schedules and notes related thereto
which are included in the Prospectus fairly present the
balance sheet, income statement, statement of members' equity
and statement of cash flows of the Bank at the respective
dates indicated and for the respective periods
9
<PAGE> 10
covered thereby and comply as to form in all material respects
with the applicable accounting requirements of Title 12 of the
Code of Federal Regulations and generally accepted accounting
principles (including those requiring the recording of certain
assets at their current market value). Such financial
statements, schedules and notes related thereto have been
prepared in accordance with generally accepted accounting
principles consistently applied through the periods involved,
present fairly in all material respects the information
required to be stated therein and are consistent with the most
recent financial statements and other reports filed by the
Bank with the OTS or the Division. The other financial,
statistical and pro forma information and related notes
included in the Prospectus present fairly the information
shown therein on a basis consistent with the audited and
unaudited financial statements of the Bank included in the
Prospectus, and as to the pro forma adjustments, the
adjustments made therein have been properly applied on the
basis described therein.
(o) Since the respective dates as of which information is given in
the Registration Statement including the Prospectus: (i) there
has not been any material adverse change, financial or
otherwise, in the condition of the Company or the Bank and its
subsidiaries, considered as one enterprise, or in the
earnings, capital or properties of the Company or the Bank,
whether or not arising in the ordinary course of business;
(ii) there has not been any material increase in the long-term
debt of the Bank or in the principal amount of the Bank's
assets which are classified by the Bank as substandard,
doubtful or loss or in loans past due 90 days or more or real
estate acquired by foreclosure, by deed-in-lieu of foreclosure
or deemed in-substance foreclosure or any material decrease in
retained earnings or total assets of the Bank, nor has the
Company or the Bank issued any securities (other than in
connection with the incorporation of the Company) or incurred
any liability or obligation for borrowing other than in the
ordinary course of business; (iii) there have not been any
material transactions entered into by the Company or the Bank;
(iv) there has not been any material adverse change in the
aggregate dollar amount of the Bank's deposits or its
consolidated net worth or spread; (v) there has been no
material adverse change in the Company's or the Bank's
relationship with its insurance carriers, including, without
limitation, cancellation or other termination of the Company's
or the Bank's fidelity bond or any other type of insurance
coverage; (vi) except as disclosed in the Prospectus, there
has been no material change in management of the Company or
the Bank, neither of which has any material undisclosed
liability of any kind, contingent or otherwise; (vii) neither
the Company nor the Bank has sustained any material loss or
interference with its respective business or properties from
fire, flood, windstorm, earthquake, accident or other
calamity, whether or not covered by insurance; (viii) neither
the Company nor the Bank is in default in the payment of
principal or interest on any outstanding debt obligations;
(ix) the capitalization,
10
<PAGE> 11
liabilities, assets, properties and business of the Company
and the Bank conform in all material respects to the
descriptions thereof contained in the Prospectus; and (x)
neither the Company nor the Bank has any material contingent
liabilities, except as set forth in the Prospectus. All
documents made available to or delivered or to be made
available to or delivered by the Bank or the Company or their
representatives in connection with the issuance and sale of
the Shares, including records of account holders, depositors,
borrowers and other members of the Bank, or in connection with
the Agent's exercise of due diligence, except for those
documents which were prepared by parties other than the Bank,
the Company or their representatives, to the best knowledge of
the Bank and the Company, were on the dates on which they were
delivered, or will be on the dates on which they are to be
delivered, true, complete and correct in all material
respects.
(p) As of the date hereof and as of the Closing Date, neither the
Company nor the Bank is (i) in violation of its articles of
incorporation or code of regulations or charter or bylaws,
respectively (and the Bank will not be in violation of its
charter or bylaws in capital stock form upon consummation of
the Conversion), or (ii) in default in the performance or
observance of any material obligation, agreement, covenant, or
condition contained in any material contract, lease, loan
agreement, indenture or other instrument to which it is a
party or by which it or any of its property may be bound. The
consummation of the transactions herein contemplated will not:
(i) conflict with or constitute a breach of, or default under,
or result in the creation of any material lien, charge or
encumbrance (with the exception of the liquidation account
established in the Conversion) upon any of the assets of the
Company or the Bank pursuant to the Articles of Incorporation
and Code of Regulations of the Company or the Amended Articles
of Incorporation and Amended Constitution of the Bank (in
either mutual or capital stock form) or any material contract,
lease or other instrument in which the Company or the Bank has
a beneficial interest, or any applicable law, rule, regulation
or order; (ii) violate any authorization, approval, judgement,
decree, order, statute, rule or regulation applicable to the
Company or the Bank, except for such violations which would
not have a material adverse effect on the financial condition
and results of operations of the Company and the Bank on a
consolidated basis; or (iii) with the exception of the
liquidation account established in the Conversion, result in
the creation of any material lien, charge or encumbrance upon
any property of the Company or the Bank.
(q) No default exists, and no event has occurred which with notice
or lapse of time, or both, would constitute a default on the
part of the Company or the Bank in the due performance and
observance of any term, covenant or condition of any
indenture, mortgage, deed of trust, note, bank loan or credit
agreement or any other instrument or agreement to which the
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<PAGE> 12
Company or the Bank is a party or by which any of them or any
of their property is bound or affected, except such defaults
which would not have a material adverse affect on the
financial condition or results of operations of the Company
and the Bank on a consolidated basis; such agreements are in
full force and effect; and no other party to any such
agreements has instituted or, to the best knowledge of the
Company and the Bank, threatened any action or proceeding
wherein the Company or the Bank would or might be alleged to
be in default thereunder.
(r) Upon consummation of the Conversion, the authorized, issued
and outstanding equity capital of the Company will be within
the range set forth in the Prospectus under the caption
"Capitalization," and no Shares have been or will be issued
and outstanding prior to the Closing Date (other than in
connection with the incorporation of the Company); the Shares
will have been duly and validly authorized for issuance and,
when issued and delivered by the Company pursuant to the Plan
against payment of the consideration calculated as set forth
in the Plan and in the Prospectus, will be duly and validly
issued, fully paid and non-assessable, except for shares
purchased by the ESOP with funds borrowed from the Company to
the extent payment therefor in cash has not been received by
the Company; except to the extent that subscription rights and
priorities pursuant thereto exist pursuant to the Plan, no
preemptive rights exist with respect to the Shares; and the
terms and provisions of the Shares will conform in all
material respects to the description thereof contained in the
Registration Statement and the Prospectus. To the best
knowledge of the Company and the Bank, upon the issuance of
the Shares, good title to the Shares will be transferred from
the Company to the purchasers thereof against payment
therefor, subject to such claims as may be asserted against
the purchasers thereof by third-party claimants.
(s) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and
delivery of this Agreement or the issuance of the Shares,
except for the approval of the Commission, the OTS, the
Division and any necessary qualification, notification,
registration or exemption under the securities or blue sky
laws of the various states in which the Shares are to be
offered, and except as may be required under the rules and
regulations of the National Association of Securities Dealers,
Inc. ("NASD") and/or The Nasdaq Stock Market.
(t) Crowe, Chizek and Company LLP, which has certified the audited
financial statements and schedules of the Bank included in the
Prospectus, has advised the Company and the Bank in writing
that they are, with respect to the Company and the Bank,
independent public accountants within the meaning of the Code
of Professional Ethics of the American Institute of Certified
Public Accountants and Title 12 of the Code of Federal
Regulations and Section 571.2(c)(3).
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<PAGE> 13
(u) Keller & Company, Inc., which has prepared the Bank's
Conversion Valuation Appraisal Report as of November 28, 1997
(as amended or supplemented, if so amended or supplemented)
(the "Appraisal"), has advised the Company in writing that it
is independent of the Company and the Bank within the meaning
of the Conversion Regulations.
(v) The Company and the Bank have timely filed all required
federal, state and local tax returns; the Company and the Bank
have paid all taxes that have become due and payable in
respect of such returns, except where permitted to be
extended, have made adequate reserves for similar future tax
liabilities and no deficiency has been asserted with respect
thereto by any taxing authority.
(w) The Bank is in compliance in all material respects with the
applicable financial record-keeping and reporting requirements
of the Currency and Foreign Transactions Reporting Act of
1970, as amended, and the regulations and rules thereunder.
(x) To the knowledge of the Company and the Bank, neither the
Company, the Bank nor employees of the Company or the Bank has
made any payment of funds of the Company or the Bank as a loan
for the purchase of the Shares or made any other payment of
funds prohibited by law, and no funds have been set aside to
be used for any payment prohibited by law.
(y) Prior to the Conversion, neither the Company nor the Bank has:
(i) issued any securities within the last 18 months (except
for notes to evidence other bank loans and reverse repurchase
agreements or other liabilities in the ordinary course of
business or as described in the Prospectus, and except for any
shares issued in connection with the incorporation of the
Company); (ii) had any material dealings within the 12 months
prior to the date hereof with any member of the NASD, or any
person related to or associated with such member, other than
discussions and meetings relating to the proposed Offering and
routine purchases and sales of United States government and
agency securities; (iii) entered into a financial or
management consulting agreement except as contemplated
hereunder; and (iv) engaged any intermediary between the Agent
and the Company and the Bank in connection with the offering
of the Shares, and no person is being compensated in any
manner for such service. Appropriate arrangements have been
made for placing the funds received from subscriptions for
Shares in a special interest-bearing account with the Bank
until all Shares are sold and paid for, with provision for
refund to the purchasers in the event that the Conversion is
not completed for whatever reason or for delivery to the
Company if all Shares are sold.
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<PAGE> 14
(z) The Company and the Bank have not relied upon the Agent or its
legal counsel or other advisors for any legal, tax or
accounting advice in connection with the Conversion.
(aa) The Company is not required to be registered under the
Investment Company Act of 1940, as amended.
(bb) Any certificates signed by an officer of the Company or the
Bank pursuant to the conditions of this Agreement and
delivered to the Agent or their counsel that refers to this
Agreement shall be deemed to be a representation and warranty
by the Company or the Bank to the Agent as to the matters
covered thereby with the same effect as if such representation
and warranty were set forth herein.
SECTION 5. REPRESENTATIONS AND WARRANTIES.
KBW represents and warrants to the Company and the Bank that:
(i) It is a corporation and is validly existing in good
standing under the laws of the State of New York and licensed to
conduct business in the State of Ohio and that Webb is an
unincorporated division thereof with full power and authority to
provide the services to be furnished to the Bank and the Company
hereunder.
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary action on the part of the Agent,
and this Agreement has been duly and validly executed and delivered by
the Agent and is a legal, valid and binding agreement of the Agent,
enforceable in accordance with its terms.
(iii) Each of the Agent and its employees, agents and
representatives who shall perform any of the services hereunder shall
be duly authorized and empowered, and shall have all licenses,
approvals and permits necessary to perform such services.
(iv) The execution and delivery of this Agreement by the
Agent, the consummation of the transactions contemplated hereby and
compliance with the terms and provisions hereof will not conflict with,
or result in a breach of, any of the terms, provisions or conditions
of, or constitute a default (or an event which with notice or lapse of
time or both would constitute a default) under, the Articles of
Incorporation of the Agent or any agreement, indenture or other
instrument to which the Agent is a party or by which it or its property
is bound.
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<PAGE> 15
(v) No approval of any regulatory or supervisory or other
public authority is required in connection with the Agent's execution
and delivery of this Agreement, except as may have been received.
(vi) There is no suit or proceeding or charge or action before
or by any court, regulatory authority or government agency or body or,
to the knowledge of the Agent, pending or threatened, which might
materially adversely affect the Agent's performance of this Agreement.
SECTION 5.L COVENANTS OF THE COMPANY AND THE BANK. The Company and the
Bank hereby jointly and severally covenant with KBW as follows:
(a) The Company will not, at any time after the date the
Registration Statement is declared effective, file any
amendment or supplement to the Registration Statement without
providing the Agent and its counsel an opportunity to review
such amendment or supplement or file any amendment or
supplement to which amendment or supplement the Agent or its
counsel shall reasonably object.
(b) The Bank will not, at any time after the Conversion
Application is approved by the OTS or the Division, file any
amendment or supplement to such Conversion Application without
providing the Agent and its counsel an opportunity to review
such amendment or supplement or file any amendment or
supplement to which amendment or supplement the Agent or its
counsel shall reasonably object.
(c) The Company will not, at any time before the Holding Company
Application is approved by the OTS, file any amendment or
supplement to such Holding Company Application without
providing the Agent and its counsel an opportunity to review
the nonconfidential portions of such amendment or supplement
or file any amendment or supplement to which amendment or
supplement the Agent or its counsel shall reasonably object.
(d) The Company and the Bank will use their best efforts to cause
any post-effective amendment to the Registration Statement to
be declared effective by the Commission and any post-effective
amendment to the Conversion Application to be approved by the
OTS and the Division and will immediately upon receipt of any
information concerning the events listed below notify the
Agent: (i) when the Registration Statement, as amended, has
become effective; (ii) when the Conversion Application, as
amended, has been approved by the OTS and the Division; (iii)
any comments from the Commission, the Division, the OTS, the
Division or any other governmental entity with respect to the
Conversion or the transactions contemplated by this Agreement;
(iv) of the request by the Commission, the OTS, the Division
or any other governmental entity for any amendment or
supplement to the Registration Statement, the Conversion
15
<PAGE> 16
Application or for additional information; (v) of the issuance
by the Commission, the OTS, the Division or any other
governmental entity of any order or other action suspending
the Offering or the use of the Registration Statement or the
Prospectus or any other filing of the Company or the Bank
under the Conversion Regulations, or other applicable law, or
the threat of any such action; (vi) the issuance by the
Commission, the OTS, the Division or any authority of any stop
order suspending the effectiveness of the Registration
Statement or of the initiation or threat of initiation or
threat of any proceedings for that purpose; or (vii) of the
occurrence of any event mentioned in paragraph (h) below. The
Company and the Bank will make every reasonable effort (i) to
prevent the issuance by the Commission, the OTS, the Division
or any other state authority of any such order and, if any
such order shall at any time be issued, (ii) to obtain the
lifting thereof at the earliest possible time.
(e) The Company and the Bank will deliver to the Agent and to its
counsel two conformed copies of the Registration Statement,
the Conversion Application and the Holding Company
Application, as originally filed and of each amendment or
supplement thereto, including all exhibits. Further, the
Company and the Bank will deliver such additional copies of
the foregoing documents to counsel to the Agent as may be
required for any NASD and "blue sky" filings.
(f) The Company and the Bank will furnish to the Agent, from time
to time during the period when the Prospectus (or any later
prospectus related to this offering) is required to be
delivered under the 1933 Act or the Securities Exchange Act of
1934 (the "1934 Act"), such number of copies of such
Prospectus (as amended or supplemented) as the Agent may
reasonably request for the purposes contemplated by the 1933
Act, the 1933 Act Regulations, the 1934 Act or the rules and
regulations promulgated under the 1934 Act (the "1934 Act
Regulations"). The Company authorizes the Agent to use the
Prospectus (as amended or supplemented, if amended or
supplemented) in any lawful manner contemplated by the Plan in
connection with the sale of the Shares by the Agent.
(g) The Company and the Bank will comply with any and all material
terms, conditions, requirements and provisions with respect to
the Conversion and the transactions contemplated thereby
imposed by the Commission, the OTS, the Division or the
Conversion Regulations, and by the 1933 Act, the 1933 Act
Regulations, the 1934 Act and the 1934 Act Regulations to be
complied with prior to or subsequent to the Closing Date and
when the Prospectus is required to be delivered, and during
such time period the Company and the Bank will comply, at
their own expense, with all material requirements imposed upon
them by the Commission, the OTS, the Division or the
Conversion Regulations, and by the 1933 Act, the 1933
16
<PAGE> 17
Act Regulations, the 1934 Act and the 1934 Act Regulations,
including, without limitation, Rule 10b-5 under the 1934 Act,
in each case as from time to time in force, so far as
necessary to permit the continuance of sales or dealing in the
Common Shares during such period in accordance with the
provisions hereof and the Prospectus.
(h) If, at any time during the period when the Prospectus relating
to the Shares is required to be delivered, any event relating
to or affecting the Company or the Bank shall occur, as a
result of which it is necessary or appropriate, in the opinion
of counsel for the Company and the Bank or in the reasonable
opinion of the Agent's counsel, to amend or supplement the
Registration Statement or Prospectus in order to make the
Registration Statement or Prospectus not misleading in light
of the circumstances existing at the time the Prospectus is
delivered to a purchaser, the Company and the Bank will
immediately so inform the Agent and prepare and file, at their
own expense, with the Commission, the OTS and the Division and
furnish to the Agent a reasonable number of copies of an
amendment or amendments of, or a supplement or supplements to,
the Registration Statement or Prospectus (in form and
substance reasonably satisfactory to the Agent and its counsel
after a reasonable time for review) which will amend or
supplement the Registration Statement or Prospectus so that as
amended or supplemented it will not contain an untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of
the circumstances existing at the time the Prospectus is
delivered to a purchaser, not misleading. For the purpose of
this Agreement, the Company and the Bank each will timely
furnish to the Agent such information with respect to itself
as the Agent may from time to time reasonably request.
(i) The Company and the Bank will take all necessary actions in
cooperating with the Agent and furnish to whomever the Agent
may direct such information as may be required to qualify or
register the Shares for offering and sale by the Company or to
exempt such Shares from registration, or to exempt the Company
as a broker-dealer and its officers, directors and employees
as broker-dealers or agents under the applicable securities or
blue sky laws of such jurisdictions in which the Shares are
required under the Conversion Regulations to be sold or as the
Agent and the Company and the Bank may reasonably agree upon;
provided, however, that the Company shall not be obligated to
file any general consent to service of process, to qualify to
do business in any jurisdiction in which it is not so
qualified, or to register its directors or officers as
brokers, dealers, salesmen or agents in any jurisdiction. In
each jurisdiction where any of the Shares shall have been
qualified or registered as above provided, the Company will
make and file such statements and reports in each fiscal
period as are or may be required by the laws of such
jurisdiction.
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<PAGE> 18
(j) The liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders will be duly
established and maintained in accordance with the requirements
of the OTS, and such Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain their
savings accounts in the Bank will have an inchoate interest in
their pro rata portion of the liquidation account, which shall
have a priority superior to that of the holders of the Common
Shares in the event of a complete liquidation of the Bank.
(k) The Company and the Bank will not sell or issue, contract to
sell or otherwise dispose of, for a period of 90 days after
the Closing Date, without the Agent's prior written consent,
any of their common shares, other than the Shares or other
than in connection with any plan or arrangement described in
the Prospectus, including existing stock benefit plans.
(l) The Company shall register its Common Shares under Section
12(g) of the 1934 Act concurrently with the Offering and shall
request that such registration be effective prior to or upon
completion of the Conversion. The Company shall maintain the
effectiveness of such registration for not less than three
years or such shorter period as may be required by the OTS or
the Division.
(m) During the period during which the Common Shares are
registered under the 1934 Act or for three (3) years from the
date hereof, whichever period is greater, the Company will
furnish to its shareholders as soon as practicable after the
end of each fiscal year an annual report of the Company
(including a consolidated balance sheet and statements of
consolidated income, shareholders' equity and cash flows of
the Company and its subsidiaries as at the end of and for such
year, certified by independent public accountants in
accordance with Regulation S-X under the 1933 Act and the 1934
Act).
(n) During the period of three years from the date hereof, the
Company will furnish to the Agent: (i) as soon as practicable
after such information is publicly available, a copy of each
report of the Company furnished to or filed with the
Commission under the 1934 Act or any national securities
exchange or system on which any class of securities of the
Company is listed or quoted (including, but not limited to,
reports on Forms 10-K, 10-Q and 8-K and all proxy statements
and annual reports to stockholders), (ii) a copy of each other
non-confidential report of the Company mailed to its
shareholders or filed with the Commission, the OTS or any
other supervisory or regulatory authority or any national
securities exchange or system on which any class of securities
of the Company is listed or quoted, each press release and
material news items
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<PAGE> 19
and additional documents and information with respect to the
Company or the Bank as the Agent may reasonably request; and
(iii) from time to time, such other nonconfidential
information concerning the Company or the Bank as the Agent
may reasonably request.
(o) The Company and the Bank will use the net proceeds from the
sale of the Shares in the manner set forth in the Prospectus
under the caption "Use of Proceeds."
(p) Other than as permitted by the Conversion Regulations, the
HOLA, the 1933 Act, the 1933 Act Regulations, the Division and
its rules and regulations and the laws of any state in which
the Shares are registered or qualified for sale or exempt from
registration, neither the Company nor the Bank will distribute
any prospectus, offering circular or other offering material
in connection with the offer and sale of the Shares.
(q) The Company will use its best efforts to (i) encourage and
assist a market maker to establish and maintain a market for
the Shares and (ii) list and maintain quotation of the Shares
on a national or regional securities exchange or on The NASDAQ
Stock Market effective on or prior to the Closing Date.
(r) The Bank will maintain appropriate arrangements for depositing
all funds received from persons mailing subscriptions for or
orders to purchase Shares in the Offering on an
interest-bearing basis at the rate described in the Prospectus
until the Closing Date and satisfaction of all conditions
precedent to the release of the Bank's obligation to refund
payments received from persons subscribing for or ordering
Shares in the Offering in accordance with the Plan and as
described in the Prospectus or until refunds of such funds
have been made to the persons entitled thereto or withdrawal
authorizations canceled in accordance with the Plan and as
described in the Prospectus. The Bank will maintain such
records of all funds received to permit the funds of each
subscriber to be separately insured by the FDIC (to the
maximum extent allowable) and to enable the Bank to make the
appropriate refunds of such funds in the event that such
refunds are required to be made in accordance with the Plan
and as described in the Prospectus.
(s) The Company will promptly take all necessary action to
register as a savings and loan holding company under the HOLA.
(t) The Company and the Bank will take such actions and furnish
such information as are reasonably requested by the Agent in
order for the Agent to ensure compliance with the NASD's
"Interpretation Relating to Free Riding and Withholding."
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<PAGE> 20
(u) Neither the Company nor the Bank will amend the Plan of
Conversion without notifying the Agent prior thereto.
(v) The Company shall assist the Agent, if necessary, in
connection with the allocation of the Shares in the event of
an oversubscription and shall provide the Agent with any
information necessary to assist the Company in allocating the
Shares in such event and such information shall be accurate
and reliable.
(w) Prior to the Closing Date, the Company and the Bank will
inform the Agent of any event or circumstances of which it is
aware as a result of which the Registration Statement and/or
Prospectus, as then amended or supplemented, would contain an
untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements
therein not misleading.
(x) Subsequent to the date the Registration Statement is declared
effective by the Commission and prior to the Closing Date,
except as otherwise may be indicated or contemplated therein
or set forth in an amendment or supplement thereto, neither
the Company nor the Bank will have: (i) issued any securities
or incurred any liability or obligation, direct or contingent,
for borrowed money, except borrowings from the same or similar
sources indicated in the Prospectus in the ordinary course of
its business, or (ii) entered into any transaction which is
material in light of the business and properties of the
Company and the Bank, taken as a whole.
(y) The facts and representations provided to Vorys, Sater,
Seymour and Pease LLP by the Bank and the Company and upon
which Vorys, Sater, Seymour and Pease LLP will base its
opinion under Section 7(c)(1) are and will be truthful,
accurate and complete.
SECTION 6. PAYMENT OF EXPENSES. Whether or not the Conversion is
completed or the sale of the Shares by the Company is consummated, the Company
and the Bank jointly and severally agree to pay or reimburse the Agent for: (a)
all filing fees in connection with all filings related to the Offering with the
NASD; (b) any stock issue or transfer taxes which may be payable with respect to
the sale of the Shares; (c) all reasonable expenses of the Conversion, including
but not limited to the Company's and the Bank's, and the Agent's attorneys' fees
(not to exceed $30,000 without the Bank's consent) and expenses, blue sky fees,
transfer agent, registrar and other agent charges, fees relating to auditing and
accounting or other advisors and costs of printing all documents necessary in
connection with the Conversion; provided, however, there will be no
out-of-pocket expenses charged by the Agent for expenses such as travel, lodging
and meals. In the event the Company is unable to sell a minimum of 1,445,000
Shares or the Conversion is terminated or otherwise abandoned, the Company and
the Bank shall promptly reimburse the Agent in accordance with Section 2(d)
hereof.
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<PAGE> 21
SECTION 7. CONDITIONS TO THE AGENT'S OBLIGATIONS. The obligations of
the Agent hereunder, as to the Shares to be delivered at the Closing Date, are
subject, to the extent not waived in writing by the Agent, to the condition that
all representations and warranties of the Company and the Bank herein are, at
and as of the commencement of the Offering and at and as of the Closing Date,
true and correct in all material respects, the condition that the Company and
the Bank shall have performed all of their obligations hereunder to be performed
on or before such dates, and to the following further conditions:
(a) At the Closing Date, the Company and the Bank shall have
conducted the Conversion in all material respects in
accordance with the Plan, the Conversion Regulations, all
requirements of Ohio law, including the rules and regulations
of the Division, and all other applicable laws, regulations,
decisions and orders, including all terms, conditions,
requirements and provisions precedent to the Conversion
imposed upon them by the OTS and the Division.
(b) The Registration Statement shall have been declared effective
by the Commission and the Conversion Application approved by
the OTS and the Division not later than 5:30 p.m. on the date
of this Agreement, or with the Agent's consent at a later time
and date; and at the Closing Date, no stop order suspending
the effectiveness of the Registration Statement shall have
been issued under the 1933 Act or proceedings therefore
initiated or threatened by the Commission or any state
authority, and no order or other action suspending the
authorization of the Prospectus or the consummation of the
Conversion shall have been issued or proceedings therefore
initiated or, to the Company's or the Bank's knowledge,
threatened by the Commission, the OTS, the Division, the FDIC,
or any other state authority.
(c) At the Closing Date, the Agent shall have received:
(1) The favorable opinion, dated as of the Closing Date
and addressed to the Agent and for its benefit, of
Vorys, Sater, Seymour and Pease LLP, special counsel
for the Company and the Bank, in form and substance
to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation under the laws of the State
of Ohio.
(ii) The Company has corporate power and
authority to own, lease and operate its properties
and to conduct its business as described in the
Registration Statement and the Prospectus.
(iii) The Bank is a validly existing savings
and loan association incorporated under Ohio law in
mutual form and immediately following the completion
of the Conversion will be a validly existing savings
and loan association incorporated under Ohio law in
permanent capital stock
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<PAGE> 22
form of organization, in both instances duly
authorized to conduct its business and own its
property as described in the Registration Statement
and the Prospectus. All of the outstanding capital
stock of the Bank upon completion of the Conversion
will be duly authorized and, upon payment therefor,
will be validly issued, fully paid and non-assessable
and will be owned by the Company, to such counsel's
Actual Knowledge, free and clear of any liens,
encumbrances, claims or other restrictions.
(iv) The Bank is a member of the
FHLB-Cincinnati. The deposit accounts of the Bank are
insured by the FDIC up to the maximum amount allowed
under law and no proceedings for the termination or
revocation of such insurance are pending or, to such
counsel's Actual Knowledge, threatened; the
description of the liquidation account as set forth
in the Prospectus under the captions "The
Conversion-Liquidation Account," to the extent that
such information constitutes matters of law and legal
conclusions, has been reviewed by such counsel and is
accurately described in all material respects.
(v) Immediately following the consummation
of the Conversion, the authorized, issued and
outstanding Common Shares of the Company will be
within the range set forth in the Prospectus under
the caption "Capitalization," and, except for shares
issued upon incorporation of the Company, no Common
Shares have been issued prior to the Closing Date; at
the time of the Conversion, the Shares subscribed for
pursuant to the Offering will have been duly and
validly authorized for issuance, and when issued and
delivered by the Company pursuant to the Plan against
payment of the consideration calculated as set forth
in the Plan and Prospectus, will be duly and validly
issued and fully paid and non-assessable, except for
shares purchased by the ESOP with funds borrowed from
the Company to the extent payment therefor in cash
has not been received by the Company; except to the
extent that subscription rights and priorities
pursuant thereto exist pursuant to the Plan, the
issuance of the Shares is not subject to preemptive
rights and the terms and provisions of the Shares
conform in all material respects to the description
thereof contained in the Prospectus. To such
counsel's Actual Knowledge, upon the issuance of the
Shares, good title to the Shares will be transferred
from the Company to the purchasers thereof against
payment therefor, subject to such claims as may be
asserted against the purchasers thereof by
third-party claimants.
(vi) The Bank and the Company have full
corporate power and authority to enter into the
Agreement and to consummate the transactions
contemplated thereby and by the Plan. The execution
and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been
duly and validly authorized by all necessary action
on the part of the Company and the Bank; and this
Agreement is a valid and binding
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<PAGE> 23
obligation of the Company and the Bank, enforceable
against the Company and the Bank in accordance with
its terms, except as the enforceability thereof may
be limited by (i) bankruptcy, insolvency,
reorganization, moratorium, conservatorship,
receivership or other similar laws now or hereafter
in effect relating to or affecting the enforcement of
creditors' rights generally or the rights of
creditors of Ohio savings institutions, (ii) general
equitable principles, (iii) laws relating to the
safety and soundness of insured depository
institutions, and (iv) applicable law or public
policy with respect to the indemnification and/or
contribution provisions contained herein, including
without limitations the provisions of Sections 23A
and 23B of the Federal Reserve Act and except that no
opinion need be expressed as to the effect or
availability of equitable remedies or injunctive
relief (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(vii) The Conversion Application has been
approved by the OTS and the Superintendent of the
Division (or his duly qualified delegate, who shall
be so identified) and the Prospectus has been
authorized for use by the OTS. The OTS has approved
the Holding Company Application and the purchase by
the Company of all of the issued and outstanding
capital stock of the Bank and no action has been
taken, and to such counsel's Actual Knowledge, none
is pending or threatened, to revoke any such
authorization or approval.
(viii) The Plan has been duly adopted by the
required vote of the directors of the Company and the
Bank, and based upon the certificate of the
inspectors of election, by the members of the Bank.
(ix) Subject to the satisfaction of the
conditions to the OTS's and the Division's approval
of the Conversion, no further approval, registration,
authorization, consent or other order of any federal
regulatory agency is required in connection with the
execution and delivery of this Agreement, the
issuance of the Shares and the consummation of the
Conversion, except as may be required under the
securities or blue sky laws of various jurisdictions
(as to which no opinion need be rendered) and except
as may be required under the rules and regulations of
the NASD and/or The Nasdaq Stock Market (as to which
no opinion need by rendered).
(x) The Registration Statement is effective
under the 1933 Act and no stop order suspending the
effectiveness has been issued under the 1933 Act or
proceedings therefor initiated or, to such counsel's
Actual Knowledge, threatened by the Commission.
(xi) At the time the Conversion Application,
including the Prospectus contained therein, was
approved by the OTS or the Division,
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<PAGE> 24
the Conversion Application, including the Prospectus
contained therein, complied as to form in all
material respects with the requirements of the
Conversion Regulations, federal and state law and all
applicable rules and regulations promulgated
thereunder (other than the financial statements, the
notes thereto, and other tabular, financial,
statistical and appraisal data included therein, as
to which no opinion need be rendered).
(xii) At the time that the Registration
Statement became effective, (i) the Registration
Statement (as amended or supplemented, if so amended
or supplemented) (other than the financial
statements, the notes thereto, and other tabular,
financial, statistical and appraisal data included
therein, as to which no opinion need be rendered),
complied as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act
Regulations, and (ii) the Prospectus (other than the
financial statements, the notes thereto, and other
tabular, financial, statistical and appraisal data
included therein, as to which no opinion need be
rendered) complied as to form in all material
respects with the requirements of the 1933 Act, the
1933 Act Regulations, the Conversion Regulations and
federal law.
(xiii) The terms and provisions of the
Shares of the Company conform, in all material
respects, to the description thereof contained in the
Registration Statement and Prospectus, and the form
of certificate used to evidence the Shares is in due
and proper form.
(xiv) There are no legal or governmental
proceedings pending, or to such counsel's Actual
Knowledge, threatened which are required to be
disclosed in the Registration Statement and
Prospectus, other than those disclosed therein.
(xv) To such counsel's Actual Knowledge,
there are no material contracts, indentures,
mortgages, loan agreements, notes, leases or other
instruments required to be described or referred to
in the Conversion Application, the Registration
Statement or the Prospectus or required to be filed
as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto in
the Conversion Application, the Registration
Statement or the Prospectus. The description in the
Conversion Application, the Registration Statement
and the Prospectus of such documents and exhibits is
accurate in all material respects and fairly presents
the information required to be shown.
(xvi) The Plan complies in all material
respects with all applicable federal and Ohio laws,
rules, regulations, decisions and orders including,
but not limited to, the Conversion Regulations; no
order has been issued by the OTS, the Division, the
Commission, the FDIC, or any state authority to
suspend the Offering or the use of the Prospectus,
and no
24
<PAGE> 25
action for such purposes has been instituted or, to
such counsel's Actual Knowledge, threatened by the
OTS, the Division, the Commission, the FDIC, or any
other state authority and, to such counsel's Actual
Knowledge, no person has sought to obtain regulatory
or judicial review of the final action of the OTS or
the Division approving the Plan, the Conversion
Application, the Holding Company Application or the
Prospectus.
(xvii) To such counsel's Actual Knowledge,
the Company and the Bank have obtained all material
licenses, permits and other governmental
authorizations currently required for the conduct of
their businesses and all such licenses, permits and
other governmental authorizations are in full force
and effect, and the Company and the Bank are in all
material respects complying therewith.
(xviii) To such counsel's Actual Knowledge,
neither the Company nor the Bank is in violation of
its Articles of Incorporation and Code of Regulations
or its Amended Articles of Incorporation and Amended
Constitution, as appropriate or, to such counsel's
Actual Knowledge, in default or violation of any
obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which
it is a party or by which it or its property may be
bound, except for such defaults or violations which
would not have a material adverse impact on the
financial condition or results of operations of the
Company and the Bank on a consolidated basis; to such
counsel's Actual Knowledge, the execution and
delivery of this Agreement, the incurrence of the
obligations herein set forth and the consummation of
the transactions contemplated herein will not
conflict with or constitute a breach of, or default
under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or
assets of the Company or the Bank pursuant to any
material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which
the Company or the Bank is a party or by which any of
them may be bound, or to which any of the property or
assets of the Company or the Bank are subject (other
than the establishment of the liquidation account);
and, such action will not result in any violation of
the provisions of the Articles of Incorporation or
Code of Regulations of the Company or the Amended
Articles of Incorporation or the Amended Constitution
of the Bank or, to such counsel's Actual Knowledge,
result in any violation of any applicable federal or
state law, act, regulation (except that no opinion
with respect to the securities and blue sky laws of
various jurisdictions or the rules or regulations of
the NASD and/or The NASDAQ Stock Market) or order or
court order, writ, injunction or decree.
(xix) The Company's Articles of
Incorporation and Code of Regulations comply in all
materials respects with the laws of the State of
25
<PAGE> 26
Ohio. The Bank's Amended Articles of Incorporation or
the Amended Constitution comply in all material
respects with Ohio law and the Rules and Regulations
of the Division.
(xx) To such counsel's Actual Knowledge,
neither the Company nor the Bank is in violation of
any directive from the OTS, the Division or the FDIC
to make any material change in the method of
conducting its respective business.
(xxi) The information in the Prospectus
under the captions "Regulation," "The Conversion,"
"Restrictions on Acquisition of the Company and the
Bank and Anti-takeover Provisions" and "Description
of Authorized Shares," to the extent that such
information constitutes matters of law, summaries of
legal matters, documents or proceedings, or legal
conclusions, has been reviewed by such counsel and is
correct in all material respects. The description of
the Conversion process in the Prospectus under the
caption "The Conversion" to the extent that such
information constitutes matters of law, summaries of
legal matters, documents or proceedings, or legal
conclusions, has been reviewed by such counsel and
fairly describes such process in all material
respects. The descriptions in the Prospectus of
statutes or regulations are accurate summaries and
fairly present the information required to be shown.
The information under the caption "The
Conversion-Principal Effects of the Conversion--Tax
Consequences" has been reviewed by such counsel and
fairly describes the opinions rendered by them to the
Company and the Bank with respect to such matters.
In addition, such counsel shall state that
during the preparation of the Conversion Application,
the Registration Statement and the Prospectus, they
participated in conferences with certain officers of,
the independent public and internal accountants for,
and other representatives of, the Company and the
Bank, at which conferences the contents of the
Conversion Application, the Registration Statement
and the Prospectus and related matters were discussed
and, while such counsel have not confirmed the
accuracy or completeness of or otherwise verified the
information contained in the Conversion Application,
the Registration Statement or the Prospectus and do
not assume any responsibility for such information,
based upon such conferences and a review of documents
deemed relevant for the purpose of rendering their
opinion (relying as to materiality as to factual
matters on certificates of officers and other factual
representations by the Company and the Bank), nothing
has come to their attention that would lead them to
believe that the Conversion Application, the
Registration Statement, the Prospectus, or any
amendment or supplement thereto (other than the
financial statements, the notes thereto, and other
tabular, financial, statistical and appraisal data
included therein as to which no view need be
rendered) contained an untrue statement of a
26
<PAGE> 27
material fact or omitted to state a material fact
required to be stated therein or necessary to make
the statements therein, in light of the circumstances
under which they were made, not misleading.
In giving such opinion, such counsel may
rely as to all matters of fact on certificates of
officers or directors of the Company and the Bank and
certificates of public officials. Such counsel's
opinion shall be limited to matters governed by
federal laws and by the laws of the State of Ohio.
The term "Actual Knowledge" as used herein shall have
the meaning set forth in the Legal Opinion Accord of
the American Bar Association Section of Business Law.
For purposes of such opinion, no proceedings shall be
deemed to be pending, no order or stop order shall be
deemed to be issued, and no action shall be deemed to
be instituted unless, in each case, a director or
executive officer of the Company or the Bank shall
have received a copy of such proceedings, order, stop
order or action. In addition, such opinion may be
limited to present statutes, regulations and judicial
interpretations and to facts as they presently exist;
in rendering such opinion, such counsel need assume
no obligation to revise or supplement it should the
present laws be changed by legislative or regulatory
action, judicial decision or otherwise; and such
counsel need express no view, opinion or belief with
respect to whether any proposed or pending
legislation, if enacted, or any proposed or pending
regulations or policy statements issued by any
regulatory agency, whether or not promulgated
pursuant to any such legislation, would affect the
validity of the Conversion or any aspect thereof.
Such counsel may assume that any agreement is the
valid and binding obligation of any parties to such
agreement other than the Company or the Bank.
(d) At the Closing Date, the Agent shall have received
the favorable opinion, dated as of the Closing Date,
of Silver, Freedman & Taff, L.L.P., the Agent's
counsel, with respect to such matters as the Agent
may reasonably require. Such opinion may rely upon
the opinions of counsel to the Company and the Bank,
and as to matters of fact, upon certificates of
officers and directors of the Company and the Bank
delivered pursuant hereto or as such counsel shall
reasonably request.
(e) At the Closing Date, the Agent shall receive a
certificate of the Chief Executive Officer and the
Principal Accounting Officer of the Company and the
Bank in form and substance reasonably satisfactory to
the Agent's Counsel, dated as of such Closing Date,
to the effect that: (i) they have carefully examined
the Prospectus and, in their opinion, at the time the
Prospectus became authorized for final use, the
Prospectus did not contain any untrue statement of a
material fact or omit to state a material fact
necessary in order to make the statements therein, in
light of the circumstances under which they were
made, not misleading; (ii) since the date the
Prospectus became authorized for final use, no event
has occurred
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<PAGE> 28
which should have been set forth in an amendment or
supplement to the Prospectus which has not been so
set forth, including specifically, but without
limitation, any material adverse change in the
condition, financial or otherwise, or in the
earnings, capital, properties or business of the
Company or the Bank and the conditions set forth in
this Section 7 have been satisfied; (iii) since the
respective dates as of which information is given in
the Registration Statement and the Prospectus, there
has been no material adverse change in the condition,
financial or otherwise, or in the earnings, capital
or properties of the Company or the Bank
independently, or of the Company and the Bank
considered as one enterprise, whether or not arising
in the ordinary course of business; (iv) the
representations and warranties in Section 4 are true
and correct with the same force and effect as though
expressly made at and as of the Closing Date; (v) the
Company and the Bank have complied in all material
respects with all agreements and satisfied all
conditions on their part to be performed or satisfied
at or prior to the Closing Date and will comply in
all material respects with all obligations to be
satisfied by them after the Conversion; (vi) no stop
order suspending the effectiveness of the
Registration Statement has been initiated or, to the
best knowledge of the Company or the Bank, threatened
by the Commission or any state authority; (vii) no
order suspending the Offering, the Conversion, the
acquisition of all of the shares of the Bank by the
Company or the effectiveness of the Prospectus has
been issued and no proceedings for that purpose are
pending or, to the best knowledge of the Company or
the Bank, threatened by the OTS, the Commission, the
FDIC, or any state authority; and (viii) to the best
knowledge of the Company or the Bank, no person has
sought to obtain review of the final action of the
OTS approving the Plan.
(f) Prior to and at the Closing Date: (i) in the
reasonable opinion of the Agent, there shall have
been no material adverse change in the condition,
financial or otherwise, or in the earnings or
business of the Company or the Bank independently, or
of the Company and the Bank considered as one
enterprise, from that as of the latest dates as of
which such condition is set forth in the Prospectus,
other than transactions referred to or contemplated
therein; (iii) the Company or the Bank shall not have
received from the OTS, the Division or the FDIC any
direction (oral or written) to make any material
change in the method of conducting their business
with which it has not complied (which direction, if
any, shall have been disclosed to the Agent) or which
materially and adversely would affect the business,
operations or financial condition or income of the
Company and the Bank taken as a whole; (iv) neither
the Company nor the Bank shall have been in default
(nor shall an event have occurred which, with notice
or lapse of time or both, would constitute a default)
under any provision of any agreement or instrument
relating to any outstanding indebtedness; (v) no
action, suit or proceeding, at law or in equity or
before or by any federal or state commission, board
or other
28
<PAGE> 29
administrative agency, shall be pending or, to the
knowledge of the Company or the Bank, threatened
against the Company or the Bank or affecting any of
their properties wherein an unfavorable decision,
ruling or finding would materially and adversely
affect the business, operations, financial condition
or income of the Company or the Bank taken as a
whole; and (vi) the Shares shall have been qualified
or registered for offering and sale or exempted
therefrom under the securities or blue sky laws of
the jurisdictions as the Agent shall have reasonably
requested and as agreed to by the Company and the
Bank.
(g) Concurrently with the execution of this Agreement,
the Agent shall receive a letter from Crowe, Chizek
and Company LLP dated as of the date of the
Prospectus and addressed to the Agent: (i) confirming
that Crowe, Chizek and Company LLP is a firm of
independent public accounts within the meaning of
Rule 101 of the Code of Professional Ethics of the
American Institute of Certified Public Accountants
and applicable regulations of the OTS and stating in
effect that in its opinion the financial statements,
schedules and related notes of the Bank as of
September 30, 1997 and 1996, and for each of the
three years in the period ended June 30, 1997,
included in the Prospectus and covered by their
opinion included therein, comply as to form in all
material respects with the applicable accounting
requirements and related published rules and
regulations of the OTS and the 1933 Act; (ii) stating
in effect that, on the basis of certain agreed upon
procedures (but not an audit in accordance with
generally accepted auditing standards) consisting of
a reading of the latest available unaudited interim
financial statements of the Bank prepared by the
Bank, a reading of the minutes of the meetings of the
Board of Directors and members of the Bank and
consultations with officers of the Bank responsible
for financial and accounting matters, nothing came to
their attention which caused them to believe that:
(A) the unaudited financial statements included in
the Prospectus are not in conformity with the 1933
Act, applicable accounting requirements of the OTS
and generally accepted accounting principles applied
on a basis substantially consistent with that of the
audited financial statements included in the
Prospectus; or (B) during the period from the date of
the latest unaudited financial statements included in
the Prospectus to a specified date not more than
three business days prior to the date of the
Prospectus, except as has been described in the
Prospectus, there was any increase in borrowings,
other than normal deposit fluctuations, by the Bank;
or (C) there was any decrease in the net assets of
the Bank at the date of such letter as compared with
amounts shown in the latest unaudited balance sheets
included in the Prospectus; and (iii) stating that,
in addition to the audit referred to in their opinion
included in the Prospectus and the performance of the
procedures referred to in clause (ii) of this
subsection (g), they have compared with the general
accounting records of the Bank, which are subject to
the internal controls of the Bank, the accounting
29
<PAGE> 30
system and other data prepared by the Bank, directly
from such accounting records, to the extent specified
in such letter, such amounts and/or percentages set
forth in the Prospectus as the Agent may reasonably
request; and they have reported on the results of
such comparisons.
(h) At the Closing Date, the Agent shall receive a letter
dated the Closing Date, addressed to the Agent,
confirming the statements made by Crowe, Chizek and
Company LLP in the letter delivered by it pursuant to
subsection (g) of this Section 7, the "specified
date" referred to in clause (ii) of subsection (g) to
be a date specified in the letter required by this
subsection (h) which for purposes of such letter
shall not be more than three business days prior to
the Closing Date.
(i) At the Closing Date, the Agent shall receive a letter
from Keller & Company, Inc. dated the Closing Date
thereof and addressed to counsel for the Agent (i)
confirming that said firm is independent of the
Company and the Bank and is experienced and expert in
the area of corporate appraisals within the meaning
of Title 12 of the Code of Federal Regulations,
Section 563b.7(f)(1)(i), (ii) stating in effect that
the Appraisal prepared by such firm complies in all
material respects with the applicable requirements of
Title 12 of the Code of Federal Regulations, and
(iii) further stating that its opinion of the
aggregate pro forma market value of the Company and
the Bank expressed in its Appraisal dated as of
November 28, 1997, and most recently updated, remains
in effect.
(j) The Company and the Bank shall not have sustained
since the date of the latest financial statements
included in the Prospectus any material loss or
interference with its business from fire, explosion,
flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than
as set forth or contemplated in the Registration
Statement and Prospectus and since the respective
dates as of which information is given in the
Registration Statement and Prospectus, there shall
not have been any change in the long-term debt of the
Company or the Bank other than debt incurred in
relation to the purchase of Shares by the Bank's
eligible plans, or any change, or any development
involving a prospective change, in or affecting the
general affairs, management, financial position,
shareholders' equity or results of operations of the
Company or the Bank, otherwise than as set forth or
contemplated in the Registration Statement and
Prospectus, the effect of which, in any such case
described above, is in Webb's reasonable judgment
sufficiently material and adverse as to make it
impracticable or inadvisable to proceed with the
Subscription Offering or the delivery of the Shares
on the terms and in the manner contemplated in the
Prospectus.
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<PAGE> 31
(k) At or prior to the Closing Date, the Agent shall
receive: (i) a copy of the letters from the OTS and
the Division approving the Conversion Application and
authorizing the use of the Prospectus; (ii) a copy of
the order from the Commission declaring the
Registration Statement effective; (iii) a certificate
from the State of Ohio evidencing the good standing
of the Bank; (iv) a certificate of good standing from
the State of Ohio evidencing the good standing of the
Company; (v) a certificate from the FDIC evidencing
the Bank's insurance of accounts; (vi) a certificate
from the FHLB-Cincinnati evidencing the Bank's
membership thereof; (vii) a copy of the letter from
the OTS approving the Company's Holding Company
Application; and (viii) a certified copy of the
Bank's Amended Articles of Incorporation and Amended
Constitution.
(l) Subsequent to the date hereof, there shall not have
occurred any of the following: (i) a suspension or
limitation in trading in securities generally on the
New York Stock Exchange or in the over-the-counter
market, or quotations halted generally on The Nasdaq
Stock Market, or minimum or maximum prices for
trading have been fixed, or maximum ranges for prices
for securities have been required by either of such
exchanges or the NASD or by order of the Commission
or any other governmental authority; (ii) a general
moratorium on the operations of commercial banks,
Ohio or federal savings and loan associations or a
general moratorium on the withdrawal of deposits from
commercial banks or Ohio or federal savings and loan
associations declared by federal or state
authorities; (iii) the engagement by the United
States in hostilities which have resulted in the
declaration, on or after the date hereof, of a
national emergency or war; or (iv) a material decline
in the price of equity or debt securities if the
effect of such a declaration or decline, in the
Agent's reasonable judgement, makes it impracticable
or inadvisable to proceed with the Offering or the
delivery of the Shares on the terms and in the manner
contemplated in the Registration Statement and the
Prospectus.
(m) At or prior to the Closing Date, counsel to the Agent
shall have been furnished with such documents and
opinions as they may reasonably require for the
purpose of enabling them to pass upon the sale of the
Shares as herein contemplated and related proceedings
or in order to evidence the occurrence or
completeness of any of the representations or
warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings
taken by the Company or the Bank in connection with
the Conversion and the sale of the Shares as herein
contemplated shall be satisfactory in form and
substance to Webb and its counsel.
SECTION 8. INDEMNIFICATION.
(a) The Company and the Bank jointly and severally agree
to indemnify and hold harmless the Agent, its
respective officers and directors, employees
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<PAGE> 32
and agents, and each person, if any, who controls the
Agent within the meaning of Section 15 of the 1933
Act or Section 20(a) of the 1934 Act, against any and
all loss, liability, claim, damage or expense
whatsoever (including, but not limited to, settlement
expenses), joint or several, that the Agent or any of
them may suffer or to which the Agent and any such
persons may become subject under all applicable
federal or state laws or otherwise, and to promptly
reimburse the Agent and any such persons upon written
demand for any expense (including reasonable fees and
disbursements of counsel) incurred by the Agent or
any of them in connection with investigating,
preparing or defending any actions, proceedings or
claims (whether commenced or threatened) to the
extent such losses, claims, damages, liabilities or
actions: (i) arise out of or are based upon any
untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement
(or any amendment or supplement thereto), preliminary
or final Prospectus (or any amendment or supplement
thereto), the Conversion Application (or any
amendment or supplement thereto), the Holding Company
Application or any instrument or document executed by
the Company or the Bank or based upon written
information supplied by the Company or the Bank filed
in any state or jurisdiction to register or qualify
any or all of the Shares or to claim an exemption
therefrom or provided to any state or jurisdiction to
exempt the Company as a broker-dealer or its
officers, directors and employees as broker-dealers
or agent, under the securities laws thereof
(collectively, the "Blue Sky Application"), or any
document, advertisement, oral statement or
communication ("Sales Information") prepared, made or
executed by or on behalf of the Company or the Bank
with their consent or based upon written or oral
information furnished by or on behalf of the Company
or the Bank, whether or not filed in any
jurisdiction, in order to qualify or register the
Shares or to claim an exemption therefrom under the
securities laws thereof; (ii) arise out of or are
based upon the omission or alleged omission to state
in any of the foregoing documents or information a
material fact required to be stated therein or
necessary to make the statements therein, in light of
the circumstances under which they were made, not
misleading; or (iii) arise from any theory of
liability whatsoever relating to or arising from or
based upon the Registration Statement (or any
amendment or supplement thereto), preliminary or
final Prospectus (or any amendment or supplement
thereto), the Conversion Application (or any
amendment or supplement thereto), any Blue Sky
Application or Sales Information or other
documentation distributed in connection with the
Conversion; provided, however, that no
indemnification is required under this paragraph (a)
to the extent such losses, claims, damages,
liabilities or actions arise out of or are based upon
any untrue material statement or alleged untrue
material statement in, or material omission or
alleged material omission from, the Registration
Statement (or any amendment or supplement thereto),
preliminary or final Prospectus (or any amendment or
supplement thereto), the Conversion Application, any
Blue Sky
32
<PAGE> 33
Application or Sales Information made in reliance
upon and in conformity with information furnished in
writing to the Company or the Bank by the Agent or
its counsel regarding the Agent, provided, that it is
agreed and understood that the only information
furnished in writing to the Company or the Bank by
the Agent regarding the Agent is set forth in the
Prospectus under the caption "The Conversion--Plan of
Distribution"; and, PROVIDED FURTHER, that such
indemnification shall be to the extent not prohibited
by the Commission, the OTS, the Division, the FDIC
and the Board of Governors of the Federal Reserve.
(b) The Agent agrees to indemnify and hold harmless the
Company and the Bank, their directors and officers
and each person, if any, who controls the Company or
the Bank within the meaning of Section 15 of the 1933
Act or Section 20(a) of the 1934 Act against any and
all loss, liability, claim, damage or expense
whatsoever (including but not limited to settlement
expenses), joint or several, which they, or any of
them, may suffer or to which they, or any of them may
become subject under all applicable federal and state
laws or otherwise, and to promptly reimburse the
Company, the Bank, and any such persons upon written
demand for any expenses (including reasonable fees
and disbursements of counsel) incurred by them, or
any of them, in connection with investigating,
preparing or defending any actions, proceedings or
claims (whether commenced or threatened) to the
extent such losses, claims, damages, liabilities or
actions: (i) arise out of or are based upon any
untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement
(or any amendment or supplement thereto), the
Conversion Application (or any amendment or
supplement thereto), the preliminary or final
Prospectus (or any amendment or supplement thereto),
any Blue Sky Application or Sales Information, (ii)
are based upon the omission or alleged omission to
state in any of the foregoing documents a material
fact required to be stated therein or necessary to
make the statements therein, in the light of the
circumstances under which they were made, not
misleading, or (iii) arise from any theory of
liability whatsoever relating to or arising from or
based upon the Registration Statement (or any
amendment or supplement thereto), preliminary or
final Prospectus (or any amendment or supplement
thereto), the Conversion Application (or any
amendment or supplement thereto), or any Blue Sky
Application or Sales Information or other
documentation distributed in connection with the
Conversion; provided, however, that the Agent's
obligations under this Section 8(b) shall exist only
if and only to the extent (i) that such untrue
statement or alleged untrue statement was made in, or
such material fact or alleged material fact was
omitted from, the Registration Statement (or any
amendment or supplement thereto), the preliminary or
final Prospectus (or any amendment or supplement
thereto), the Conversion Application (or any
amendment or supplement thereto), any Blue Sky
Application or Sales Information in reliance upon and
in conformity with information furnished in writing
to the Company or the Bank by the Agent or its
counsel regarding the Agent, provided, that it is
agreed and understood that the only information
furnished
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<PAGE> 34
in writing to the Company or the Bank by the Agent
regarding the Agent is set forth in the Prospectus
under the caption "The Conversion--Plan of
Distribution."
(c) Each indemnified party shall give prompt written
notice to each indemnifying party of any action,
proceeding, claim (whether commenced or threatened),
or suit instituted against it in respect of which
indemnity may be sought hereunder, but failure to so
notify an indemnifying party shall not relieve it
from any liability which it may have on account of
this Section 8 or otherwise. An indemnifying party
may participate at its own expense in the defense of
such action. In addition, if it so elects within a
reasonable time after receipt of such notice, an
indemnifying party, jointly with any other
indemnifying parties receiving such notice, may
assume defense of such action with counsel chosen by
it and approved by the indemnified parties that are
defendants in such action, unless such indemnified
parties reasonably object to such assumption on the
ground that there may be legal defenses available to
them that are different from or in addition to those
available to such indemnifying party. If an
indemnifying party assumes the defense of such
action, the indemnifying parties shall not be liable
for any fees and expenses of counsel for the
indemnified parties incurred thereafter in connection
with such action, proceeding or claim, other than
reasonable costs of investigation. In no event shall
the indemnifying parties be liable for the fees and
expenses of more than one separate firm of attorneys
(and any special counsel that said firm may retain)
for each indemnified party in connection with any one
action, proceeding or claim or separate but similar
or related actions, proceedings or claims in the same
jurisdiction arising out of the same general
allegations or circumstances.
(d) The agreements contained in this Section 8 and in
Section 9 hereof and the representations and
warranties of the Company and the Bank set forth in
this Agreement shall remain operative and in full
force and effect regardless of: (i) any investigation
made by or on behalf of the Agent or its officers,
directors or controlling persons, agent or employees
or by or on behalf of the Company or the Bank or any
officers, directors or controlling persons, agent or
employees of the Company or the Bank; (ii) delivery
of and payment hereunder for the Shares; or (iii) any
termination of this Agreement.
SECTION 9. CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 8 is due in accordance with its terms but is for any reason held by a
court to be unavailable from the Company, the Bank or the Agent, the Company,
the Bank and the Agent shall contribute to the aggregate losses, claims, damages
and liabilities (including any investigation, legal and other expenses incurred
in
34
<PAGE> 35
connection with, and any amount paid in settlement of, any action, suit or
proceeding, but after deducting any contribution received by the Company, the
Bank or the Agent from persons other than the other parties thereto, who may
also be liable for contribution) in such proportion so that the Agent is
responsible for that portion represented by the percentage that the fees paid to
the Agent pursuant to Section 2 of this Agreement (not including expenses) bears
to the gross proceeds received by the Company from the sale of the Shares in the
Offering, and the Company and the Bank shall be responsible for the balance. If,
however, the allocation provided above is not permitted by applicable law, then
each indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative fault of the Company and the Bank on the one hand and the Agent on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions, proceedings or claims in
respect thereto), but also the relative benefits received by the Company and the
Bank on the one hand and the Agent on the other from the Offering (before
deducting expenses). The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company and/or the Bank on the one hand or the Agent
on the other and the parties' relative intent, good faith, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Bank and the Agent agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro-rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to above in this Section 9. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions, proceedings or claims in respect thereof)
referred to above in this Section 9 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action, proceeding or claim. It is expressly
agreed that the Agent shall not be liable for any loss, liability, claim, damage
or expense or be required to contribute any amount which in the aggregate
exceeds the amount paid (excluding reimbursable expenses) to the Agent under
this Agreement. It is understood that the above stated limitation on the Agent's
liability is essential to the Agent and that the Agent would not have entered
into this Agreement if such limitation had not been agreed to by the parties to
this Agreement. No person found guilty of any fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not found guilty of such fraudulent
misrepresentation. The obligations of the Company, the Bank and the Agent under
this Section 9 and under Section 8 shall be in addition to any liability which
the Company, the Bank and the Agent may otherwise have. For purposes of this
Section 9, each of the Agent's, the Company's or the Bank's officers and
directors and each person, if any, who controls the Agent or the Company or the
Bank within the meaning of the 1933 Act and the 1934 Act shall have the same
rights to contribution as the Agent, the Company or the Bank. Any party entitled
to contribution, promptly after receipt of notice of commencement of any action,
suit, claim or proceeding against such party in respect of which a claim for
contribution may be made against another party under this Section 9, will notify
such party from whom contribution may be sought, but the omission to so notify
such party shall not relieve the party from whom contribution may be sought from
any other obligation it may have hereunder or otherwise than under this Section
9.
35
<PAGE> 36
SECTION 10. SURVIVAL OF AGREEMENTS, REPRESENTATIONS AND INDEMNITIES.
The respective indemnities of the Company, the Bank and the Agent and the
representations and warranties and other statements of the Company, the Bank and
the Agent set forth in or made pursuant to this Agreement shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement or any investigation made by or on behalf of the Agent, the Company,
the Bank or any controlling person referred to in Section 8 hereof, and shall
survive the issuance of the Shares, and any successor or assign of the Agent,
the Company, the Bank, and any such controlling person shall be entitled to the
benefit of the respective agreements, indemnities, warranties and
representations.
SECTION 11. TERMINATION. The Agent may terminate this Agreement by
giving the notice indicated below in this Section 11 at any time after this
Agreement becomes effective as follows:
(a) In the event the Company fails to sell the required
minimum number of the Shares by December 31, 1998,
and in accordance with the provisions of the Plan or
as required by the Conversion Regulations, and
applicable law, this Agreement shall terminate upon
refund by the Company to each person who has
subscribed for or ordered any of the Shares the full
amount which it may have received from such person,
together with interest as provided in the Prospectus,
and no party to this Agreement shall have any
obligation to the other hereunder, except as set
forth in Sections 2(a), 6, 8 and 9 hereof.
(b) If any of the conditions specified in Section 7 shall
not have been fulfilled when and as required by this
Agreement, unless waived in writing, or by the
Closing Date, this Agreement and all of the Agent's
obligations hereunder may be cancelled by the Agent
by notifying the Company and the Bank of such
cancellation in writing or by telegram at any time at
or prior to the Closing Date, and any such
cancellation shall be without liability of any party
to any other party except as otherwise provided in
Sections 2(a), 6, 8 and 9 hereof.
(c) If the Agent elects to terminate this Agreement as
provided in this Section, the Company and the Bank
shall be notified promptly by telephone or telegram,
confirmed by letter.
The Company and the Bank may terminate this Agreement in the event the
Agent is in material breach of the representations and warranties or covenants
contained in Section 5 and such breach has not been cured after the Company and
the Bank have provided the Agent with notice of such breach.
This Agreement may also be terminated by mutual written consent of the
parties hereto.
36
<PAGE> 37
SECTION 12. NOTICES. All communications hereunder, except as herein
otherwise specifically provided, shall be mailed in writing and if sent to the
Agent shall be mailed, delivered or telegraphed and confirmed to Charles Webb &
Company, 211 Bradenton, Dublin, Ohio 43017-5034, Attention: Patricia A. McJoynt
(with a copy to Silver, Freedman & Taff, L.L.P., Attention: Jeffrey M. Werthan,
P.C. and, if sent to the Company and the Bank, shall be mailed, delivered or
telegraphed and confirmed to the Company and the Bank at 401 Main Street,
Coshocton, Ohio 43812-1580, Attention: Robert C. Hamilton, President (with a
copy to Vorys, Sater, Seymour and Pease LLP, Attention: Terri Reyering Abare.
SECTION 13. PARTIES. The Company and the Bank shall be entitled to act
and rely on any request, notice, consent, waiver or agreement purportedly given
on behalf of the Agent when the same shall have been given by the undersigned.
The Agent shall be entitled to act and rely on any request, notice, consent,
waiver or agreement purportedly given on behalf of the Company or the Bank, when
the same shall have been given by the undersigned or any other officer of the
Company or the Bank. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Agent, the Company, the Bank, and their respective
successors and assigns, and no other person shall have or be construed to have
any legal or equitable right, remedy or claim under or in respect of or by
virtue of this Agreement or any provision herein contained. It is understood and
agreed that this Agreement is the exclusive agreement among the parties hereto,
and supersedes any prior agreement among the parties and may not be varied
except in writing signed by all the parties.
SECTION 14. CLOSING. The closing for the sale of the Shares shall take
place on the Closing Date at such location as mutually agreed upon by the Agent
and the Company and the Bank. At the closing, the Company and the Bank shall
deliver to the Agent in next day funds the commissions, fees and expenses due
and owing to the Agent as set forth in Sections 2 and 6 hereof and the opinions
and certificates required hereby and other documents deemed reasonably necessary
by the Agent shall be executed and delivered to effect the sale of the Shares as
contemplated hereby and pursuant to the terms of the Prospectus.
SECTION 15. PARTIAL INVALIDITY. In the event that any term, provision
or covenant herein or the application thereof to any circumstance or situation
shall be invalid or unenforceable, in whole or in part, the remainder hereof and
the application of said term, provision or covenant to any other circumstances
or situation shall not be affected thereby, and each term, provision or covenant
herein shall be valid and enforceable to the full extent permitted by law.
SECTION 16. CONSTRUCTION. This Agreement shall be construed in
accordance with the laws of the State of Ohio.
SECTION 17. COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which so executed and delivered shall be an original, but
all of which together shall constitute but one and the same instrument.
If the foregoing correctly sets forth the arrangement among the
Company, the Bank and the Agent, please indicate acceptance thereof in the space
provided below for that purpose, whereupon this letter and the Agent's
acceptance shall constitute a binding agreement.
37
<PAGE> 38
SECTION 18. ENTIRE AGREEMENT. This Agreement, including schedules and
exhibits hereto, which are integral parts hereof and incorporated as though set
forth in full, constitutes the entire agreement between the parties pertaining
to the subject matter hereof superseding any and all prior or contemporaneous
oral or prior written agreements, proposals, letters of intent and
understandings, and cannot be modified, changed, waived or terminated except by
a writing which expressly states that it is an amendment, modification or
waiver, refers to this Agreement and is signed by the party to be charged. No
course of conduct or dealing shall be construed to modify, amend or otherwise
affect any of the provisions hereof.
38
<PAGE> 39
HOME LOAN FINANCIAL CORPORATION
By Its Authorized
Representative:
Robert C. Hamilton
President
THE HOME LOAN SAVINGS BANK
By Its Authorized
Representative:
Robert C. Hamilton
President
CHARLES WEBB & COMPANY, A DIVISION OF
KEEFE, BRUYETTE & WOODS, INC.
By Its Authorized
Representative:
Patricia A. McJoynt
Executive Vice President
39
<PAGE> 1
Exhibit 10.3
HOME LOAN FINANCIAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
Effective _________________, 199__
<PAGE> 2
HOME LOAN FINANCIAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C> <C>
1 PARTICIPATION ...................................................................... 1
-------------
1.01 Eligibility Requirements.............................................. 1
1.02 Service for Eligibility............................................... 1
2 CONTRIBUTIONS ...................................................................... 1
-------------
2.01 Regular Employer Contribution......................................... 1
2.02 Employer Contribution to Reduce
Loan Obligation..................................................... 2
2.03 Rollover Contributions/Participant
Contributions....................................................... 2
2.04 Limitations on Annual Additions....................................... 2
2.05 Dual Plan Limitation.................................................. 3
2.06 Corrective Adjustments................................................ 4
2.07 Contributions Conditioned on
Plan Qualification.................................................... 4
3 ALLOCATION OF EMPLOYER CONTRIBUTIONS................................................ 4
------------------------------------
3.01 Allocation of Regular Contributions
and Forfeitures..................................................... 4
3.02 Allocation of Employer Shares Purchased
with Proceeds of Plan Loan.......................................... 4
3.03 Special Restriction on Allocation..................................... 5
4 PARTICIPANTS' ACCOUNTS.............................................................. 5
----------------------
4.01 Establishment of Employer Contributions
Accounts............................................................ 5
4.02 Establishment of Suspense Account..................................... 5
5 PLAN INVESTMENTS.................................................................... 6
----------------
5.01 Primary Investments................................................... 6
5.02 Diversification Requirements.......................................... 6
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C> <C>
6 VALUATION OF PARTICIPANTS' ACCOUNTS................................................. 7
-----------------------------------
6.01 Valuations............................................................ 7
6.02 Method of Adjustment.................................................. 7
7 RETIREMENT BENEFITS................................................................. 8
-------------------
7.01 Time of Retirement.................................................... 8
7.02 Amount of Retirement Benefits......................................... 8
8 DEATH BENEFITS...................................................................... 8
--------------
8.01 Amount of Death Benefit............................................... 8
8.02 Designation of Beneficiary............................................ 8
8.03 Distribution of Death Benefit......................................... 8
9 DISABILITY BENEFITS................................................................. 10
-------------------
9.01 Amount of Disability Benefit.......................................... 10
9.02 Determination of Total and Permanent
Disability.......................................................... 10
10 TERMINATION OF EMPLOYMENT........................................................... 10
-------------------------
10.01 Amount of Benefits Upon Termination of
Employment.......................................................... 10
11 VESTING ...................................................................... 11
-------
11.01 Determination of Vested Benefits...................................... 11
11.02 Service for Vesting................................................... 11
11.03 Full Vesting at Normal Retirement Age,
Death or Disability................................................. 11
11.04 Termination After Eligibility for
Retirement.......................................................... 11
12 PAYMENT OF BENEFITS................................................................. 11
-------------------
12.01 Method of Payment..................................................... 11
12.02 Timing of Payments.................................................... 12
12.03 Installment Payments.................................................. 12
12.04 Distributions After Death............................................. 12
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C> <C>
12.05 Cash-Outs............................................................. 13
12.06 Put Option............................................................ 14
12.07 Right of First Refusal................................................ 14
12.08 Eligible Rollover Distributions....................................... 15
13 BREAK IN SERVICE RULES.............................................................. 16
----------------------
13.01 Effect of Break in Service on
Eligibility......................................................... 16
13.02 Effect of Break in Service on Vesting................................. 17
13.03 Authorized Leaves of Absence.......................................... 17
14 TRUST AGREEMENT..................................................................... 17
---------------
14.01 Description of Trust Agreement............................................... 17
15 PLAN ADMINISTRATION................................................................. 18
-------------------
15.01 Plan Administrator.................................................... 18
15.02 Duties of Plan Administrator.......................................... 18
16 AMENDMENTS ...................................................................... 19
----------
16.01 Employer's Right to Amend Plan............................................... 19
17 DISTRIBUTIONS ON PLAN TERMINATION................................................... 19
---------------------------------
17.01 Full Vesting on Plan Termination...................................... 19
17.02 Payment on Plan Termination........................................... 19
17.03 Discontinuance of Contributions;
Partial Termination of Plan......................................... 20
18 CREDITORS OF PARTICIPANTS........................................................... 20
-------------------------
18.01 Non-Assignability..................................................... 20
18.02 Qualified Domestic Relations Orders................................... 20
19 CLAIMS PROCEDURES................................................................... 20
-----------------
19.01 Filing a Claim for Benefits........................................... 20
19.02 Denial of Claim....................................................... 21
19.03 Remedies Available to Participants.................................... 21
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C> <C>
20 VOTING RIGHTS ...................................................................... 22
-------------
20.01 Participant Voting Rights with
Respect to Allocated Shares......................................... 22
20.02 Participant Voting Rights with
Respect to Unallocated Shares......................................... 22
21 TOP HEAVY RULES..................................................................... 22
---------------
21.01 Definitions........................................................... 22
21.02 Top Heavy Status...................................................... 23
21.03 Minimum Contributions................................................. 24
22 EXEMPT LOANS ...................................................................... 24
------------
22.01 Authority to Borrow................................................... 24
22.02 Requirements for Plan Loans........................................... 25
23 MISCELLANEOUS ...................................................................... 26
-------------
23.01 Employment Rights..................................................... 26
23.02 Gender................................................................ 26
23.03 Notice Requirement.................................................... 26
23.04 Merger or Consolidation............................................... 26
23.05 Social Security Benefits.............................................. 26
23.06 Forfeitures........................................................... 27
23.07 Named Fiduciaries..................................................... 27
23.08 Limitations on Payment................................................ 27
23.09 Interpretation of Document............................................ 27
23.10 Nonterminable Protections and Rights.................................. 28
23.11 Use of Income With Respect to
Employer Shares..................................................... 28
24 CERTAIN DEFINITIONS................................................................. 28
-------------------
24.01 Account............................................................... 28
24.02 Adjustment Factor..................................................... 28
24.03 Affiliate............................................................. 28
24.04 Annual Additions...................................................... 29
24.05 Beneficiary........................................................... 29
24.06 Code.................................................................. 29
24.07 Compensation.......................................................... 29
24.08 Current Participant................................................... 30
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C> <C>
24.09 Intentionally Omitted................................................. 30
24.10 Effective Date........................................................ 30
24.11 Employee.............................................................. 30
24.12 Employer.............................................................. 30
24.13 Employer Contributions Account........................................ 30
24.14 Employer Shares or Shares............................................. 30
24.15 Employment Commencement Date.......................................... 31
24.16 Entry Date............................................................ 31
24.17 ERISA................................................................. 31
24.18 Family Member......................................................... 31
24.19 Forfeiture............................................................ 31
24.20 Full Time............................................................. 31
24.21 Highly-Compensated Employee........................................... 31
24.22 Hour of Service....................................................... 32
24.23 Late Retirement Date.................................................. 33
24.24 Leased Employee....................................................... 34
24.25 Limitation Year....................................................... 34
24.26 Normal Retirement Age................................................. 34
24.27 Normal Retirement Date................................................ 34
24.28 One-Year Break in Service............................................. 34
24.29 Participant........................................................... 35
24.30 Plan.................................................................. 35
24.31 Plan Administrator.................................................... 35
24.32 Plan Year............................................................. 35
24.33 Projected Annual Benefit.............................................. 35
24.34 Spouse or Surviving Spouse............................................ 35
24.35 Trust Agreement....................................................... 35
24.36 Trust Fund............................................................ 36
24.37 Trustee............................................................... 36
24.38 Valuation Date........................................................ 36
24.39 Year of Service....................................................... 36
25 MULTIEMPLOYER PROVISIONS............................................................ 36
------------------------
25.01 Adoption by Affiliates of Home Loan
Financial Corporation................................................. 36
25.02 Administration........................................................ 36
25.03 Common Fund........................................................... 37
25.04 Withdrawal-Termination................................................ 37
</TABLE>
<PAGE> 7
HOME LOAN FINANCIAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
Home Loan Financial Corporation hereby adopts the following
employee stock ownership plan (hereinafter referred to as the "Plan"), effective
as of the Effective Date. The Plan shall be for the exclusive benefit of
eligible Employees and, where applicable, the designated Beneficiaries of such
Employees. It is intended that this Plan, together with the Trust Agreement,
shall comply with the applicable provisions of the Code and ERISA.
SECTION l
---------
PARTICIPATION
-------------
1.01. Eligibility Requirements
- ------------------------------------------
Each Employee who was a Full-Time Employee during the 12 month
period immediately preceding the Effective Date shall become a Participant in
the Plan on the Effective Date. Each other Employee of the Employer shall be
eligible to participate in the Plan on the Entry Date coinciding with or first
following the date on which he has completed 12 months of service as a Full-Time
Employee.
1.02. Service for Eligibility
- -----------------------------------------
The 12-month period during which the Employee must meet the
Full-Time requirement shall initially be the 12 consecutive months beginning
with his Employment Commencement Date, and thereafter, beginning with the Plan
Year that includes the first anniversary of the Employee's Employment
Commencement Date, shall be the 12-month periods beginning January 1 and July 1
of each Plan Year.
<PAGE> 8
SECTION 2
---------
CONTRIBUTIONS
-------------
2.01. Regular Employer Contribution
- -----------------------------------------------
Subject to its right to terminate or amend this Plan, the
Employer may contribute and pay to the Trustee of the Trust Fund created for the
purpose of carrying out this Plan a contribution in cash or Employer Shares as
the Board of Directors of the Employer may in its discretion determine.
The amount of such contribution by the Employer to be paid to
the Plan in any year shall be such amount as the Board of Directors of the
Employer may in its discretion determine; provided, however, that in any year
the amount contributed shall not exceed the maximum amount deductible from the
Employer's income for such year under Section 404(a)(3) of the Code, or any
succeeding statute of similar import.
2.02. Employer Contribution to Reduce Loan Obligation
- -------------------------------------------------------
In addition to the contributions authorized by Section 2.01,
the Employer may in its discretion contribute amounts sufficient to enable the
Trustee to pay, on or before the due date thereof, each installment of principal
and interest on any Plan loan used to acquire Employer Shares; provided, that
the amounts contributed by the Employer pursuant to this Section 2.02, in any
year, shall not exceed the maximum amount deductible from the Employer's income
for such year under Section 404(a)(9) of the Code, or any succeeding statute of
similar import.
2.03. Rollover Contributions/Participant Contributions
- ------------------------------------------------------------------
Neither rollover contributions nor participant contributions
to the Plan are permitted.
2.04. Limitations on Annual Additions
- -------------------------------------------------
Annual Additions to each Participant's Account shall not
exceed the lesser of (a) $30,000 [or if greater, 1/4th of the defined benefit
dollar limitation in effect under Code Section 415(b)(l) for the Limitation
Year]; or (b) 25% of the Participant's compensation for the Limitation Year;
provided,
2
<PAGE> 9
however, that for any Plan Year in which the conditions of Code Section
415(c)(6) are satisfied by the Plan, the limitations contained in this Section
2.04 shall be adjusted to the maximum amount permitted under such section of the
Code. For purposes of this Section 2.04, the portion of such Employer
contribution which is deemed to be allocated to a Participant's Account shall be
an amount which bears the same ratio to the total contribution made by or on
behalf of the Employer for such Plan Year which is used to repay principal on
one or more Plan loans, or to purchase Employer Shares, as the number of
Employer Shares allocated to such Participant's Account in respect of such Plan
Year bears to the total number of Employer Shares allocated to the Accounts of
all Participants in respect of such Plan Year.
For purposes of this Section 2.04, "compensation" shall mean
compensation as defined in Treasury Regulation Section 1.415-2(d) and shall
include wages, salaries, fees for professional services, percentage of profits,
earned income in the case of a self-employed Participant, disability payments
under Code Section 105(d), paid or reimbursed moving expenses to the extent not
deductible by the Participant, medical reimbursement items and the value of a
non-qualified stock option to the extent includable in an Employee's gross
income upon making the election under Code Section 83(b). Specifically excluded
are salary deferral contributions; contributions to or distributions from most
deferred compensation plans; amounts realized from the sale of a non-qualified
stock option plan or from the sale, exchange or other disposition of stock
acquired under a qualified stock option plan and most amounts which receive
special tax benefits.
2.05. Dual Plan Limitation
- --------------------------------------
If the Participant is, or was, covered under a defined benefit
plan and a defined contribution plan maintained by the Employer, the sum of the
Participant's defined benefit plan fraction and defined contribution plan
fraction may not exceed 1.0 in any Limitation Year.
The defined benefit plan fraction is a fraction, the numerator
of which is the sum of the Participant's Projected Annual Benefits under all
defined benefit plans (whether or not terminated) maintained by the Employer and
the denominator of which is the lesser of (a) 1.25 times the dollar limitation
3
<PAGE> 10
of Section 415(b)(1)(A) of the Code in effect for the Limitation Year; or (b)
1.4 times the Participant's average compensation for the three consecutive years
that produced the highest average.
The defined contribution plan fraction is a fraction, the
numerator of which is the sum of the Annual Additions to the Participant's
Accounts under all defined contribution plans maintained by the Employer
(whether or not terminated) for the current and all prior Limitation Years, and
the denominator of which is the sum of the lesser of the following amounts
determined for such year and for each prior Year of Service with the Employer:
(a) 1.25 times the dollar limitation in effect under Section 415(c)(1)(A) of the
Code for such year; or (b) 1.4 times the amount which may be taken into account
under Section 415(c)(1)(B) of the Code.
For any years in which the Plan is "top heavy," "1.0" shall be
substituted for "1.25" in the preceding two paragraphs.
If, in any Limitation Year, the sum of the defined benefit
plan fraction and the defined contribution plan fraction exceeds 1.0, the rate
of benefit accruals under this Plan will be reduced so that the sum of the
fractions equals 1.0.
2.06. Corrective Adjustments
- ----------------------------------------
If, due to a reasonable error in estimating a Participant's
annual compensation or due to the allocation of Forfeitures an excess Annual
Addition exists, such excess will be used to reduce Employer contributions for
such Participant in the next, and succeeding, Limitation Years. If the
Participant was not covered by the Plan at the end of the Limitation Year, such
excess will be applied to reduce Employer contributions for all remaining
Participants in the next, and succeeding, Limitation Years.
2.07. Contributions Conditioned on Plan Qualification
- -----------------------------------------------------------------
All Employer contributions under this Plan will be made with
the understanding that the Plan will qualify under the provisions of Section
401(a) of the Code. In the event the Internal Revenue Service initially
determines that this Plan fails to meet the requirements for a qualified plan
and the Employer is unable to amend the Plan so as to receive a favorable
4
<PAGE> 11
determination, then all Employer contributions under the Plan, less any expenses
and adjusted by any gains or losses, will be refunded to the Employer.
SECTION 3
---------
ALLOCATION OF EMPLOYER CONTRIBUTIONS
------------------------------------
3.01. Allocation of Regular Contributions and Forfeitures
- ---------------------------------------------------------------------
Each Plan Year, the Employer's regular contribution made
pursuant to Section 2.01, and any Forfeitures available for such year, shall be
allocated to the Accounts of Current Participants. In that regard, the amount
allocated to the Account of a particular Current Participant shall be in the
same proportion to the total amounts available for allocation as the
Compensation of such Current Participant for the Plan Year bears to the
Compensation of all Current Participants for such Plan Year.
3.02. Allocation of Employer Shares Purchased with Proceeds of Plan
- -------------------------------------------------------------------------------
Loan
----
Any Employer Shares purchased with the proceeds of Plan loans
shall be held in a suspense account and allocated to Participants' Employer
Contributions Accounts as such loans are reduced and such Shares are released
pursuant to the terms of the loans. Each year the number of Employer Shares
released under all Plan loans shall be allocated to each Participant's Employer
Contributions Account in the same manner as the Employer's regular contribution
is allocated under Section 3.01.
3.03. Special Restriction on Allocation
- ---------------------------------------------------
Notwithstanding any provision contained herein, no portion of
the assets of the Plan attributable to Employer Shares acquired by the Plan in a
sale to which either Sections 1042 or 2057 of the Code applies may be allocated,
either directly or indirectly, (i) to the Employer Contributions Account of a
Participant who owns, after application of Section 318(a) of the Code, more than
25% of either (a) any class of outstanding stock of the Employer; or (b) the
total value of any outstanding stock of the Employer; or (ii) during the
nonallocation period [as defined in Code Section 409(n)] to the Employer
Contributions
5
<PAGE> 12
Account of a Participant -- or any person related to such Participant within the
meaning of Code Section 267(b) -- who makes an election under Code Section
1042(a) with respect to Employer Shares.
SECTION 4
---------
PARTICIPANTS' ACCOUNTS
----------------------
4.01. Establishment of Employer Contributions Accounts
- ------------------------------------------------------------------
The Plan Administrator shall establish and maintain an
Employer Contributions Account for each Participant to record:
(a) his share of the Employer contributions and Forfeitures
allocated under Section 3; and
(b) his share of the net income, or net losses, resulting from
the investment thereof.
4.02. Establishment of Suspense Account
- ---------------------------------------------------
The Plan Administrator shall establish and maintain a suspense
account to record the number of Employer Shares encumbered under all outstanding
Plan loans. As described in Section 3.02, Employer Shares shall be transferred
from the suspense account and allocated to the Participants' Employer
Contributions Accounts as such Shares are released from encumbrance under the
terms of such Plan loans.
SECTION 5
---------
PLAN INVESTMENTS
----------------
5.01. Primary Investments
- -------------------------------------
As an employee stock ownership plan, this Plan shall invest
primarily in Employer Shares. Any Plan assets not invested in Employer Shares
shall be invested in other investment vehicles by the Trustee, in its
discretion, pursuant to the provisions of the Trust Agreement.
6
<PAGE> 13
5.02. Diversification Requirements
- ----------------------------------------------
(a) Any Participant who has completed at least ten years of
participation in the Plan and who has attained age 55 (the "diversification
requirements"), may elect within the first 90 days of each of the six Plan Years
immediately following the Plan Year in which he first satisfies the
diversification requirements, to direct the Plan as to the investment of up to
25% of the total balance of his Account attributable to Employer Shares (to the
extent such 25% portion exceeds the amount to which a prior election under this
paragraph applies). In the case of the Plan Year in which the Participant can
make his last such election, the preceding sentence shall be applied by
substituting "50%" for "25%." The Participant's direction shall be provided to
the Plan Administrator in writing.
(b) The Plan shall, in each instance, distribute
[notwithstanding Section 409(d) of the Code] the portion of the Participant's
Account that is covered by the election within the first 180 days of the Plan
Year in which the election is made. This paragraph (b) shall apply
notwithstanding any other provision of the Plan other than such provisions as
require the consent of the Participant to a distribution with a present value in
excess of $3,500. If the Participant does not consent, such amount shall be
retained in the Plan.
(c) In lieu of making the distribution described in paragraph
(b) above, the Plan may satisfy the requirements of paragraph (a) by offering at
least three investment options (other than Employer Shares) to each Participant
making the election described in paragraph (a); and if the Participant so elects
by investing, within the 180 day period specified in paragraph (b), the amount
in question in the option(s) selected by the Participant.
SECTION 6
---------
VALUATION OF PARTICIPANTS' ACCOUNTS
-----------------------------------
6.01. Valuations
- ----------------------------
As of each Valuation Date, or more frequently at the election
of the Plan Administrator, the Plan Administrator shall obtain an evaluation of
the assets of the Trust Fund from the
7
<PAGE> 14
Trustee on the basis of the market value of the assets of the Trust Fund. On the
basis of such valuation, the Participants' Accounts shall be adjusted as of such
Valuation Date to reflect the effect of income received or accrued, realized and
unrealized profits and losses, expenses, Forfeitures, payments to Participants
and all other transactions in the period since the last preceding Valuation
Date.
For purposes of valuation of Employer Shares under this
Section and with respect to all other activities carried on by the Plan which
require the valuation of Employer Shares, at all times during which the Employer
Shares are not readily tradable on an established securities market, such
valuations shall be made by an independent appraiser, within the meaning of
Section 401(a)(28)(C) of the Code.
6.02. Method of Adjustment
- --------------------------------------
The amount to the credit of each Participant's Account as of
each Valuation Date shall be adjusted as of each succeeding Valuation Date by
the following credits and charges in the order specified:
(a) In the case of each Participant to, for or on behalf of
whom disbursements from the Plan have been made, there shall be debited the
total amount of any disbursements made to him or for his account from his
Account during the period since the last Valuation Date.
(b) In the case of each Participant (including former
Employees for whom Accounts are being maintained), there shall be credited or
debited to his Account that portion of the net increase (including an amount
equal to the non-distributed dividends on allocated Employer Shares) or net
decrease of the value of the assets of the Trust Fund since the last Valuation
Date which the balance of his Account (after completion of the adjustment called
for in Section 6.02(a) above) bears to the total balance of all Accounts after
completion of the adjustments called for in Section 6.02(a) above.
(c) In the case of each Current Participant, there shall be
credited to his Account the Employer's contributions, Forfeiture and Employer
Shares released under Plan loans that are allocable to him under Section 3 of
this Plan. In allocating
8
<PAGE> 15
Forfeitures, Employer Shares shall be allocated only after other assets in the
terminated Participants' Accounts have been allocated.
SECTION 7
---------
RETIREMENT BENEFITS
-------------------
7.01. Time of Retirement
- ------------------------------------
A Participant may retire from the employ of the Employer on
his Normal Retirement Date or his Late Retirement Date.
7.02. Amount of Retirement Benefits
- -----------------------------------------------
The amount which a Participant shall be entitled to receive
upon reaching his Normal Retirement Date or his Late Retirement Date shall be an
amount equal to the value of the Employer Shares credited to his Account and the
net value of the other assets of such Account as of the first Valuation Date
following his Normal Retirement Date or his Late Retirement Date.
SECTION 8
---------
DEATH BENEFITS
--------------
8.01. Amount of Death Benefit
- -----------------------------------------
The death benefit under this Plan shall be an amount equal to
the value of the Employer Shares and the net value of the other assets credited
to the deceased Participant's Account as of the first Valuation Date following
the date of his death.
8.02. Designation of Beneficiary
- --------------------------------------------
Subject to the provisions of Section 8.03, each Participant
shall designate, by a written instrument filed with the Plan Administrator, one
or more Beneficiaries who, upon the death of the Participant, shall be entitled
to receive the death benefit described in Section 8.01. If more than one
Beneficiary is named, the Participant may specify the sequence and/or proportion
in which payments must be made to each Beneficiary. In the absence of such
specification, payments shall be made in
9
<PAGE> 16
equal shares to all named Beneficiaries then living at the time of the
Participant's death. To the extent otherwise consistent with this Plan, a
Participant may change his Beneficiary from time to time by written notice
delivered to the Plan Administrator in the manner prescribed by the Plan
Administrator. The Plan Administrator may, in its discretion, limit the number
of Beneficiaries that may be designated by a Participant. If no Beneficiary has
been designated or if no designated Beneficiary is living at the time of the
Participant's death, payment of such death benefit, if any, to the extent
permitted by law, shall be made to the surviving person or persons in the first
of the following classes of successive preference of beneficiaries: (a)
Surviving Spouse; (b) issue, then living, per stirpes; (c) executors or
administrators. Any minor's share shall be paid to such adult or adults as have,
in the opinion of the Plan Administrator, assumed custody and support of such
minor. Proof of death satisfactory to the Plan Administrator must be furnished
prior to the payment of any death benefit under the Plan. Once benefits begin to
be paid to a Beneficiary pursuant to this Section, such Beneficiary shall name
an individual or individuals to receive the remainder of such benefit, if any,
upon the death of the Beneficiary. In the absence of such a designation by the
Beneficiary, such remaining benefit, if any, shall be paid to the estate of the
Beneficiary.
8.03. Distribution of Death Benefit
- -----------------------------------------------
If a Participant dies without a Surviving Spouse either before
retirement or after retirement, but before a complete distribution of his
Accounts, the death benefit described in Section 8.01 shall be distributed to
the person or persons specified in Section 8.02, in accordance with the
provisions of Section 12 hereof.
If a Participant dies with a Surviving Spouse either before
retirement or after retirement, but before a complete distribution of his
Accounts, then, notwithstanding the provisions of Section 8.02 hereof, the death
benefit described in Section 8.01 shall be paid to his Surviving Spouse in
accordance with the provisions of Section 12 hereof, unless such Surviving
Spouse, in accordance with the provisions of this paragraph, has consented to an
alternate Beneficiary, in which case, such death benefit shall be distributed to
such alternate Beneficiary in accordance with the provisions of Section 12. For
purposes of
10
<PAGE> 17
the preceding sentence, the consent of the Spouse must (a) be in writing; (b)
designate a specific Beneficiary, including any class of beneficiaries or
contingent beneficiaries, which may not be changed without spousal consent (or
the Spouse expressly permits designations by the Participant without further
spousal consent); (c) acknowledge the effect of such consent; and (d) be
witnessed by a Plan representative or notary public.
SECTION 9
---------
DISABILITY BENEFITS
-------------------
9.01. Amount of Disability Benefit
- ----------------------------------------------
If a Participant becomes "totally and permanently disabled" as
defined in Section 9.02 below, such Participant shall be entitled to receive as
a disability benefit an amount equal to the value of the Employer Shares
credited to his Account and the net value of other assets of such Account as of
the first Valuation Date following the date that the Plan Administrator
determines him to be "totally and permanently disabled".
9.02. Determination of Total and Permanent Disability
- -----------------------------------------------------------------
A Participant shall be considered to be "totally and
permanently disabled" if it is established by a licensed physician selected by
the Plan Administrator that (i) the Participant has suffered a disability which
is expected to result in his death or last for not less than 12 months; and (ii)
the Participant is not able to perform his job or any job for which he is
reasonably suited as a result of his education, training and experience. The
determination by the Plan Administrator with respect to whether a Participant is
totally and permanently disabled shall be made in a nondiscriminatory manner.
SECTION 10
----------
TERMINATION OF EMPLOYMENT
-------------------------
10.01. Amount of Benefits Upon Termination of Employment
- -------------------------------------------------------------------
If a Participant leaves the employ of the Employer for any
reason other than retirement, death or disability in accordance with Sections 7,
8 or 9 hereof, he shall be entitled
11
<PAGE> 18
to receive an amount equal to the nonforfeitable percentage of the value of the
Employer Shares and the net value of the other assets credited to his Account as
of the first Valuation Date following the date of his termination of employment.
Such nonforfeitable percentage shall be determined in accordance with Section
11.01 hereof.
SECTION 11
----------
VESTING
-------
11.01. Determination of Vested Benefits
- --------------------------------------------------
Employer contributions allocated to the Participant's Employer
Contributions Account shall become vested in accordance with the table shown
below:
<TABLE>
<CAPTION>
NONFORFEITABLE
YEARS OF SERVICE PERCENTAGE
---------------- ----------
<S> <C>
Less than 1 0
1 20%
2 40%
3 60%
4 80%
5 or more 100%
</TABLE>
11.02. Service for Vesting
- -------------------------------------
Years of Service for vesting purposes shall include all Years
of Service with the Employer.
11.03. Full Vesting at Normal Retirement Age, Death or Disability
- ----------------------------------------------------------------------------
Notwithstanding any provision in this Plan to the contrary,
the value of a Participant's Accounts shall be fully vested and nonforfeitable
upon the Participant's (i) attaining his Normal Retirement Age, (ii) becoming
totally and permanently disabled, or (iii) death.
12
<PAGE> 19
11.04. Termination After Eligibility for Retirement
- --------------------------------------------------------------
The termination of a Participant's employment after he has
attained his Normal Retirement Age shall be considered a retirement for purposes
of this Plan.
SECTION 12
----------
PAYMENT OF BENEFITS
-------------------
12.01. Method of Payment
- -----------------------------------
At the time a Participant becomes entitled to receive any
amount because of his retirement, death, disability or termination of
employment, the Trustee, acting in accordance with the written instructions of
the Plan Administrator, shall make payment from the Trust Fund to such
individual (or his Beneficiary) in a lump sum. All such payments shall be made
by the Trustee, at the option of the Participant (or his Beneficiary) in
Employer Shares, in cash or both.
12.02. Timing of Payments
- ------------------------------------
Unless the Participant or Beneficiary elects otherwise, the
payment of retirement, death, disability and termination benefits shall begin no
later than 60 days after the close of the Plan Year in which the Participant
retires, dies, becomes disabled or otherwise terminates service with the
Employer.
Notwithstanding any provisions hereof to the contrary, benefit
payments under this Plan shall in all instances commence by the April 1
following the end of the calendar year in which the Participant attains age 70
1/2.
12.03. Installment Payments
- --------------------------------------
Notwithstanding any provisions in this Plan to the contrary,
if a Participant's entire interest is to be distributed in other than an
immediate lump sum, minimum annual payments under the Plan must be paid over one
of the following periods (or a combination thereof):
(a) a period certain not extending beyond the life expectancy
of the Participant; or
13
<PAGE> 20
(b) a period certain not extending beyond the joint and last
survivor expectancy of the Participant and a designated Beneficiary.
If a Participant's entire interest is to be distributed in
other than a lump sum, then the amount to be distributed each year must be at
least an amount equal to the quotient obtained by dividing the Participant's
entire interest by the life expectancy of the Participant or joint and last
survivor expectancy of the Participant and designated Beneficiary. If the
Participant's Spouse is not the designated Beneficiary, the method of
distribution selected must assure that at least 50% of the present value of the
amount available for distribution is paid within the life expectancy of the
Participant.
12.04. Distributions After Death
- -------------------------------------------
If the distribution of the Participant's Account has begun and
he dies before his entire Account has been distributed to him, the remaining
portion of such Account will be distributed at least as rapidly as under the
method of distribution being used prior to the Participant's death.
Subject to the succeeding paragraph, if the Participant dies
before his distribution has begun, his entire Account shall be distributed
within five years of his death unless (a) a portion of his Account is payable to
or on behalf of a designated Beneficiary; (b) such portion will be distributed
over the life of such designated Beneficiary; and (c) such distribution begins
not later than one year after the date of the Participant's death (or such date
as prescribed by the Secretary of Treasury).
Notwithstanding the preceding paragraph if the designated
Beneficiary is the Participant's Surviving Spouse, the date by which
distribution must commence under (c) in the preceding paragraph shall be the
date the Participant would have attained age 70 1/2. If the Surviving Spouse
dies before distribution to said Spouse begins, this section shall apply as if
the Surviving Spouse were the Participant. Life expectancy of a Surviving Spouse
may be recalculated annually; however, in the case of any other designated
Beneficiary, such life expectancy will be calculated at the time that payment
first commences without further calculations. In addition, any amount paid to a
14
<PAGE> 21
child of the Participant will be treated as if it had been paid to the Surviving
Spouse if the amount becomes payable to the Surviving Spouse when the child
reaches the age of majority.
The provisions of this Section 12.04 are subject to the
provisions of Section 12.01 hereof.
12.05. Cash-Outs
- ---------------------------
If for any reason a Participant terminates service and the
value of his nonforfeitable Accounts does not exceed (or at the time of any
prior distribution has not exceeded) $3,500, the Participant shall receive a
distribution of the value of the entire nonforfeitable portion of such Accounts
as soon as administratively feasible after the first Valuation Date following
his date of termination; and the remainder of such Accounts will be treated as a
Forfeiture. For purposes of this section, if the value of a Participant's
nonforfeitable Accounts is zero, the Participant shall be deemed to have
received a distribution of such nonforfeitable Account.
If a Participant receives a distribution pursuant to this
Section which is less than the value of his Employer Contributions Account and
resumes employment covered under this Plan, the Participant's Accounts will be
restored to the amount on the date of distribution if he repays to the Plan the
full amount of his distribution before the earlier of (a) five years after the
first date on which the Participant is subsequently reemployed by the Employer;
or (b) the date on which he incurs five consecutive One Year Breaks in Service
following the date of distribution.
12.06. Put Option
- ----------------------------
Except as otherwise provided in this Section 12.06, any
Employer Shares which are not publicly traded at the time they are distributed
to Participants or former Participants shall be subject to a put option which
will permit the Participant to put those Employer Shares to the Employer. Put
options shall be exercisable at least during the 16-month period which begins on
the date the Employer Shares subject to the option are distributed by this Plan.
Such an option may be exercised by the holder of the Shares notifying the
Employer in writing that the put option is being exercised. The price at which
the put option
15
<PAGE> 22
must be exercisable is the fair market value of the Shares determined in
accordance with the provisions of Treasury Regulation Section 54.4975-11(d)(5).
If, pursuant to this Section, the Employer is required to
repurchase Employer Shares which are distributed to a Participant within one
taxable year in a distribution that represents the balance to the credit of the
Participant's Account, the amount to be paid for such Employer Shares shall be
paid in substantially equal periodic payments (not less frequently than
annually) over a period beginning not later than 30 days after the exercise of
the put option described in this Section and not exceeding five years. Adequate
security shall be provided and reasonable interest shall be paid on the unpaid
amounts referred to in the preceding sentence.
If, pursuant to this Section, the Employer is required to
repurchase Employer Shares which are distributed to a Participant as part of an
installment distribution, the amount to be paid for such Employer Shares shall
be paid not later than 30 days after the exercise of the put option described in
this Section.
Notwithstanding any provision of this Plan to the contrary, to
the extent that the Employer is prohibited by law from redeeming or purchasing
it own securities, consistent with the provisions of Section 409(h)(3) of the
Code, Employer Shares under this Plan shall not be subject to the put option
described in this Section 12.06 and, as such, a Participant will not be
permitted to put such Employer Shares to the Employer.
12.07. Right of First Refusal
- ----------------------------------------
(a) During any period when Employer Shares are not publicly
traded, all distributions of Employer Shares to any Participant or his
Beneficiary by the Plan shall be subject to a "right of first refusal" upon the
terms and conditions hereinafter set forth. The "right of first refusal" shall
provide that prior to any transfer (as determined by the Plan Administrator) of
the Employer Shares, the Participant or Beneficiary must first offer to sell
such shares to the Plan; and if the Plan refuses to exercise its right to
purchase the Employer Shares, then the Employer shall have a "right of first
refusal" to purchase such Shares. Neither the Plan nor the
16
<PAGE> 23
Employer shall be required to exercise the "right of first refusal." This
Section 12.07 shall not be operative unless and until the Board of Directors of
the Employer so directs.
(b) The terms and conditions of the "right of first refusal"
shall be determined as follows:
(i) If the Participant or Beneficiary receives a bona
fide offer for the purchase of all or any part of his Employer
Shares from a third party, the Participant or Beneficiary
shall forthwith deliver (by registered mail, return receipt
requested) a copy of any such offer to the Plan Administrator.
The Trustee (as directed by the Plan Administrator) or the
Employer, as the case may be, shall then have 14 days after
receipt by the Plan Administrator of the written offer to
exercise the right to purchase all or any portion of the
Employer Shares.
(ii) The selling price and other terms under the
"right of first refusal" must not be less favorable to the
Participant or Beneficiary than the purchase price and other
terms offered by a buyer other than the Employer or the Plan,
making a good faith offer to purchase the security.
12.08. Eligible Rollover Distributions
- -------------------------------------------------
(a) Notwithstanding any provision of this Plan to the contrary
that would otherwise limit a distributee's election under the Plan, a
distributee may elect at the time and in the manner prescribed by the Plan
Administrator, to have any portion of an eligible rollover distribution made on
or after January l, 1993 paid directly to an eligible retirement plan specified
by the distributee in a direct rollover.
(b) The following definitions will apply for purposes of this
Section 12.08:
(i) Eligible rollover distribution: An eligible
rollover distribution is any distribution of all or any
portion of the balance to the credit of the distributee,
except that an eligible rollover distribution does not
include: (A) any distribution
17
<PAGE> 24
that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life
(or life expectancy) of the distributee or the joint lives (or
joint life expectancies) of the distributee and the
distributee's designated Beneficiary; (B) any distribution
that is for a specified period of ten years or more; (C) any
distribution to the extent such distribution is required under
Code Section 401(a)(9); and (D) the portion of any
distribution that is not includable in gross income
(determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities).
(ii) Eligible retirement plan: An eligible retirement
plan is an individual retirement account described in Code
Section 408(a), an individual retirement annuity described in
Code Section 408(b), an annuity plan described in Code Section
403(a) or a qualified trust described in Code Section 401(a)
that accepts the distributee's eligible rollover distribution.
However, in the case of an eligible rollover distribution to
the Surviving Spouse, an eligible retirement plan is an
individual retirement account or individual retirement
annuity.
(iii) Distributee: A distributee includes an Employee
or former Employee. In addition, the Spouse or Surviving
Spouse of an Employee or former Employee is a distributee with
regard to the interest of the Spouse or Surviving Spouse.
(iv) Direct rollover: A direct rollover is a payment
by the Plan to the eligible retirement plan specified by the
distributee.
SECTION l3
----------
BREAK IN SERVICE RULES
----------------------
13.01. Effect of Break in Service on Eligibility
- -----------------------------------------------------------
If a Participant terminates his employment with the Employer
and subsequently resumes employment after incurring a
18
<PAGE> 25
One Year Break in Service, the rehired Participant shall again participate in
the Plan as of the date of his reemployment.
13.02. Effect of Break in Service on Vesting
- -------------------------------------------------------
In the case of a Participant who has five or more consecutive
One-Year Breaks in Service, Years of Service performed by such Participant after
such One-Year Breaks in Service will be disregarded for the purpose of
determining the vested percentage of any Employer Contributions that accrued to
his Account before the commencement of such One-Year Breaks in Service.
Accordingly, upon the occurrence of five consecutive One-Year Breaks in Service,
the non-vested portion of the Participant's Account shall be treated as a
Forfeiture.
Moreover, if a Participant incurs five or more consecutive
One-Year Breaks in Service, such Participant's pre-break service will be
disregarded in determining the vested percentage of any post-break Employer
Contributions that accrue to his Account if (a) he has no vested interest in his
Account at the time of his separation from service, and (b) upon returning to
service, the number of his consecutive One-Year Breaks in Service is greater
than the number of his pre-break Years of Service.
Separate accounts will be maintained for the Participant's
pre-break and post-break Employer contributions. Both accounts will share in the
earnings and losses of the Trust Fund.
In the case of a Participant who does not have five
consecutive One-Year Breaks in Service, both pre-break and post- break Years of
Service will count in determining the vested percentage of pre-break and
post-break Employer contributions that accrue to his Account.
13.03. Authorized Leaves of Absence
- ----------------------------------------------
Authorized leaves of absence, as determined by the Plan
Administrator, including military service recognized by law as leave of absence,
will be included in determining Years of Service for both eligibility and
vesting purposes. All Employees in similar circumstances will be treated alike.
19
<PAGE> 26
SECTION 14
----------
TRUST AGREEMENT
---------------
14.01. Description of Trust Agreement
- ------------------------------------------------
The Employer proposes to enter into a Trust Agreement with the
Trustee to provide for the administration of the Trust Fund. The Trust Agreement
shall be deemed to form a part of this Plan, and any and all rights or benefits
which may accrue to any person under this Plan shall be subject to all the terms
and provisions of the Trust Agreement. The Plan is designed to invest primarily
in Employer Shares. If and to the extent that Employer Shares are not available
at a price acceptable to the Trustee, the Trustee is authorized to make other
investments as provided in the Trust Agreement.
SECTION 15
----------
PLAN ADMINISTRATION
-------------------
15.01. Plan Administrator
- ------------------------------------
The Plan shall be administered by a Plan Administrator. Such
Plan Administrator shall be a committee of one or more individuals who shall be
appointed by and serve at the pleasure of the Employer. In the event that no
such appointment is made, Home Loan Financial Corporation shall serve as Plan
Administrator.
15.02. Duties of Plan Administrator
- ----------------------------------------------
The Plan Administrator shall supervise the maintenance of such
accounts and records as shall be necessary or desirable to show the
contributions of the Employer, allocation to Participants' Accounts, payments
from Participants' Accounts, valuations of the Trust Fund and all other
transactions pertinent to the Plan.
The Plan Administrator is authorized to perform all functions
necessary to administer the Plan, including, without limitation, to determine
the eligibility and qualification of Employees for benefits under the Plan; to
determine the allocation and vesting of contributions, earnings and profits of
20
<PAGE> 27
the Plan; to interpret and construe the terms of Plan; to adopt rules,
regulations and procedures consistent therewith and to decide all disputes with
respect to the rights and obligations of Participants in the Plan. If the Trust
Agreement permits, the Plan Administrator may direct the Trustee with respect to
investment of the assets of the Trust Fund or may employ investment counsel to
do so. The Plan Administrator will have absolute discretion in carrying out its
duties and responsibilities under this paragraph.
The Plan Administrator may employ one or more persons to
render advice with regard to any responsibility it has under the Plan and may
designate others to carry out any of its responsibilities.
SECTION 16
----------
AMENDMENTS
----------
16.01. Employer's Right to Amend Plan
- ------------------------------------------------
The Employer shall have the right at any time, by an
instrument in writing, to modify, alter or amend this Plan in whole or in part;
provided, that no such change shall in any way affect the vested rights of the
Employees under this Plan; and provided further, that the provisions of this
Plan with respect to the amount, price and timing of awards to officers shall
not be amended more than once every six months, other than to comply with
applicable provisions of the Code, ERISA or regulations thereunder. If an
amendment changes the nonforfeitable rights provided in Section 11, each
Participant having not less than three Years of Service may elect, during the
period beginning when the amendment is adopted and ending no earlier than the
latest of (a) 60 days after the amendment's adoption; (b) 60 days after the
amendment's effective date; or (c) 60 days after the Participant is issued a
written notice of the amendment, to have his nonforfeitable rights computed
without regard to such amendment. No amendment to the Plan shall decrease a
Participant's Account balance or eliminate an optional form of distribution. Any
amendment to the Plan shall be executed by any individual authorized by the
Board of Directors of the Employer.
21
<PAGE> 28
SECTION 17
----------
DISTRIBUTIONS ON PLAN TERMINATION
---------------------------------
17.01. Full Vesting on Plan Termination
- --------------------------------------------------
When and if this Plan is terminated, or upon dissolution or
liquidation of the Employer, after the payment of all expenses and after all
adjustments of Participants' Accounts to reflect such expenses, fund profits or
losses, income and allocations-to date of termination, each Participant shall be
entitled to receive that number of Employer Shares as is then credited to his
Accounts and the net value of other assets of such Accounts.
17.02. Payment on Plan Termination
- ---------------------------------------------
The Plan Administrator shall make payment of each
Participant's Account in cash or Employer Shares. Such payment shall be made to
each Participant in a single lump sum payment.
17.03. Discontinuance of Contributions; Partial Termination of Plan
- ------------------------------------------------------------------------------
Any complete discontinuance of contributions by the Employer
or partial termination of the Plan will be treated as a termination with all
affected Participants acquiring nonforfeitable interests in amounts contributed
to such date of termination.
SECTION 18
----------
CREDITORS OF PARTICIPANTS
-------------------------
18.01. Non-Assignability
- -----------------------------------
Except to the extent permitted by ERISA, assignment, pledge or
encumbrance of any character of the benefits under the Plan is not permitted or
recognized under any circumstances; and such benefits shall not be subject to
claims of creditors, execution, attachment, garnishment or any other legal
process.
22
<PAGE> 29
18.02. Qualified Domestic Relations Orders
- -----------------------------------------------------
Section 18.01 shall also apply to the creation,
assignment or recognition of a right to any benefit payable with respect to a
Participant pursuant to a domestic relations order, unless such order is
determined to be a qualified domestic relations order [as defined in Section
414(p) of the Code], or any domestic relations order entered before January l,
1985.
SECTION 19
----------
CLAIMS PROCEDURES
-----------------
19.01. Filing a Claim for Benefits
- ---------------------------------------------
A Participant or Beneficiary, or the Employer acting on behalf
of such Participant or Beneficiary, shall notify the Plan Administrator of a
claim for benefits under the Plan. Such request shall be in writing to the Plan
Administrator and shall set forth the basis of such claim and shall authorize
the Plan Administrator to conduct such examinations as may be necessary to
determine the validity of the claim and to take such steps as may be necessary
to facilitate the payment of benefits to which the Participant or Beneficiary
may be entitled under the terms of the Plan.
A decision by the Plan Administrator shall be made promptly
and not later than 90 days after the Plan Administrator's receipt of the claim
for benefits under the Plan, unless special circumstances require an extension
of the time for processing, in which case a decision shall be rendered as soon
as possible, but not later than 180 days after the initial receipt of the claim
for benefits.
19.02. Denial of Claim
- ---------------------------------
Whenever a claim for benefits by any Participant or
Beneficiary has been denied by the Plan Administrator, a written notice prepared
in a manner calculated to be understood by the Participant or Beneficiary shall
be provided setting forth (a) the specific reasons for the denial; (b) the
specific reference to the pertinent Plan provisions on which the denial is
based; (c) a description of any additional material or information necessary for
the claimant to perfect the claim and an
23
<PAGE> 30
explanation of why such material or information is necessary; and (d) an
explanation of the Plan's claim review procedure.
19.03. Remedies Available to Participants
- ----------------------------------------------------
Upon denial of his claim by the Plan Administrator, a
Participant or Beneficiary
(a) may request a review by a named fiduciary, other than the
Plan Administrator, upon written application to the Plan;
(b) may review pertinent Plan documents; and
(c) may submit issues and comments in writing to a named
fiduciary.
A Participant or Beneficiary shall have 60 days after receipt
by the claimant of written notification of a denial of a claim to request a
review of a denied claim.
A decision by a named fiduciary shall be made promptly and not
later than 60 days after the named fiduciary's receipt of a request for review,
unless special circumstances require an extension of the time for processing; in
which case, a decision shall be rendered as soon as possible, but not later than
120 days after receipt of a request for review. The decision on review by a
named fiduciary shall be in writing and shall include specific reasons for the
decision, written in a manner calculated to be understood by the claimant, and
specific references to the pertinent Plan provisions on which the decision is
based.
SECTION 20
----------
VOTING RIGHTS
-------------
20.01. Participant Voting Rights with Respect to Allocated Shares
- ----------------------------------------------------------------------------
All Employer Shares held in the Trust Fund and allocated to
Participants' Accounts shall be voted by the Trustee pursuant to written
instructions received from the Participants. With respect to Allocated Shares
for which the Trustee does not
24
<PAGE> 31
receive written instructions from Participants, such Shares shall be voted by
the Trustee in its sole discretion.
20.02. Participant Voting Rights with Respect to Unallocated Shares
- ------------------------------------------------------------------------------
All Employer Shares held in the Trust Fund and not allocated
to Participants' Accounts shall be voted by the Trustee in its sole discretion.
SECTION 21
----------
TOP HEAVY RULES
---------------
21.01. Definitions
- -----------------------------
If the Plan is or becomes top heavy in any Plan Year, the
provisions of this Section 21 will supersede any conflicting provisions in the
Plan. The following definitions and rules are necessary to comply with related
federal tax requirements:
(a) Key Employee: Any Employee or former Employee (and the
Beneficiaries of such Employee) who at any time during the determination period
was (i) an officer of the Employer if such individual's annual compensation
exceeds 50% of the dollar limitation under Code Section 415(b)(1)(A); (ii) an
owner (or considered an owner under Code Section 318) of one of the ten largest
interests in the Employer if such individual's annual compensation exceeds the
dollar limitation under Code Section 415(c)(l)(A); (iii) a 5% owner of the
Employer; or (iv) a 1% owner of the Employer who has annual compensation of more
than $150,000. For purposes of this section, annual compensation means
compensation as defined in Code Section 415(c)(3), but including amounts
contributed by the Employer pursuant to a salary reduction agreement which are
excludable from the Employee's gross income under Code Section 125, 402(a)(8),
402(h) or 403(b). The determination period is the Plan Year containing the
Determination Date and the four preceding Plan Years. The determination of who
is a Key Employee will be made in accordance with Code Section 416(i)(1) and the
regulations thereunder.
(b) Non-Key Employee: Any Employee or former Employee of the
Employer who is not a Key Employee. The Beneficiary of a Non-Key Employee will
be treated as a Non-Key Employee, and the
25
<PAGE> 32
Beneficiary of a former Non-Key Employee will be treated as a former Non-Key
Employee.
(c) Determination Date: For any Plan Year subsequent to the
first Plan Year, the last day of the preceding Plan Year. For the first Plan
Year, the last day of such Plan Year.
(d) Permissive Aggregation Group: The Required Aggregation
Group of plans plus any other plan or plans of the Employer which, when
considered as a group with the Required Aggregation Group, would continue to
satisfy the requirements of Code Sections 401(a)(4) and 410.
(e) Required Aggregation Group: (i) Each qualified plan of the
Employer in which at least one Key Employee participates or participated at any
time during the determination period (regardless of whether the Plan has
terminated); and (ii) any other qualified plan of the Employer which enables a
plan described in (i) to meet the requirements of Code Sections 401(a)(4) or
410.
(f) Top-Heavy Plan: The Plan, if it meets the requirements of
Section 21.02.
21.02. Top Heavy Status
- ----------------------------------
This Plan, and any other plans aggregated with it, will become
top heavy pursuant to this Section 21.02, as of the Determination Date, if the
present value of accrued benefits for Key Employees is more than 60% (90% in the
case of "super top heavy") of the sum of the present value of accrued benefits
of all Employees, excluding former Key Employees. In the case of more than one
plan which is to be aggregated, the present value of the accrued benefits
(including distributions for Key Employees and all Employees) is first
determined separately for each plan as of each plan's determination date. The
plans then will be aggregated by adding the results of each plan as of the
determination dates for such plans that fall within the same calendar year. The
combined results will indicate whether the plans are top heavy.
The account balances and accrued benefits of a Participant who
has not been credited with an Hour of Service for
26
<PAGE> 33
the Employer maintaining the Plan during the five-year period ending on the
Determination Date will be disregarded.
The present value of accrued benefits as of the Determination
Date for any individual is the sum of (a) the Account balance as of the most
recent Valuation Date occurring within a 12-month period ending on the
Determination Date; (b) an adjustment for contributions due as of the
Determination Date; and (c) the aggregate distributions made with respect to
such individual under the Plan during the five-year period ending on the
Determination Date. For an employee stock-ownership plan, the adjustment in (b)
is generally the amount of contributions actually made after the Valuation Date
but on or before the Determination Date.
In determining whether the Plan is top heavy, it must be
aggregated with each plan included in the Required Aggregation Group. In
addition, the Employer may aggregate plans included in the Permissive
Aggregation Group.
21.03. Minimum Contributions
- ---------------------------------------
For each Plan Year in which the Plan is top heavy, each
Participant who is a Non-Key Employee (including those Participants who did not
complete 1,000 Hours of Service in the Plan Year) must receive an annual
allocation of contributions and Forfeitures (disregarding Social Security
benefits) equal to at least 3% of his Compensation; provided that if the largest
percentage of Compensation allocated to a Key Employee for a Plan Year is less
than 3%, that largest percentage will be substituted for 3%. For any year in
which the Employer maintains a defined benefit plan in addition to this Plan,
the requirements of this paragraph will be satisfied by providing each Non-Key
Employee with the minimum annual benefit provided under the top heavy provisions
of the defined benefit plan. For any year in which the Employer maintains
another defined contribution plan in addition to this Plan, the minimum benefit
described in this paragraph shall be provided by such other defined contribution
plan.
27
<PAGE> 34
SECTION 22
----------
EXEMPT LOANS
------------
22.01. Authority to Borrow
- -------------------------------------
The Trustee may borrow funds on behalf of the Plan to purchase
Employer Shares, provided that any Plan loan is an exempt loan within the
meaning of Treasury Regulation Section 54.4975-7(b)(l)(iii).
22.02. Requirements for Plan Loans
- ---------------------------------------------
Any loan made to the Plan pursuant to this Section 22 must
meet the following requirements:
(a) The proceeds of the loan must be used within a reasonable
time after their receipt by the Plan either (i) to acquire Employer Shares; (ii)
to repay such loan; or (iii) to repay a prior exempt loan.
(b) The interest rate of the loan must not be in excess of a
reasonable rate of interest. All relevant factors will be considered in
determining a reasonable rate of interest, including the amount and duration of
the loan, the security and guarantee (if any) involved, the credit standing of
the Plan and the guarantor (if any) and the interest rate prevailing for
comparable loans.
(c) The loan must be for a specific term. Such loan may not be
payable at the demand of any person, except in the case of default.
(d) The loan must be without recourse against the Plan.
Furthermore, the only assets of the Plan that may be given as collateral for the
loan are Employer Shares of two classes--those acquired with the proceeds of the
loan and those that were used as collateral on a prior exempt loan repaid with
the proceeds of the current loan. No person entitled to payment under the exempt
loan shall have any rights to assets of the Plan other than (i) collateral given
for the loan; (ii) contributions (other than contributions of Employer Shares)
that are made under the Plan to meet its obligations under the loan; and (iii)
28
<PAGE> 35
earnings attributable to such collateral and the investment of such
contributions.
(e) The loan must provide for the release from encumbrance of
Plan assets used as collateral for the loan. For each Plan Year during the
duration of the loan, the number of securities released must equal the number of
encumbered securities held immediately before release for the current Plan Year
multiplied by a fraction. The numerator of the fraction is the amount of
principal and interest paid for the year. The denominator of the fraction is the
sum of the numerator plus the principal and interest to be paid for all future
years. The number of future years under the loan must be definitely
ascertainable and must be determined without taking into account any possible
extensions or renewal periods. If the interest rate under the loan is variable,
the interest to be paid in future years must be computed by using the interest
rate applicable as of the end of the Plan Year. If collateral includes more than
one class of securities, the number of securities of each class to be released
for a Plan Year must be determined by applying the same fraction to each class.
(f) All other requirements of Treasury Regulation Section
54.4975-7(b).
SECTION 23
----------
MISCELLANEOUS
-------------
23.01. Employment Rights
- -----------------------------------
The right of the Employer to terminate the employment of any
of its Employees shall not in any way be affected by the Employee's
participation in this Plan.
23.02. Gender
- ------------------------
Wherever used in this Plan the masculine pronoun refers to
both men and women.
29
<PAGE> 36
23.03. Notice Requirement
- ------------------------------------
Notice of the existence and provisions of the Plan and of any
amendment thereto shall be communicated by the Employer to those entitled to
notice thereof.
23.04. Merger or Consolidation
- -----------------------------------------
In case of any merger or consolidation with, or transfer of
assets or liabilities to, any other plan, each Participant in the Plan would (if
this Plan then terminated) receive a benefit immediately after the merger,
consolidation or transfer which is equal to, or greater than, the benefit he
would have been entitled to receive immediately before the merger, consolidation
or transfer (if the Plan then terminated).
23.05. Social Security Benefits
- ------------------------------------------
Post-separation Social Security benefit increases shall not
affect benefits under this Plan.
23.06. Forfeitures
- -----------------------------
Forfeitures resulting from termination of employment shall be
allocated to other Participants as of the first day of the month coincident with
or following the earlier of the date on which the Participant (a) receives an
actual distribution of his nonforfeitable Account; or (b) incurs five
consecutive One-Year Breaks in Service. In the event that a Participant who
received a distribution of his nonforfeitable Account returns to the employment
of the Employer before he incurs five consecutive One Year Breaks in Service and
takes such action as is necessary to reinstate the portion of his account that
was previously forfeited, the forfeited portion of his Account shall be restored
first from Forfeitures available for allocation in that year and then from
additional Employer contributions, if necessary.
23.07. Named Fiduciaries
- -----------------------------------
The named fiduciary of this Plan shall be Home Loan Financial
Corporation.
30
<PAGE> 37
23.08. Limitations on Payment
- ----------------------------------------
No payment shall be made to any incompetent person (through
minority or otherwise) until the Plan Administrator shall have been furnished
evidence satisfactory to it of the person to whom such payment shall be made and
his right to receive the same. Until furnished such evidence, all amounts so
payable shall be held in trust for the person or persons entitled to receive
them, separate and apart from the Plan's general Trust Fund.
23.09. Interpretation of Document
- --------------------------------------------
The construction and interpretation of the Plan provisions are
vested with the Plan Administrator, in its absolute discretion, including,
without limitation, the determination of benefits, eligibility and
interpretation of Plan provisions. All such decisions, determinations and
interpretations shall be final, conclusive and binding upon all parties having
an interest in the Plan.
23.10. Nonterminable Protections and Rights
- ------------------------------------------------------
Notwithstanding anything contained herein to the contrary, no
security acquired with the proceeds of an exempt loan may be subject to a put,
call or other option, or buy-sell or similar arrangement while held by and or
distributed from this Plan. The rights and protections specified in the
preceding sentence, together with the put option rights provided for in Section
12.06 hereof, shall be non-terminable regardless of whether this Plan ceases to
be an employee stock ownership plan or an exempt loan is paid in full.
23.11. Use of Income With Respect to Employer Shares
- ---------------------------------------------------------------
The Plan reserves the right to use income with respect to
Employer Shares acquired with the proceeds of an exempt loan to repay such loan.
31
<PAGE> 38
SECTION 24
----------
CERTAIN DEFINITIONS
-------------------
Whenever used in this Plan, the following words and phrases
shall have the meanings specified below. Additional words and phrases may be
defined in the text of the Plan.
24.01. Account
- -------------------------
"Account" means a Participant's Employer Contributions
Account.
24.02. Adjustment Factor
- -----------------------------------
"Adjustment Factor" means the cost-of-living adjustment
prescribed by the Secretary of the Treasury under Code Section 415(d) for years
beginning after December 31, 1987, as applied to such items and in such manner
as the Secretary shall provide.
24.03. Affiliate
- ---------------------------
"Affiliate" means any other employer which, together with Home
Loan Financial Corporation, is a member of a controlled group of corporations or
of a commonly controlled trade or business [as defined in Code Sections 414(b)
and (c) and as modified by Code Section 415(h)] or of an affiliated service
group [as defined in Code Section 414(m)] or other organization described in
Code Section 414(o).
24.04. Annual Additions
- ----------------------------------
"Annual Additions" means the sum of the following amounts
credited to a Participant for the Limitation Year under all defined contribution
plans maintained by the Employer:
(a) Employer contributions;
(b) Forfeitures;
(c) amounts allocated after March 31, 1984 to an
individual medical account, as defined in Section 415(l) (l) of the Code, which
is part of a defined benefit plan maintained by the Employer; and
32
<PAGE> 39
(d) amounts derived from contributions paid or
accrued after December 31, 1985 in taxable years ending after such date which
are attributable to post-retirement medical benefits allocated to the separate
account of a key employee [as defined in Section 416(i) of the Code] under a
welfare benefit fund [as defined in Section 419(e) of the Code] maintained by
the Employer. The amounts described under this paragraph (d) shall not be
subject to the 25% of compensation limit provided in Section 2.04.
24.05. Beneficiary
- -----------------------------
"Beneficiary" means the individual, individuals or trust
designated by the Participant under the terms of Section 8.02 hereof to receive
the death benefit payable under the Plan.
24.06. Code
- ----------------------
"Code" means the Internal Revenue Code of 1986, as may be
amended from time to time, and corresponding provisions of future federal
internal revenue codes.
24.07. Compensation
- ------------------------------
"Compensation" means compensation, as defined in Section 2.04
hereof, including, to the extent applicable, Earned Income; provided, however,
that Compensation shall not include (i) any amounts paid or accrued to a
Participant during any Plan Year under any Recognition and Retention Plan
adopted by the Employer after the Effective Date, or (ii) any amounts paid by
the Employer during any Plan Year in excess of $150,000, adjusted under Code
Section 401(a)(17). In determining the compensation of a Participant for
purposes of the $150,000 limit, the family aggregation rules of Code Section
414(g)(6) will apply, except in applying such rules, the term "family" will
include only the Spouse of the participant and any lineal descendants of the
participant who have not attained age 19 before the close of the year. If, as a
result of the application of such rules, compensation would exceed the adjusted
$150,000 limitation, then the limitation will be prorated among the affected
persons in proportion to each such person's compensation as determined under
this paragraph prior to the application of this limitation. For purposes of a
Participant's first Plan Year of eligibility, only
33
<PAGE> 40
Compensation paid to such Participant after the Entry Date on which he begins to
participate in the Plan shall be considered for purposes of determining
allocations under Section 3 hereof.
24.08. Current Participant
- -------------------------------------
"Current Participant" means, for any Plan Year, (i) a
Participant who was both a Full-Time Employee during such Plan Year and employed
by the Employer on the last day of such Plan Year, and (ii) a Participant who
died, retired or became totally and permanently disabled during such Plan Year.
24.09. Intentionally Omitted
- ---------------------------------------
24.10. Effective Date
- --------------------------------
"Effective Date" means January 1, 1996.
24.11. Employee
- --------------------------
"Employee" means any person who is an employee in the regular
employment of the Employer. For this purpose, the term "Employee" shall not
include any Leased Employee.
24.12. Employer
- --------------------------
"Employer" means Home Loan Financial Corporation and any
Affiliate that adopts this Plan pursuant to the provisions of Section 25 hereof.
24.13. Employer Contributions Account
- ------------------------------------------------
"Employer Contributions Account" means the account established
for each Participant under this Plan pursuant to Section 4.01.
24.14. Employer Shares or Shares
- -------------------------------------------
"Employer Shares" or "Shares" means securities which
constitute "employer securities" under Section 409(l) of the Code and
"qualifying employer securities" under Section 4975(e)(8) of the Code and
Section 407(d)(5) of ERISA.
34
<PAGE> 41
24.15. Employment Commencement Date
- ----------------------------------------------
"Employment Commencement Date" means the date on which an
Employee first performs an Hour of Service for the Employer.
24.16. Entry Date
- ----------------------------
"Entry Date" means January 1 and July l of each year.
24.17. ERISA
- -----------------------
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
24.18. Family Member
- -------------------------------
"Family Member" means, with respect to any individual, such
individual's Spouse and lineal ascendants or descendants and the spouses of such
lineal ascendants or descendants.
24.19. Forfeiture
- ----------------------------
"Forfeiture" means the amount of the value of any
Participant's Account that such Participant is not entitled to receive under
Section 11 on the termination of his employment.
24.20. Full Time
- ---------------------------
"Full Time" means employment with the Employer for not less
than 1,000 hours during the 12 consecutive calendar months for which a
determination is made.
24.21. Highly-Compensated Employee
- ---------------------------------------------
"Highly-Compensated Employee" means a highly-compensated
active employee and a highly-compensated former employee. A highly-compensated
active employee includes any Employee who performs service for the Employer
during the determination year and who, during the look-back year (a) received
compensation from the Employer in excess of $75,000 multiplied by the Adjustment
Factor; (b) received compensation from the Employer in excess of $50,000
multiplied by the Adjustment Factor and was a member of the top-paid group for
such year; or (c) was an officer of the Employer and received
35
<PAGE> 42
compensation during such year that is greater than 50% of the dollar limitation
in effect under Code Section 415(b)(l)(A).
The term Highly-Compensated Employee also includes: (a)
Employees who are both described in the preceding paragraph if the term
"determination year" is substituted for the term "look-back year" and the
Employee is one of the 100 Employees who received the most compensation from the
Employer during the determination year; and (b) Employees who are 5% owners at
any time during the look-back year or determination year. If no officer has
satisfied the compensation requirement of (c) in the preceding paragraph during
either a determination year or look-back year, the highest paid officer for such
year shall be treated as a Highly-Compensated Employee. For this purpose, the
determination year shall be the Plan Year. The look-back year shall be the
12-month period immediately preceding the determination year.
A highly-compensated former Employee includes any Employee who
separated from service (or was deemed to have separated) prior to the
determination year, performs no service for the Employer during the
determination year and was a highly compensated active employee for either the
separation year or any determination year ending on or after the Employee's 55th
birthday. If an Employee is, during a determination year or look-back year, a
Family Member of either a 5% owner who is an active or former Employee or a
Highly-Compensated Employee who is one of the 10 most highly-compensated
employees ranked on the basis of compensation paid by the Employer during such
year, then the Family Member and the 5% owner or top-10 highly-compensated
employee shall be aggregated. In such case, the Family Member and 5% owner or
top-10 highly-compensated employee shall be treated as a single Employee
receiving compensation and Plan contributions or benefits equal to the sum of
such compensation and contributions or benefits of the Family Member and 5%
owner or top-10 highly-compensated employee.
The determination of who is a Highly-Compensated Employee,
including the determinations of the number and identity of Employees in the
top-paid group, the top 100 Employees, the number of Employees treated as
officers and the compensation that is considered, will be made in accordance
with Code Section 414(q) and the regulations thereunder.
36
<PAGE> 43
24.22. Hour of Service
- ---------------------------------
"Hour of Service" means
(a) each hour for which an Employee is paid, or entitled to
payment, for the performance of duties for the Employer or an Affiliate. These
hours shall be credited to the Employee for the computation period or periods in
which the duties are performed; and
(b) each hour for which an Employee is paid, or entitled to
payment, by the Employer or an Affiliate on account of a period of time during
which no duties are performed (irrespective of whether the employment
relationship has terminated) due to vacation, holiday, illness, incapacity
(including disability), layoff, absence for maternity or paternity reasons, jury
duty, military duty or leave of absence. No more than 501 hours of service shall
be credited under this paragraph for any single continuous period (whether or
not such period occurs in a single computation period). Hours under this
paragraph shall be calculated and credited pursuant to Section 2530.200b-2 of
the Department of Labor Regulations, which are incorporated herein by this
reference; and
(c) each hour for which back pay, irrespective of mitigation
of damages, is either awarded or agreed to by the Employer or an Affiliate. The
same hours of service shall not be credited both under paragraph (a) or
paragraph (b), as the case may be, and under this paragraph (c). These hours
shall be credited to the computation period or periods to which the award or
agreement pertains rather than the computation period in which the award,
agreement or payment is made; and
(d) in the case of a Participant who is absent from work for
maternity or paternity reasons, such Participant shall have credited, solely for
purposes of determining whether a One-Year Break in Service has occurred for
eligibility and vesting, in the year in which the absence begins if necessary to
prevent a One Year Break in Service for such year; or in the following year, the
number of hours that would normally have been credited but for such absence; or
in any case in which such hours cannot be determined, 8 hours of service per day
of such absence. The total number of hours treated as hours of service under
this paragraph shall not exceed 501 hours. For purposes of this
37
<PAGE> 44
paragraph, an absence from work for maternity or paternity reasons means an
absence (i) by reason of pregnancy of the Participant; (ii) by reason of the
birth of a child of the Participant; (iii) by reason of the placement of a child
with the Participant in connection with the adoption of such child by such
Participant; or (iv) for purposes of caring for such child for a period
beginning immediately following such birth or placement.
24.23. Late Retirement Date
- --------------------------------------
"Late Retirement Date" means the first day of the month
following the date on which a Participant elects to retire after his Normal
Retirement Date.
24.24. Leased Employee
- ---------------------------------
"Leased Employee" means any person (other than an employee of
the recipient) who, pursuant to an agreement between the recipient and any other
person (leasing organization), has performed services for the recipient [or for
the recipient and related persons determined in accordance with Code Sections
414(n) and 414(o)] on a substantially full-time basis for a period of at least
one year, and such services are of a type historically performed by employees in
the business field of the recipient employer. Contributions or benefits provided
a Leased Employee by the leasing organization which are attributable to services
performed for the recipient employer shall be treated as provided by the
recipient employer.
A Leased Employee shall not be considered an employee of the
recipient if (a) such employee is covered by a money purchase pension plan
providing (i) a nonintegrated employer contribution rate of at least 10% of
compensation, as defined in Code Section 415(c)(3), but including amounts
contributed by the employer pursuant to a salary reduction agreement which are
excludable from the employee's gross income under Code Section 125, Section
402(a)(8), Section 402(h) or Section 403(b); (ii) immediate participation; and
(iii) full and immediate vesting; and (b) Leased Employees do not constitute
more than 20% of the recipient's non-highly-compensated work force.
24.25. Limitation Year
- ---------------------------------
"Limitation Year" means the Plan Year.
38
<PAGE> 45
24.26. Normal Retirement Age
- ---------------------------------------
"Normal Retirement Age" means age 65.
24.27. Normal Retirement Date
- ----------------------------------------
"Normal Retirement Date" means the first day of the month
coincident with or following the date on which the Participant attains Normal
Retirement Age; provided, however, that this Plan shall not be interpreted to
require that a Participant retire prior to attaining any specific age.
24.28. One-Year Break in Service
- -------------------------------------------
"One-Year Break in Service" means, for eligibility and vesting
purposes, a Plan Year during which a Participant has not completed more than 500
Hours of Service.
24.29. Participant
- -----------------------------
"Participant" means either (a) an Employee who is
participating in the Plan in accordance with Section 1.01 for whom Accounts are
being maintained; or (b) a former Employee for whom Accounts are being
maintained.
24.30. Plan
- ----------------------
"Plan" means the Home Loan Financial Corporation Employee
Stock Ownership Plan as in effect from time to time.
24.31. Plan Administrator
- ------------------------------------
"Plan Administrator" means an administrative committee
appointed by the Employer to administer this Plan pursuant to Section 15, or if
no such appointment is made, Home Loan Financial Corporation.
24.32. Plan Year
- ---------------------------
"Plan Year" means the fiscal year of the Plan which begins
each January l and ends each December 31.
39
<PAGE> 46
24.33. Projected Annual Benefit
- ------------------------------------------
"Projected Annual Benefit" means the annual benefit to which
the Participant would be entitled under all Employer sponsored defined benefit
plans, assuming that the Participant continues employment until his Normal
Retirement Date, that the Participant's Compensation continues until his Normal
Retirement Date at the rate in effect during the current calendar year and that
all other factors relevant for determining benefits under the plans remain
constant at the level in effect during the current calendar year.
24.34. Spouse or Surviving Spouse
- --------------------------------------------
"Spouse" or "Surviving Spouse" means an individual who is
legally married to the Participant, provided that an individual who was formerly
married to the Participant will be treated as the Spouse or Surviving Spouse to
the extent provided under a qualified domestic relations order as described in
Section 414(p) of the Code.
24.35. Trust Agreement
- ---------------------------------
"Trust Agreement" means the agreement, and any amendments made
thereto, by and between the Employer and the Trustee for the management,
investment and disbursement of funds held in the Trust Fund.
24.36. Trust Fund
- ----------------------------
"Trust Fund" means the fund established pursuant to the terms
of the Trust Agreement.
24.37. Trustee
- -------------------------
"Trustee" means the bank, trust company and/or individual or
individuals designated by the Employer to hold and invest the Trust Fund and to
pay benefits and expenses as authorized by the Plan Administrator in accordance
with the terms and provisions of the agreement by and between the Employer and
such bank, trust company and/or individual or individuals.
40
<PAGE> 47
24.38. Valuation Date
- --------------------------------
"Valuation Date" means the last day of each Plan Year and any
other date fixed by the Plan Administrator for the valuation of assets and
adjustments of individual Accounts.
24.39. Year of Service
- ---------------------------------
"Year of Service" means a Plan Year during which a Participant
is, and each 12 calendar year prior to the Effective Date during which such
Participant was, a Full-Time Employee of the Employer.
SECTION 25
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MULTIEMPLOYER PROVISIONS
------------------------
25.01. Adoption by Affiliates of Home Loan Financial Corporation
- ---------------------------------------------------------------------------
Effective as of the Effective Date, any Affiliate may adopt
the Plan with the approval of the Board of Directors of Home Loan Financial
Corporation. However, notwithstanding such adoption by any Affiliate, or any
other provision of this Plan, Home Loan Financial Corporation shall have the
sole and exclusive right to amend the Plan or Trust Agreement and it shall not
be necessary for any adopting Affiliate to execute the original or any amended
Plan or Trust Agreement.
25.02. Administration
- --------------------------------
Home Loan Financial Corporation shall have the exclusive right
to appoint the Plan Administrator under Section 15 hereof, and Home Loan
Financial Corporation and the Plan Administrator shall have exclusive
administrative authority over the Plan, although responsibility for those
internal matters peculiar to a particular Affiliate may be delegated to that
Affiliate.
25.03. Common Fund.
- ------------------------------
The Trustee of the Plan need not earmark or keep separate the
assets attributable to each Affiliate, but may commingle them with assets
attributable to other Affiliates. The
41
<PAGE> 48
Trust shall be available to pay benefits to Participants and their Beneficiaries
without distinction as to the Affiliate to which particular assets or amounts
are attributable.
25.04. Withdrawal - Termination.
- -------------------------------------------
Any Affiliate, by action of its Board of Directors or other
governing authority, and notice to the Plan Administrator and the Trustee, may
withdraw from the Plan, or may terminate the Plan with respect to its employees,
without affecting any other Affiliates. A withdrawing Affiliate may arrange for
the continuation of this Plan in separate form for its own employees, with such
amendments as it may deem proper, and may arrange for continuation of the Plan
by merger with an existing plan and trust, and transfer of Trust Fund assets.
Notwithstanding anything contained herein to the contrary, by action of its
Board of Directors, Home Loan Financial Corporation, in its absolute discretion,
may terminate the entire Plan or an Affiliate's participation at any time,
without the consent of any Affiliate, Participant or Beneficiary.
IN WITNESS WHEREOF, the undersigned has caused this Plan to be
executed by its duly authorized officer effective as of the Effective Date.
HOME LOAN FINANCIAL CORPORATION
By:
------------------------------
Name (Print):
--------------------
Title:
----------------------------
Date:
---------------------
42
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
We have issued our report dated July 25, 1997, accompanying the balance sheets
of The Home Loan Savings Bank as of June 30, 1997 and 1996, and the related
statements of income, members' equity and cash flows for each of the three years
in the period ended June 30, 1997, included in the Forms AC and S-1 to be filed
with the Office of Thrift Supervision and Securities and Exchange Commission on
or about February 2, 1998. We consent to the use of our report and our name as
it appears in the Prospectus under the caption "Experts".
Crowe, Chizek and Company LLP
Columbus, Ohio
February 2, 1998
