<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ___________________
Commission File Number: 000-23927
HOME LOAN FINANCIAL CORPORATION
------------------------------------------------------
(Name of small business issuer in its charter)
Ohio 31-1578552
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
401 Main Street, Coshocton, Ohio 43812-1580
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (740) 622-0444
---------------
Securities registered pursuant to Section 12(b) of the Act:
None None
- -------------------- ----------------------
(Title of Class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common shares, no par value per share
-------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The Registrant's revenues for the fiscal year ended June 30, 1998, were
$5,548,085.
Based upon the closing price quoted by the Nasdaq National Market, the
aggregate market value of the voting stock held by non-affiliates of the
Registrant on September 14, 1998, was $26.2 million. (The exclusion from such
amount of the market value of the shares owned by any person shall not be deemed
an admission by the registrant that such person is an affiliate of the
registrant).
As of September 15, 1998, there were 2,248,250 of the Registrant's
common shares issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of 1998 Annual Report to Shareholders
Part III of Form 10-KSB - Portions of Proxy Statement for the 1998 Annual
Meeting of Shareholders
Transitional Small Business Disclosure Format (check one)
Yes No X
----- -----
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Home Loan Financial Corporation (the "Company") was incorporated under
Ohio law in December 1997 for the purpose of purchasing all of the capital stock
of The Home Loan Savings Bank (the "Bank") issued in connection with the
conversion of the Bank from mutual to stock form (the "Conversion"). On March
25, 1998, the effective date of the Conversion, the Company acquired 100 common
shares of the Bank. The principal business of the Company since the effective
date of the Conversion has been holding all of the issued and outstanding shares
of the Bank.
The Bank was organized as a mutual savings and loan association 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. The Bank converted to the stock form of
ownership on March 25, 1998. As an Ohio savings and loan association, the Bank
is subject to supervision and regulation by the Office of Thrift Supervision
(the "OTS"), the Ohio Department of Commerce, Division of Financial Institutions
(the "Division") and the Federal Deposit Insurance Corporation (the "FDIC"). The
Bank is a member of the Federal Home Loan Bank (the "FHLB") of Cincinnati, and
the deposits of the Bank are insured up to applicable limits by the FDIC in the
Savings Association Insurance Fund (the "SAIF").
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, which consists of
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. For liquidity and interest rate risk management purposes, the Bank
invests in interest-bearing deposits in other financial institutions and U.S.
Treasury securities. 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 Savings Association Insurance Fund (the "SAIF"),
principal repayments of loans and maturities of securities.
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.
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.
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> 3
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,
------------------------------------------------------------
1998 1997
--------------------------- ------------------------
Percent of Percent of
Amount total loans Amount total loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family $39,552 67.93% $35,156 70.64%
Home equity 1,528 2.62 728 1.46
Nonresidential 4,307 7.40 3,297 6.62
Construction and land 2,055 3.53 1,125 2.26
--------- ------- -------- -------
Total real estate loans 47,442 81.48 40,306 80.98
Commercial loans 1,429 2.46 1,645 3.31
Consumer loans:
Home improvement 3,993 6.86 3,701 7.44
Automobile loans 2,997 5.15 2,506 5.03
Loans on deposits 422 0.72 219 0.44
Credit card 411 0.71 347 0.70
Other consumer loans 1,528 2.62 1,047 2.10
----- ------- --------- --------
Total consumer loans 9,351 16.06 7,820 15.71
-------- ------ --------- -------
Total loans 58,222 100.00% 49,771 100.00%
------- ====== ======
Less:
Net deferred loan fees and costs (121) (107)
Loans in process (1,054) (245)
Allowance for loan losses (223) (119)
--------- ----------
Net loans $56,824 $49,300
======= =======
</TABLE>
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<PAGE> 4
LOAN MATURITY. The following table sets forth certain information as of
June 30, 1998, 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 during Due between
the year 7/1/99 Due after
ending 6/30/99 and 6/30/02 6/30/02 Total
-------------- ----------- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 31 $ 858 $38,663 $39,552
Home equity 294 58 1,176 1,528
Nonresidential - 22 4,285 4,307
Construction and land 72 5 1,978 2,055
Commercial loans 364 632 433 1,429
Consumer loans 2,215 4,557 2,579 9,351
------ ------ ------- -------
Total $2,976 $6,132 $49,114 $58,222
====== ====== ======= =======
</TABLE>
The next table sets forth the dollar amount of all loans due after June
30, 1999, which have fixed interest rates and have adjustable interest rates:
<TABLE>
<CAPTION>
Due after June 30, 1999
-----------------------
(In thousands)
<S> <C>
Fixed rate of interest $12,908
Adjustable rate of interest 42,338
-------
$55,246
=======
</TABLE>
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 June 30, 1998, the Bank's one-
to four-family residential real estate loans totaled approximately $39.6
million, or 67.93% 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 ARMs for terms
of up to 30 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. Effective January 1998, the Bank
began originating home equity loans at the National City Bank prime rate with
closing fees waived if the initial borrowing was $5,000 or more. Prior to
January 1998, rate adjustments on home equity loans were determined by adding 1%
for loans under $20,000 or .75% for loans over $20,000 to the National City Bank
prime rate. At June 30, 1998, approximately $1.5 million, or 2.62%, of the
Bank's portfolio consisted of home equity loans.
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<PAGE> 5
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 U.S. Treasury Index. Rates are determined for
fixed-rate loans by adding 2% to the rate at which fixed-rate residential loans
are then being offered. Among the properties securing the Bank's 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 June 30, 1998, the Bank's largest loan secured by
nonresidential real estate was approximately $578,000 and such loan was
performing according to its terms.
At June 30, 1998, approximately $4.3 million, or 7.40%, 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 June 30, 1998,
the Bank had approximately $1.4 million, or 2.35% 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 June 30, 1998, approximately $0.7 million,
or 1.18%, 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 prime rate.
At June 30, 1998, the Bank had approximately $1.4 million, or 2.46% 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.
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<PAGE> 6
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 June 30, 1998, the Bank had approximately $9.4 million, or 16.06% 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 large 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. The
Bank has not purchased any loans, or participation interests in any loans, in
recent years.
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<PAGE> 7
The following table presents the Bank's total loan origination and
repayment activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------
1998 1997
-------- ---------
(In thousands)
<S> <C> <C>
Loans originated:
One- to four-family $11,884 $ 9,417
Home equity 990 639
Nonresidential 1,222 578
Construction and land 1,582 1,026
Commercial 875 1,511
Consumer 4,805 8,146
-------- ---------
Total loans originated 21,358 21,317
Loans purchased - -
Loans sold - -
Principal repayments (12,907) (16,823)
(Increase) decrease in other items, net (1) (927) 512
--------- ---------
Net increase $ 7,524 $ 5,006
======== ========
<FN>
- ----------------------------
(1) Consists of net deferred loan fees and costs, loans in process and allowance for loan losses.
</TABLE>
At June 30, 1998, the Bank had $1.1 million of outstanding commitments
to originate loans, $1.7 million available to borrowers under lines of credit
and $0.8 million available to customers under credit card arrangements. At June
30, 1998, the Bank had $1.1 million 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 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." 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 $3.1
million to one borrower at June 30, 1998. The largest amount the Bank had
outstanding to any group of affiliated borrowers at June 30, 1998, was $798,714,
which consisted of eight loans, secured by a commercial property, equipment and
the borrowers' residences. At June 30, 1998, 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 a payment is 10 days late 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> 8
The following table reflects the amount of loans in a delinquent status
at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------
1998 1997
------------------------------ -------------------------------
Percent of Percent of
total total
Number Amount loans Number Amount loans
------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days 14 $164 0.28% 21 $532 1.07%
60-89 days 16 240 0.41 11 85 0.17
90 days or over 9 245 0.42 7 33 0.07
-- ---- ---- -- ---- ----
Total delinquent loans 39 $649 1.11% 39 $650 1.31%
== ==== ==== == ==== ====
</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. 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,
-----------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Total nonaccrual loans $ - $ -
Accruing loans delinquent 90 days or more 245 33
---- -----
Total nonperforming loans 245 33
Real estate owned - -
---- -----
Total nonperforming assets $245 $ 33
==== =====
Allowance for loan losses $223 $119
Nonperforming assets as a percent of total assets 0.30% 0.05%
Nonperforming loans as a percent of gross loans(1) 0.43% 0.07%
Allowance for loan losses as a percent of
nonperforming loans 91.23% 361.27%
<FN>
(1) Gross loans are stated at unpaid principal balances.
</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. After acquisition, a
valuation allowance reduces the reported amount to the lower of the initial
amount or fair value less costs to sell. Operating expenses of such properties,
net of related income or loss on disposition, are included in other expenses. At
June 30, 1998, 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
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<PAGE> 9
possibility of loss. An asset classified "loss" is considered uncollectible and
of such little value that its continuance as an asset of the Bank is not
warranted. 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 June 30,
----------------------
1998 1997
---- ----
(In thousands)
Classified assets:
<S> <C> <C>
Substandard $245 $33
Doubtful - -
Loss - -
---- ---
Total classified assets $245 $33
==== ===
</TABLE>
The Bank analyzes each classified asset on a quarterly basis to
determine whether changes in its classification is 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.
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 could result in the establishment of an additional
allowance based upon the judgment of the OTS.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------
1998 1997
----- -----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 119 $ 117
Charge-offs (18) (4)
Recoveries 2 --
----- -----
Net (charge-offs) recoveries (16) (4)
Provision for losses on loans 120 6
----- -----
Balance at end of period $ 223 $ 119
===== =====
Ratio of net charge-offs to average
gross loans outstanding during the period, net of loans in
process and deferred loan fees and costs 0.03% 0.01%
Ratio of allowance for loan losses to loans, net of loans in 0.39% 0.24%
process
</TABLE>
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<PAGE> 10
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,
-----------------------------------------------------------------------
1998 1997
------------------------------ --------------------------------
Percent of loans in Percent of loans in
each category each category
Amount to total loans Amount to total loans
------ -------------- ------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans $145 81.48% $ 67 80.98%
Commercial loans 14 2.46 14 3.31
Consumer loans 58 16.06 38 15.71
Unallocated 6 - - -
---- ------ ---- ------
Total $223 100.00% $119 100.00%
==== ====== ==== ======
</TABLE>
INVESTMENT ACTIVITIES
GENERAL. Federal regulations and Ohio law permit the Bank to invest in
various types of 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.
As of June 30, 1998, the Bank's securities portfolio was comprised of
FHLB stock and U.S. Treasury securities with an aggregate market value of $14.4
million. The Bank's securities at June 30, 1998, 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.
-9-
<PAGE> 11
The following table sets forth the composition of the Bank's
interest-bearing deposits and securities portfolio, including those designated
as available for sale, at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------------------------------
1998 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
demand deposits $ 534 2.34% $ 534 2.34% $ 165 1.98% $ 165 1.98%
Interest-bearing
deposits in other
financial institutions 2,037 8.94 2,037 8.94 39 0.47 39 0.47
Overnight deposits 1,000 4.39 1,000 4.39 1,250 15.02 1,250 15.02
Federal funds 4,800 21.07 4,800 21.07 1,500 18.02 1,500 18.02
------- ------ ------- ------ ------- ------ ------- ------
Total interest-bearing
deposits 8,371 36.74 8,371 36.74 2,954 35.49 2,954 35.49
Securities for sale:
U.S. Treasury
securities 5,519 24.22 5,519 24.22 5,004 60.11 5,004 60.11
U.S. Government
agency securities 8,500 37.31 8,500 37.31 - - - -
FHLB stock 393 1.73 393 1.73 366 4.40 366 4.40
------- ------ ------- ------ ------- ------ ------- ------
Total 14,412 63.26 10,160 63.26 5,370 64.51 5,370 64.51
------- ------ ------- ------ ------- ------ ------- ------
securities
Total $22,783 100.00% $22,783 100.00% $ 8,324 100.00% $ 8,324 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
The maturities of the Bank's interest-bearing deposits and securities
at June 30, 1998, excluding FHLB stock, are indicated in the following table:
<TABLE>
<CAPTION>
At June 30, 1998
-----------------------------------------------------------------------------------------------
After one through
One year or less five years After five years Total
----------------- ---------------------- --------------- ----------------------------------
Carrying Average Carrying Average Carrying Average Carrying Fair Weighted
value yield value yield value yield value value average yield
----- ----- ----- ----- ----- ----- ----- ----- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Interest-bearing demand deposits $ 534 4.26% $ - -% $- -% $ 534 $ 534 4.26%
Interest-bearing deposits
in other financial institutions 2,037 5.64 - - - - 2,037 2,037 5.64
Overnight deposits 1,000 5.90 - - - - 1,000 1,000 5.90
Federal funds 4,800 6.44 - - - - 4,800 4,800 6.44
------- ---- ------- ---- --- --- ------- ------- ----
Total interest-bearing deposits 8,371 6.04 - - - - 8,371 8,371 6.04
Securities available for sale:
U.S. Treasury securities 5,268 5.78 251 6.27 - - 5,519 5,519 5.80
U.S. Government agency
securities 4,499 5.56 4,001 5.91 - - 8,500 8,500 5.72
------- ---- ------- ---- --- --- ------- ------- ----
Total securities 9,767 5.68 4,252 5.93 - - 14,019 14,019 5.75
------- ---- ------- ---- --- --- ------- ------- ----
Total interest-bearing
deposits and securities $18,138 5.85% $ 4,252 5.93% $- -% $22,390 $22,390 5.86%
======= ==== ======= ==== === === ======= ======= ====
</TABLE>
-10-
<PAGE> 12
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of the
Bank's funds for use in lending and other investment activities. In addition to
deposits, the Bank derives funds from interest payments and principal repayments
on loans and income on earning assets. Loan payments are a relatively stable
source of funds, while deposit inflows and outflows fluctuate 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, and 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 June 30,
---------------------------------------------------
1998 1997
---------------------- ---------------------
Percent Percent
of total of total
Amount deposits Amount deposits
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
Non-interest bearing demand
deposit accounts $ 3,141 6.47% $ 1,069 2.17%
NOW accounts(1) 3,892 8.02 5,800 11.78
Savings accounts(2) 11,034 22.73 11,295 22.94
Money market accounts(3) 4,361 8.99 1,850 3.76
------- ------- -------- ------
Total transaction accounts 22,428 46.21 20,014 40.65
Certificates of deposit:
4.00% or less 37 0.07 63 0.13
4.01% - 6.00% 20,045 41.30 22,866 46.44
6.01% - 8.00% 5,728 11.80 5,992 12.17
Over 8.01% 300 0.62 300 0.61
------- ------- -------- ------
Total certificates of
deposit(4) 26,110 53.79 29,221 59.35
------- ------- -------- ------
Total deposits $48,538 100.00% $49,235 100.00%
======= ====== ======= ======
<FN>
- -----------------------------
(1) The weighted average rate on NOW accounts was 2.04% and 2.02% at June 30, 1998 and
1997, respectively.
(2) The weighted average rate on savings accounts was 2.50% and 2.50% at June 30, 1998
and 1997, respectively.
(3) The weighted average rate on money market accounts was 4.91% and 2.63% at June 30,
1998 and 1997, respectively.
(4) The weighted average rate on all certificates of deposit was 5.93% and 5.90% at June
30, 1998 and 1997, respectively.
</TABLE>
-11-
<PAGE> 13
The following table shows rate and maturity information for the Bank's
certificates of deposit at June 30, 1998:
<TABLE>
<CAPTION>
At June 30, 1998
------------------------------------------------------
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 $ 37 $ - $ - $ 37
4.01% to 6.00% 13,143 5,031 1,871 20,045
6.01% to 8.00% 2,296 3,014 418 5,728
Over 8.00% - 300 - 300
------- ------ ------ -------
Total certificates of deposit $15,476 $8,345 $2,289 $26,110
======= ====== ====== =======
</TABLE>
At June 30, 1998, approximately $15.5 million of the Bank's
certificates of deposit were scheduled to 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 $7.8 million are available from the FHLB of
Cincinnati.
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 June 30,
1998:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $ 106
Over 3 months to 6 months -
Over 6 months to 12 months 451
Over 12 months 1,100
-------
Total $1,657
=======
</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,
--------------------------
1998 1997
------- ------
(Dollars in thousands)
<S> <C> <C>
Beginning balance $ 49,235 $ 44,884
Deposits(1) 183,429 119,082
Withdrawals(1) (185,375) (116,055)
--------- ---------
Net deposits before interest 47,289
credited 47,911
Interest credited 1,249 1,324
--------- ---------
Ending balance $ 48,538 $ 49,235
========= =========
Net increase (decrease) $ (697) $ 4,351
========= =========
Percent increase (decrease) (1.42)% 9.69%
===== ====
<FN>
- ----------
(1) In 1998 includes stock subscription activity which was included in savings
accounts in conjunction with the Bank's mutual to stock conversion.
</TABLE>
-12-
<PAGE> 14
BORROWINGS. The FHLB system functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. 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. If an
association meets the QTL test, the association will be eligible for 100% of the
advances it would otherwise be eligible to receive. If an association does not
meet the QTL test, the association will be eligible for such advances only to
the extent it holds specified QTL test assets. At June 30, 1998, the Bank was in
compliance with the QTL test and had $1.0 million outstanding in 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.
EMPLOYEES
At June 30, 1998, the Bank had 20 full-time equivalent employees and 2
part-time employees.
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.
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 examined its computer
hardware and software and determined that it will cost approximately $15,000 to
make such systems Year 2000 compliant. 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.
If, by December 31, 1998, any of the Bank's suppliers or servicers is unable to
certify Year 2000 compliance with respect to any systems the failure of which
would have a material adverse effect on the Bank's operations, financial
condition or results, the Bank would then have sufficient time to identify and
contract with suppliers and servicers who are able to certify Year 2000
compliance. The Bank has also identified two companies whose services are deemed
critical to the mission of the Bank and received assurances that such companies
will be Year 2000 compliant. As a contingency plan, however, the Bank has
determined that if such service providers were to have their systems fail, the
Bank would implement manual systems until such systems could be re-established.
The Bank does not anticipate that such short-term manual systems would have a
material adverse effect on the Bank's operations. The expense of any change in
suppliers or servicers is not expected to be material to the Bank. At this time,
however, the expense that may be incurred by the Bank in connection with Year
2000 issues cannot be determined.
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
-13-
<PAGE> 15
employer or industry, the Bank does not expect any significant or prolonged Year
2000 related difficulties that will affect net earnings or cash flow.
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
Division. 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 Division 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 Company is a savings and loan holding company within the meaning of
the Home Owners Loan Act, as amended (the "HOLA"). Consequently, the Company is
subject to regulation, examination, and oversight by the OTS and is required to
submit periodic reports to the OTS. Because the 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 Company might become subject to different holding
company regulations, including separate capital requirements. At this time, the
Company cannot predict when or whether Congress may actually pass legislation
regarding the Company's and the Bank's regulatory requirements or charter.
Although such legislation may change the activities in which either the Company
and the Bank may engage, it is not anticipated that the current activities of
the Company or the Bank will be materially affected by those activity limits.
OHIO SAVINGS AND LOAN LAW
The Division 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 Division also has approval authority over any mergers involving or
acquisitions of control of Ohio savings and loan associations. The Division may
initiate certain supervisory measures or formal enforcement actions against Ohio
associations. Ultimately, if the grounds provided by law exist, the Division may
place an Ohio association in conservatorship or receivership.
The Division conducts regular examinations of the Bank approximately
once every eighteen months. Such examinations are usually conducted jointly with
one or both federal regulators. The Division 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
-14-
<PAGE> 16
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. 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. Pursuant to that requirement a savings association has 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 is required to deduct one-half of such excess exposure from
its total capital when determining its risk-based capital. 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. 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.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings and
loan associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. The OTS has defined
these capital levels as follows: (i) well-capitalized associations must have
total risk-based capital of at least 10%, core risk-based capital (consisting
only of items that qualify for inclusion in core capital) of at least 6% and
core capital of at least 5%; (ii) adequately capitalized associations are those
that meet the regulatory minimum of total risk-based capital of 8%, core
risk-based capital 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 June 30, 1998, met 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
-15-
<PAGE> 17
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 June 30, 1998, was
32.12%, which exceeded the then applicable 4% liquidity requirement.
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 June 30, 1998, 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 $3.1
million to one borrower at June 30, 1998. The largest amount the Bank had
outstanding to any group of affiliated borrowers at June 30, 1998, was $798,714,
which consisted of eight loans, secured by a commercial property, equipment and
the borrowers' residences. At June 30, 1998, such loans were performing in
accordance with their terms.
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 June 30, 1998.
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
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
-16-
<PAGE> 18
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 June 30, 1998.
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 into one of three tiers. The first rating category is Tier 1,
consisting of associations that, before and after the proposed capital
distribution, meet their fully phased-in capital requirement. Associations in
this category may make capital distributions during any calendar year equal to
the greater of (i) 100% of its net income, current year-to-date, plus 50% of the
amount by which the lesser of the 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 (ii) the amount
authorized for a Tier 2 association. The second category, Tier 2, consists of
associations that, before and after the proposed capital distribution, meet
their current minimum, but not fully phased-in, capital requirement.
Associations in this category may make capital distributions up to 75% of their
net income over the most recent four quarters. Tier 3 associations do not meet
their current minimum capital requirement and must obtain OTS approval of any
capital distribution. A Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be treated as a Tier 2 or a Tier 3
association.
The Bank will also be prohibited from declaring or paying any dividends
or from repurchasing any of its stock if, as a result, the net worth of the Bank
would be reduced below the amount required to be maintained for the liquidation
account established in connection with the Conversion. In addition, as a
subsidiary of the 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 was 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.
An association which is not owned by a holding company and which has an
examination rating of 1 or 2 can make a capital distribution without notice to
the OTS, if it remains adequately capitalized, as described above, after the
distribution is made. 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. The Company is a savings and loan holding
company within the meaning of the HOLA. As such, the Company is registered with
the OTS and 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 Company is 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 Company and its affiliates may be imposed on the
savings and loan association. Notwithstanding the
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<PAGE> 19
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 June 30, 1998, the Bank met the QTL. See "Qualified Thrift Lender
Test."
Congress is considering legislation which may limit the Company's
ability to engage in these activities and the Company cannot predict if and in
what form these proposals might become law. However, such limits would not
impact the Company's initial activity of holding the stock of the Bank.
If the Company were to acquire control of another savings institution,
other than through a merger or other business combination with the Bank, the
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 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 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.
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 $.23 per $100 in deposits.
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
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<PAGE> 20
level required by law. Certain banks holding SAIF deposits were 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 are $.013 per $100 in deposits, and SAIF assessments for healthy
institutions are $.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 was tax-deductible but
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 June 30, 1998, 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
"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 $393,000 at June 30, 1998.
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 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 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 million 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 $7.5 million. In determining if a
corporation meets this requirement, the first year that it achieved small
corporation status is not taken into consideration.
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<PAGE> 21
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.
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 began 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
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-
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<PAGE> 22
1988 reserves. As of June 30, 1998, the Bank's pre-1988 reserves for tax
purposes totaled approximately $1,548,000. The Bank believes it had
approximately $9.1 million of accumulated earnings and profits for tax purposes
as of June 30, 1998, 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 1995. 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 Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 and
(ii) 0.4% 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 Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Certain holding companies, such as the Company, will qualify for
complete exemption from the net worth tax if certain conditions are met. The
Company will most likely meet these conditions, and thus, calculate its Ohio
franchise tax on the net income basis.
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 1.4% 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 1999 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.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at June 30, 1998,
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 $251,244 $39,765
Coshocton, Ohio 43812-1580
590 Walnut Street Owned 1985 $220,555 $ 8,773
Coshocton, Ohio 43812-1632
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company and the Bank are 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.
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<PAGE> 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The information contained in the Home Loan Financial Corporation
Annual Report to Shareholders for the fiscal year ended June 30, 1998 (the
"Annual Report") under the caption "Market Price of Company Common Shares and
Related Shareholder Matters" is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in the Annual Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements appearing in the Annual
Report and the report of Crowe, Chizek and Company LLP dated July 24, 1998, are
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information contained in the definitive Proxy Statement for
the 1998 Annual Meeting of Shareholders of the Company (the "Proxy Statement"),
under the caption "Board of Directors" is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors" is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption
"Voting Securities and Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
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<PAGE> 24
ITEM 13. EXHIBITS AND REPORTS ON FROM 8-K
(A) EXHIBITS
3 Articles of Incorporation and Code of Regulations
13 1998 Annual Report to Shareholders (the following parts of
which are incorporated herein by reference; "Market Price
of FFD's Common Shares and Related Shareholders' Matters,"
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Consolidated
Financial Statements).
10 Employment Contract for Robert C. Hamilton
20 Proxy Statement for 1998 Annual Meeting of Shareholders
21 Subsidiaries of Home Loan Financial Corporation
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by the Company during the
quarter ended June 30, 1998.
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<PAGE> 25
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
HOME LOAN FINANCIAL CORPORATION
By: /s/ Robert C. Hamilton
---------------------------------
Robert C. Hamilton, President
(Principal Executive Officer)
Date: September 8, 1998
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Robert C. Hamilton /s/ Preston W. Bair
- -------------------------- -----------------------------
Robert C. Hamilton, Preston W. Bair,
President and Director Treasurer
(Principal Financial Officer)
Date: September 8, 1998 Date: September 8, 1998
/s/ Neal J. Caldwell /s/ Charles H. Durmis
- -------------------------- -----------------------------
Neal J. Caldwell Charles H. Durmis
Director Director
Date: September 8, 1998 Date: September 8, 1998
/s/ Robert D. Mauch /s/ Douglas L. Randles
- -------------------------- -----------------------------
Robert D. Mauch Douglas L. Randles
Director Director
Date: September 8, 1998 Date: September 8, 1998
-24-
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
<S> <C> <C>
3.1 Articles of Incorporation of Home Loan Incorporated by reference to the Registration Statement on
Financial Corporation Form S-1 filed by the Company on December 16, 1997 (the
"S-1") with the Securities and Exchange Commission (the
"SEC"), Exhibit 3.1.
3.2 Certificate of Amendment to Articles of Incorporated by reference to Pre-Effective Amendment No. 1 to
Incorporation of Home Loan Financial the S-1 filed with the SEC on February 3, 1998
Corporation ("Pre-Effective Amendment No. 1"), Exhibit 3.2.
3.4 Code of Regulations of Home Loan Financial Incorporated by reference to the S-1, Exhibit 3.3.
Corporation
10 Employment Contract for Robert C. Hamilton
13 Home Loan Financial Corporation 1998
Annual Report to Shareholders
20 Proxy Statement for 1998 Annual Meeting of
Shareholders
21 Subsidiaries of Home Loan Financial
Corporation
27 Financial Data Schedule
</TABLE>
-25-
<PAGE> 1
Exhibit 10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this
"AGREEMENT"), is entered into this 1st day of January, 1998, by and between The
Home Loan Savings Bank, a savings and loan association incorporated under Ohio
law (hereinafter referred to as the "BANK"), and Robert C. Hamilton, an
individual (hereinafter referred to as the "EMPLOYEE");
WITNESSETH:
WHEREAS, the EMPLOYEE is currently employed as the President of the
BANK;
WHEREAS, as a result of the skill, knowledge and experience of the
EMPLOYEE, the Board of Directors of the BANK desires to retain the services of
the EMPLOYEE as the President of the BANK;
WHEREAS, the EMPLOYEE desires to continue to serve as the President of
the BANK; and
WHEREAS, the EMPLOYEE and the BANK desire to enter into this AGREEMENT
to set forth the terms and conditions of the employment relationship between the
BANK and the EMPLOYEE;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the BANK and the EMPLOYEE hereby agree as follows:
1. EMPLOYMENT AND TERM.
(a) TERM. Upon the terms and subject to the conditions of this
AGREEMENT, the BANK hereby employs the EMPLOYEE, and the EMPLOYEE hereby accepts
employment, as the President of the BANK. The term of this AGREEMENT shall
commence on the date hereof and shall end on December 31, 2000, unless extended
by the BANK, with the consent of the EMPLOYEE, as provided in subsection (b) of
this Section 1 (hereinafter referred to, together with such extensions, as the
"TERM").
(b) EXTENSION. On or before each anniversary of the date of
this AGREEMENT, the Board of Directors of the BANK shall review this AGREEMENT,
document its justification and approval of this AGREEMENT in the board minutes,
and the TERM shall be extended for a one-year period beyond the then effective
expiration date, provided the Board of Directors determines that this AGREEMENT
should be extended. Any such extension shall be subject to the written consent
of the EMPLOYEE.
<PAGE> 2
2. DUTIES OF THE EMPLOYEE.
(a) GENERAL DUTIES AND RESPONSIBILITIES. The EMPLOYEE shall
serve as the President of the BANK. Subject to the direction of the Board of
Directors of the BANK, the EMPLOYEE shall have responsibility for the general
management of the business and affairs of the BANK and shall perform all duties
and shall have all powers which are commonly incident to the office of President
or which, consistent therewith, are delegated to him by the Board of Directors.
Such duties shall include, but not be limited to, (i) managing the day to day
operations of the BANK, (ii) managing the efforts of the BANK to comply with
applicable laws and regulations, (iii) marketing the BANK and its services, (iv)
supervising other employees of the BANK, (v) providing reports to the Board of
Directors of the BANK regarding the affairs and conditions of the BANK, and (vi)
making recommendations to the Board of Directors of the BANK concerning the
strategies, capital structure, tactics and general operations of the BANK.
(b) DEVOTION OF ENTIRE TIME TO THE BUSINESS OF THE BANK. The
EMPLOYEE shall devote his entire productive time, ability and attention during
normal business hours throughout the TERM to the faithful performance of his
duties under this AGREEMENT. The EMPLOYEE shall not directly or indirectly
render any services of a business, commercial or professional nature to any
person or organization other than the BANK, Home Loan Financial Corporation
(hereinafter referred to as the "HOLDING COMPANY"), the sole shareholder of the
BANK, or any subsidiary of the BANK or the HOLDING COMPANY without the prior
written consent of the Board of Directors of the BANK; provided, however, that
the EMPLOYEE shall not be precluded from (i) vacations and other leave time in
accordance with Section 3(d) below, (ii) reasonable participation in community,
civic, charitable or similar organizations, (iii) reasonable participation in
industry-related activities, including, but not limited to, attending state and
national trade association meetings and serving as an officer, director or
trustee of a state or national trade association or Federal Home Loan Bank, (iv)
serving as an officer or director of the HOLDING COMPANY or any subsidiary of
the BANK or the HOLDING COMPANY and receiving a salary, director's fees or other
compensation or benefits, as appropriate, or (v) pursuing personal investments
which do not interfere or conflict with the performance of the EMPLOYEE's duties
to the BANK.
3. COMPENSATION.
(a) SALARY. The EMPLOYEE shall receive during the TERM an
annual salary payable in equal installments not less often than monthly. The
amount of such annual salary shall be $165,000 until changed by the Board of
Directors of the BANK in accordance with Section 3(b) below.
(b) ANNUAL SALARY REVIEW. On or before each anniversary of the
date of this AGREEMENT, the annual salary of the EMPLOYEE shall be reviewed by
the Board of Directors of the BANK and shall be set at an amount not less than
$165,000, based upon the EMPLOYEE's individual performance and the overall
profitability and financial condition of the BANK (hereinafter referred to as
the "ANNUAL REVIEW"). The results of the ANNUAL REVIEW shall be reflected in the
minutes of the Board of Directors of the BANK.
2
<PAGE> 3
(c) EMPLOYEE BENEFIT PROGRAMS. During the TERM, the EMPLOYEE
shall be entitled to participate in all formally established employee benefit,
bonus, pension and profit sharing plans and similar programs that are maintained
by the BANK or the HOLDING COMPANY from time to time and all employee benefit
plans or programs hereafter adopted in writing by the Board of Directors of the
BANK or the HOLDING COMPANY for which senior management personnel of the BANK
are eligible, including any employee stock ownership plan, stock option plan or
other stock benefit plan (hereinafter collectively referred to as "BENEFIT
PLANS") in accordance with the terms and conditions of such BENEFIT PLANS,
including, but not limited to, satisfaction of any participation or vesting
requirements. Notwithstanding any statement to the contrary contained elsewhere
in this AGREEMENT, the BANK may at any time discontinue or terminate any BENEFIT
PLAN now existing or hereafter adopted, to the extent permitted by the terms of
such BENEFIT PLAN, and shall not be required to compensate the EMPLOYEE for such
discontinuance or termination.
(d) VACATION AND SICK LEAVE. The EMPLOYEE shall be entitled,
without loss of pay, to be absent voluntarily from the performance of his duties
under this AGREEMENT, in accordance with the policies periodically established
by the Board of Directors of the BANK for senior management officials of the
BANK. The EMPLOYEE shall be entitled to annual sick leave as established by the
Board of Directors of the BANK for senior management officials of the BANK.
(e) EXPENSES. In addition to any compensation received under
Section 3(d), the BANK shall pay or reimburse the EMPLOYEE for all reasonable
travel, entertainment and miscellaneous expenses incurred in connection with the
performance of his duties under this AGREEMENT, including participation in
industry-related activities.
4. TERMINATION OF EMPLOYMENT.
(a) GENERAL. In addition to the termination of the employment
of the EMPLOYEE upon the expiration of the TERM, the employment of the EMPLOYEE
shall terminate at any other time during the TERM (i) at the option of the BANK
upon the delivery by the BANK of written notice of termination to the EMPLOYEE,
or (ii) at the option of the EMPLOYEE upon delivery by the EMPLOYEE of written
notice of termination to the BANK if, in connection with a CHANGE IN CONTROL
(hereinafter defined), the present capacity or circumstances in which the
EMPLOYEE is employed are materially adversely changed (including, but not
limited to, a material reduction in responsibilities or authority or the
assignment of duties or responsibilities substantially inconsistent with those
normally associated with the EMPLOYEE's position described in Section 2(a) of
this AGREEMENT, change of title or removal as a director of the BANK or the
HOLDING COMPANY or the requirement that the EMPLOYEE regularly perform his
principal executive functions more than thirty-five (35) miles from his primary
office as of the date of the commencement of the TERM of this AGREEMENT) or the
EMPLOYEE's compensation or other benefits provided under this AGREEMENT are
reduced, unless the benefit reductions are part of a Company-wide reduction. For
purposes of this AGREEMENT, an event shall be deemed to have occurred "in
connection with a CHANGE
3
<PAGE> 4
OF CONTROL" if such event occurs within one year before or after a CHANGE OF
CONTROL. The following subsections (A), (B) and (C) of this Section 4(a) shall
govern the obligations of the BANK to the EMPLOYEE upon the occurrence of the
events described in such subparagraphs:
(A) TERMINATION FOR JUST CAUSE. In the event that the BANK
terminates the employment of the EMPLOYEE during the TERM because of the
EMPLOYEE's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure or refusal to
perform the duties and responsibilities assigned in this AGREEMENT, willful
violation of any law, rule, regulation or final cease-and-desist order (other
than traffic violations or other minor offenses), conviction of a felony or for
fraud or embezzlement, or material breach of any provision of this AGREEMENT
(hereinafter collectively referred to as "JUST CAUSE"), the EMPLOYEE shall not
receive, and shall have no right to receive, any compensation or other benefits
for any period after such termination.
(B) TERMINATION IN CONNECTION WITH CHANGE OF CONTROL. In the
event that the employment of the EMPLOYEE is terminated by the BANK in
connection with a CHANGE OF CONTROL for any reason other than JUST CAUSE or is
terminated by the EMPLOYEE as provided in Section 4(a)(ii) above, then the
following shall occur:
(I) The BANK shall promptly pay to the EMPLOYEE or to
his beneficiaries, dependents or estate an amount equal to the product of 2.99
multiplied by the EMPLOYEE's "base amount" as defined in Section 280G(b)(3) of
the Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder (hereinafter collectively referred to as "SECTION 280G");
(II) The EMPLOYEE, his dependents, beneficiaries and
estate shall continue to be covered at the BANK's expense under all health,
life, disability and other benefit plans of the BANK in which the EMPLOYEE was a
participant prior to the effective date of the termination of his employment as
if the EMPLOYEE were still employed under this AGREEMENT until the earlier of
the expiration of the TERM or the date on which the EMPLOYEE is included in
another employer's benefit plans as a full-time employee; and
(III) The EMPLOYEE shall not be required to mitigate
the amount of any payment provided for in this AGREEMENT by seeking other
employment or otherwise, nor shall any amounts received from other employment or
otherwise by the EMPLOYEE offset in any manner the obligations of the BANK
hereunder, except as specifically stated in subparagraph (II) above.
(C) TERMINATION NOT IN CONNECTION WITH CHANGE OF CONTROL. In
the event that the employment of the EMPLOYEE is terminated before the
expiration of the TERM not for JUST CAUSE and not in connection with a CHANGE OF
CONTROL, then the following shall occur:
(I) The BANK shall be obligated to continue to pay on
a monthly basis, until the expiration of the TERM, to the EMPLOYEE, his
designated beneficiaries or his
4
<PAGE> 5
estate, the annual salary in effect at the time of termination pursuant to
Section 3 above, plus a cash bonus equal to the cash bonus, if any, paid to the
EMPLOYEE in the twelve month period prior to the termination of employment;
(II) The BANK shall continue to provide to the
EMPLOYEE, at the BANK's expense, health, life, disability and other benefits
substantially equal to those being provided to the EMPLOYEE at the date of
termination of his employment until the earliest to occur of the expiration of
the TERM or the date on which the EMPLOYEE is included in another employer's
benefit plans as a full-time employee; and
(III) The EMPLOYEE shall not be required to mitigate
the amount of any payment provided for in this AGREEMENT by seeking other
employment or otherwise, nor shall any amounts received from other employment or
otherwise by the EMPLOYEE offset in any manner the obligations of the BANK
hereunder, except as specifically stated in subparagraph II above.
(b) DEATH OF THE EMPLOYEE. The TERM shall automatically expire
upon the death of the EMPLOYEE. In such event, the EMPLOYEE's estate shall be
entitled to receive the compensation due the EMPLOYEE through the last day of
the calendar month in which the death occurred, except as otherwise specified
herein.
(c) "GOLDEN PARACHUTE" PROVISION. In the event that any
payments pursuant to this Section 4 would result in the imposition of a penalty
tax pursuant to Section 280G, such payments shall be reduced to the maximum
amount which may be paid under SECTION 280G without exceeding such limits.
Payments pursuant to this Section 4. Any payments made to the EMPLOYEE pursuant
to this AGREEMENT are subject to and conditioned upon their compliance with 12
U.S.C. Section 1828(k) and any regulations promulgated thereunder.
(d) DEFINITION OF "CHANGE OF CONTROL". A "CHANGE OF CONTROL"
shall mean any one of the following events; (i) the acquisition of ownership or
power to vote more than 25% of the voting stock of the BANK or the HOLDING
COMPANY; (ii) the acquisition of the ability to control the election of a
majority of the directors of the BANK or the HOLDING COMPANY; (iii) during any
period of up to two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of the BANK or the HOLDING COMPANY
cease for any reason to constitute at least a majority thereof; provided,
however, that any individual whose election or nomination for election as a
member of the Board of Directors of the BANK or the HOLDING COMPANY was approved
by a vote of at least two-thirds of the directors then in office shall be
considered to have continued to be a member of the Board of Directors of the
BANK or the HOLDING COMPANY; or (iv) the acquisition by any person or entity of
"conclusive control" of the BANK within the meaning of 12 C.F.R. Section
574.4(a), or the acquisition by any person or entity of "rebuttable control"
within the meaning of 12 C.F.R. Section 574.4(b) that has not been rebutted in
accordance with 12 C.F.R. Section 574.4(c). For purposes of this paragraph, the
term "person" refers to an individual or corporation, partnership, trust,
association or other organization, but does not include the EMPLOYEE and any
person or
5
<PAGE> 6
persons with whom the EMPLOYEE is "acting in concert" within the meaning of 12
C.F.R. Part 574.
5. SPECIAL REGULATORY EVENTS. Notwithstanding the provisions of Section 4 of
this AGREEMENT, the obligations of the BANK to the EMPLOYEE shall be as follows
in the event of the following circumstances:
(a) If the EMPLOYEE is suspended and/or temporarily prohibited
from participating in the conduct of the BANK's affairs by a notice served under
section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (hereinafter
referred to as the "FDIA"), the BANK's obligations under this AGREEMENT shall be
suspended as of the date of service of such notice, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the BANK shall pay the
EMPLOYEE all or part of the compensation withheld while the obligations in this
AGREEMENT were suspended and reinstate, in whole or in part, any of the
obligations that were suspended;
(b) If the EMPLOYEE is removed and/or permanently prohibited
from participating in the conduct of the BANK's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the FDIA, all obligations of the BANK under this
AGREEMENT shall terminate as of the effective date of such order; provided,
however, that vested rights of the EMPLOYEE shall not be affected by such
termination;
(c) If the BANK is in default, as defined in section 3(x)(1)
of the FDIA, all obligations under this AGREEMENT shall terminate as of the date
of default; provided, however, that vested rights of the EMPLOYEE shall not be
affected;
(d) All obligations under this AGREEMENT shall be terminated,
except to the extent of a determination that the continuation of this AGREEMENT
is necessary for the continued operation of the BANK, (i) by the Director of the
Office of Thrift Supervision (hereinafter referred to as the "OTS"), or his or
her designee, at the time that the Federal Deposit Insurance Corporation enters
into an agreement to provide assistance to or on behalf of the BANK under the
authority contained in Section 13(c) of the FDIA or (ii) by the Director of the
OTS, or his or her designee, at any time the Director of the OTS approves a
supervisory merger to resolve problems related to the operation of the BANK or
when the BANK is determined by the Director of the OTS to be in an unsafe or
unsound condition; provided, however that no vested rights of the EMPLOYEE shall
not be affected by any such termination; and
(e) The provisions of this Section 5 are governed by the
requirements of 12 C.F.R. Section 563.39(b) and in the event that any statements
in this Section 5 are inconsistent with 12 C.F.R. Section 563.39(b), the
provisions of 12 C.F.R. Section 563.39(b) shall be controlling.
6. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this AGREEMENT shall
preclude the BANK or the HOLDING COMPANY from consolidating with, merging into,
or transferring all, or substantially all, of their assets to another
corporation that assumes all of their obligations and undertakings hereunder.
Upon such a consolidation, merger or transfer of assets, the term
6
<PAGE> 7
"BANK" as used herein, shall mean such other corporation or entity, and this
AGREEMENT shall continue in full force and effect.
7. CONFIDENTIAL INFORMATION. The EMPLOYEE acknowledges that during his
employment he will learn and have access to confidential information regarding
the BANK and its customers and businesses. The EMPLOYEE agrees and covenants not
to disclose or use for his own benefit, or the benefit of any other person or
entity, any confidential information, unless or until the BANK consents to such
disclosure or use or such information is otherwise legally in the public domain.
The EMPLOYEE shall not knowingly disclose or reveal to any unauthorized person
any confidential information relating to the BANK, its subsidiaries, or
affiliates, or to any of the businesses operated by them, and the EMPLOYEE
confirms that such information constitutes the exclusive property of the BANK.
The EMPLOYEE shall not otherwise knowingly act or conduct himself to the
material detriment of the BANK, its subsidiaries, or affiliates or in a manner
which is inimical or contrary to the interests of the BANK.
8. NON-ASSIGNABILITY. Neither this AGREEMENT nor any right or interest hereunder
shall be assignable by the EMPLOYEE, his beneficiaries or legal representatives
without the BANK's prior written consent; provided, however, that nothing in
this Section VIII shall preclude the EMPLOYEE from designating a beneficiary to
receive any benefits payable hereunder upon his death or the executors,
administrators or other legal representatives of the EMPLOYEE or his estate from
assigning any rights hereunder to the person or persons entitled thereto.
9. NO ATTACHMENT. Except as required by law, no right to receive payment under
this AGREEMENT shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge or hypothecation or to execution,
attachment, levy, or similar process of assignment by operation of law, and any
attempt, voluntary or involuntary, to effect any such action shall be null, void
and of no effect.
10. BINDING AGREEMENT. This AGREEMENT shall be binding upon, and inure to the
benefit of, the EMPLOYEE and the BANK and their respective permitted successors
and assigns.
11. AMENDMENT OF AGREEMENT. This AGREEMENT may not be modified or amended,
except by an instrument in writing signed by the parties hereto.
12. WAIVER. No term or condition of this AGREEMENT shall be deemed to have been
waived, nor shall there be an estoppel against the enforcement of any provision
of this AGREEMENT, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver,
unless specifically stated therein, and each waiver shall operate only as to the
specific term or condition waived and shall not constitute a waiver of such term
or condition for the future or as to any act other than the act specifically
waived.
13. SEVERABILITY. If, for any reason, any provision of this AGREEMENT is held
invalid, such invalidity shall not affect the other provisions of this AGREEMENT
not held so invalid, and each such other provision shall, to the full extent
consistent with applicable law, continue in full force
7
<PAGE> 8
and effect. If this AGREEMENT is held invalid or cannot be enforced, then any
prior AGREEMENT between the BANK (or any predecessor thereof) and the EMPLOYEE
shall be deemed reinstated to the full extent permitted by law, as if this
AGREEMENT had not been executed.
14. HEADINGS. The headings of the paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this AGREEMENT.
15. GOVERNING LAW. This AGREEMENT has been executed and delivered in the State
of Ohio and its validity, interpretation, performance, and enforcement shall be
governed by the laws of the State of Ohio, except to the extent that federal law
is governing.
16. EFFECT OF PRIOR AGREEMENTS. This AGREEMENT contains the entire understanding
between the parties hereto and supersedes any prior employment agreement between
the BANK or any predecessor of the BANK and the EMPLOYEE.
17. NOTICES. Any notice or other communication required or permitted pursuant to
this AGREEMENT shall be deemed delivered if such notice or communication is in
writing and is delivered personally or by facsimile transmission or is deposited
in the United States mail, postage prepaid, addressed as follows:
If to the BANK:
The Home Loan Savings Bank
401 Main Street
Coshocton, Ohio 43812-1580
If to the EMPLOYEE:
Mr. Robert C. Hamilton
217 S. Wall Street
West Lafayette, Ohio 43845
8
<PAGE> 9
IN WITNESS WHEREOF, the BANK has caused this AGREEMENT to be executed
by its duly authorized officer, and the EMPLOYEE has signed this AGREEMENT, each
as of the day and year first above written.
Attest: The Home Loan Savings Bank
By: /s/ Robert D. Mauch
- --------------------------------- -------------------------------
Robert D. Mauch
its Chairman of the Board
Attest:
/s/ Robert C. Hamilton
- --------------------------------- -------------------------------
Robert C. Hamilton
9
<PAGE> 1
Exhibit 13
HOME LOAN FINANCIAL CORPORATION
Coshocton, Ohio
ANNUAL REPORT
June 30, 1998
<PAGE> 2
HOME LOAN FINANCIAL CORPORATION
Coshocton, Ohio
ANNUAL REPORT
June 30, 1998
CONTENTS
LETTER TO SHAREHOLDERS................................................... 2
BUSINESS OF HOME LOAN FINANCIAL CORPORATION.............................. 3
MARKET PRICE OF THE CORPORATION'S COMMON SHARES AND
RELATED SHAREHOLDER MATTERS............................................ 3
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND
OTHER DATA............................................................. 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................... 7
REPORT OF INDEPENDENT AUDITORS .......................................... 20
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets ....................................... 21
Consolidated Statements of Income ................................. 22
Consolidated Statements of Shareholders' Equity ................... 23
Consolidated Statements of Cash Flows ............................. 24
Notes to Consolidated Financial Statements ........................ 25
SHAREHOLDER INFORMATION.................................................. 40
CORPORATE INFORMATION.................................................... 41
<PAGE> 3
Dear Shareholder:
On behalf of your directors, officers and employees, it is indeed a
pleasure to present our first annual report as a public company. On March
25, 1998, The Home Loan Savings Bank converted from a state-chartered
mutual savings and loan to a state-chartered stock savings and loan. In
connection with the conversion, Home Loan Financial Corporation was
incorporated to become the holding company for The Home Loan Savings Bank
and sold 2,248,250 shares at $10 per share in the conversion offering.
Although our 1998 fiscal year results reflect only one quarter of
operations as a stock company, it was a very good year for our Corporation.
Net income was $918,928 for fiscal 1998, an increase of approximately
$151,500 over fiscal 1997 (adjusting the 1997 results for the effects of
the one-time SAIF assessment). We ended the 1998 fiscal year with total
assets of $81.9 million compared to $60.4 million for fiscal year end 1997.
This increase is primarily a result of the conversion. We begin the 1999
fiscal year with an asset base that is 36% larger than July 1, 1997. Our
principal focus in 1999 will be to use our increased asset base to enhance
shareholder value and build for the future.
We recognize that the key to our success as a community bank is the
personal relationships that we maintain with our customers. Our customers
look to us to handle their transactions in a timely, confidential and
accurate fashion. Our success is driven by a dedicated staff of officers
and employees as well as our commitment to participate in and support
numerous community events.
On behalf of the Board of Directors, thank you for your support and your
investment in Home Loan Financial Corporation.
SINCERELY,
Robert C. Hamilton
Chairman of the Board and President
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<PAGE> 4
BUSINESS OF HOME LOAN FINANCIAL CORPORATION
Home Loan Financial Corporation ("Corporation"), a unitary thrift holding
company incorporated under the laws of the State of Ohio, owns all of the issued
and outstanding common shares of The Home Loan Savings Bank ("Bank"), a savings
and loan association incorporated under the laws of the State of Ohio. On March
25, 1998, the Corporation acquired all of the common shares issued by the Bank
upon its conversion from a mutual savings and loan association to a stock
savings and loan association ("Conversion"). The Corporation's activities have
been limited primarily to holding the common shares of the Bank.
Serving the Coshocton, Ohio area since 1882, the Bank conducts business from its
main office at 401 Main Street and a full-service branch office at 590 Walnut
Street. Both banking facilities are 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,
motor vehicle loans, unsecured loans and credit cards. 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. Funds for lending and other investment
activities are obtained primarily from savings deposits, which are insured up to
applicable limits by the Federal Deposit Insurance Corporation ("FDIC") in the
Savings Association Insurance Fund ("SAIF"), principal repayments on loans and
maturities of securities.
As a savings and loan holding company, the Corporation is subject to regulation,
examination and oversight by the Office of Thrift Supervision of the United
States Department of the Treasury ("OTS"). As a savings and loan association
incorporated under the laws of the State of Ohio, the Bank is subject to
regulation, examination and oversight by the OTS and the State of Ohio Division
of Financial Institutions. The Bank is also subject to general oversight by the
FDIC. Because the Corporation and the Bank are corporations organized under Ohio
law, they are also subject to the provisions of the Ohio Revised Code generally
applicable to corporations. The Bank is also a member of the Federal Home Loan
Bank of Cincinnati ("FHLB").
MARKET PRICE OF THE CORPORATION'S COMMON SHARES AND
RELATED SHAREHOLDER MATTERS
The Corporation had 2,248,250 common shares outstanding on August 21, 1998, held
of record by approximately 740 shareholders. Price information with respect to
the Corporation's common shares is quoted on The Nasdaq National Market. The
high and low trading prices for the common shares of the Corporation from March
25, 1998, the date of formation, to June 30, 1998, as quoted by The Nasdaq Stock
Market, Inc., and cash dividends paid by quarter are shown below.
QUARTER ENDED
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1998
------ ------
<S> <C> <C>
High $ 15.750 $ 16.750
Low 15.375 14.000
Cash Dividends -- --
</TABLE>
OTS regulations impose various restrictions 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 regulations, 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 into one of three tiers. The first rating category is Tier 1,
consisting of associations that, before and after the proposed capital
distribution, meet their
-3-
<PAGE> 5
fully phased-in capital requirement. Associations in this category may make
capital distributions during any calendar year equal to the greater of (i) 100%
of net income to date during the calendar year plus 50% of the amount by which
the lesser of the 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 (ii) 75% of its net income over the most
recent four quarter period. The second category, Tier 2, consists of
associations that, before and after the proposed capital distribution, meet
their current minimum, but not fully phased-in, capital requirement.
Associations in this category may make capital distributions up to 75% of their
net income over the most recent four quarters. Tier 3 associations do not meet
their current minimum capital requirement and must obtain OTS approval of any
capital distribution. A Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be treated as a Tier 2 or a Tier 3
association. The Bank currently meets all of its capital requirements and the
OTS has not determined that the Bank is an institution requiring more than
normal supervision.
The Bank is also 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 (the account established for the purpose of granting a limited priority
claim on the assets of the Bank in the event of complete liquidation to those
members of the Bank before the Conversion who maintain a savings account at the
Bank after the Conversion). As a subsidiary of the Corporation, the Bank will be
required to give the OTS 30 days notice before declaring any dividend. 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.
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the consolidated
financial condition, earnings and other data regarding the Corporation at the
dates and for the periods indicated. Because the conversion was completed on
March 25, 1998, information for the years prior to the 1998 fiscal year end is
for the Bank.
<TABLE>
<CAPTION>
Selected Financial Condition At June 30,
- ---------------------------- --------------------------------------------------------------------------
and Other Data: 1998 1997 1996 1995 1994
-------------- ------------ ------------- ----------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $ 81,915 $ 60,401 $ 55,366 $ 49,102 $ 48,255
Cash and cash equivalents 7,657 4,681 5,723 2,559 3,023
Interest-bearing time deposits 2,037 39 41 -- --
Securities available for sale 14,019 5,004 1,743 753 --
Securities held to maturity -- -- 2,252 5,498 8,243
FHLB stock 393 366 341 318 295
Loans, net (1) 56,824 49,300 44,294 39,156 35,782
Deposits 48,538 49,235 44,884 39,543 39,558
Federal Home Loan Bank
advances 1,000 -- -- -- --
Shareholders' equity (2) 31,565 10,370 9,768 9,005 8,268
Number of full-service offices 2 2 2 2 2
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------------------------------
Selected Operations Data: 1998 1997 1996 1995 1994
- ------------------------ ------------ ------------- ----------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME $ 5,372 $ 4,609 $ 4,259 $ 3,696 $ 3,353
Interest expense 2,108 1,931 1,703 1,331 1,135
------------ ------------- ------------ ------------ ------------
Net interest income 3,264 2,678 2,556 2,365 2,218
Provision for loan losses 120 6 -- 2 13
------------ ------------- ------------ ------------ ------------
NET INTEREST INCOME AFTER
provision for loan losses 3,144 2,672 2,556 2,363 2,205
</TABLE>
-4-
<PAGE> 6
<TABLE>
<S> <C> <C> <C> <C> <C>
Noninterest income 176 175 165 149 162
Noninterest expense 1,929 1,943 1,532 1,418 1,321
------------ ------------- ------------ ------------ ------------
Income before income taxes 1,391 904 1,189 1,094 1,046
Income tax expense 472 309 419 378 367
Cumulative effect of change in
accounting principle -- -- -- -- 58
------------ ------------- ------------ ------------ ------------
Net income $ 919 $ 595 $ 770 $ 716 $ 737
============ ============= ============ ============ ============
Earnings per share - basic and
diluted (3) $ .15
============
Dividends per share $ --
============
</TABLE>
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<PAGE> 7
<TABLE>
<CAPTION>
At or for the year ended June 30,
----------------------------------------------------------------------
Selected Financial Ratios and 1998 1997 1996 1995 1994
- ----------------------------- ------------ ------------- ----------- ------------ --------
Other Data:
----------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net
income to average total assets) 1.37% 1.04% 1.47% 1.47% 1.55%
Return on equity (ratio of net
income to average equity) (2) 5.40 5.94 8.20 8.32 9.33
Interest rate spread (4) 4.05 4.25 4.45 4.52 4.46
Net interest margin (5) 5.09 4.88 5.10 5.04 4.87
Noninterest expense to average
assets 2.89 3.39 2.93 2.91 2.78
Efficiency ratio 56.09 68.09 56.30 56.41 55.52
Net interest income to
noninterest expense 169.14 137.86 166.82 166.78 167.83
Average interest-earning assets
to average interest-bearing
liabilities 1.32x 1.18x 1.19x 1.18x 1.16x
Capital Ratios:
Average equity to average
assets (2) 25.51% 17.51% 17.95% 17.67% 16.64%
Shareholders' equity to total
assets at end of period (2) 38.53 17.17 17.64 18.34 17.13
Asset Quality Ratios and Other Data:
Nonperforming assets to average
assets (6) 0.37 0.06 0.17 0.03 0.06
Nonperforming assets to total
assets at end of period (6) 0.30 0.05 0.16 0.03 0.06
Nonperforming loans to gross
loans (7) 0.43 0.07 0.20 0.04 0.08
Allowance for loan losses to
gross loans (7) 0.39 0.24 0.26 0.30 0.34
Allowance for loan losses to
nonperforming loans 91.23 361.27 133.54 734.46 431.09
Net charge-offs to
average loans 0.03 0.01 -- 0.02 --
Amount of nonperforming loans $ 245,000 $ 33,000 $ 88,000 $ 16,000 $ 28,000
Amount of nonperforming assets 245,000 33,000 88,000 16,000 28,000
<FN>
- ----------
(1) Loans are shown net of loans in process, net deferred loan fees and costs and the allowance for loan losses.
(2) Consists solely of retained earnings, unrealized gain (loss) on securities available for sale and excess of
additional pension liability over unrecognized prior service cost before June 30, 1998.
(3) Earnings and dividends per share are not applicable for any of the periods presented before June 30, 1998.
Earnings per share for 1998 was computed based on net income of the Corporation since its stock issuance on
March 25, 1998.
(4) The interest rate spread represents the difference between the weighted average yield on interest-earning
assets and the weighted average cost of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of average interest-earning assets.
(6) Nonperforming assets consist of nonperforming loans and foreclosed assets. Nonperforming loans consist of all
accruing loans 90 days or more past due and all nonaccrual loans.
(7) Gross loans are stated at the unpaid principal balances.
</TABLE>
-6-
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following is management's analysis of the Corporation's financial condition
and results of operations as of and for the year ended June 30, 1998, compared
to prior years. This discussion is designed to provide a more comprehensive
review of the operating results and financial position than could be obtained
from an examination of the financial statements alone. This analysis should be
read in conjunction with the consolidated financial statements and related
footnotes and the selected financial data included elsewhere in this report.
The Conversion was consummated on March 25, 1998. A total of 2,248,250 common
shares of the Corporation were sold at $10.00 per share and net proceeds from
the sale were $21,880,273 after deducting the costs of conversion. The
Corporation retained 50% of the net proceeds from the sale of common shares. The
remainder of the net proceeds was invested in the capital stock issued by the
Bank to the Corporation in connection with the Conversion.
FORWARD LOOKING STATEMENTS
When used in this discussion or future filings by the Corporation with the
Securities and Exchange Commission, or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," "believe" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Corporation
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities and competitive and regulatory factors, could affect the
Corporation's financial performance and could cause the Corporation's actual
results for future periods to differ materially from those anticipated or
projected.
The Corporation is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on its liquidity,
capital resources or operations except as discussed herein. The Corporation is
not aware of any current recommendations by regulatory authorities that would
have such effect if implemented.
The Corporation does not undertake, and specifically disclaims, any obligation
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect occurrence of anticipated or unanticipated
events or circumstances after the date of such statements.
FINANCIAL CONDITION
Total assets at June 30, 1998 were $81.9 million compared to $60.4 million at
June 30, 1997, an increase of $21.5 million, or 35.6%. The increase in total
assets was primarily the result of cash received from the Conversion. A large
portion of the proceeds from the conversion were invested in U.S. Treasury and
U.S. Government agency securities with relatively short-term maturities. As a
result, securities available for sale increased from $5.0 million at June 30,
1997 to $14.0 million at June 30, 1998, an increase of $9.0 million.
Management's strategy emphasized investment in securities guaranteed by the U.S.
Government and its agencies to mitigate credit risk. The investment strategy
also included selecting securities maturing within the next five years with the
majority maturing within one year to provide a cash flow stream to fund future
loan demand, operations or for reinvestment at a later date. A portion of the
Conversion proceeds were invested in federal funds sold, which increased from
$1.5 million at June 30, 1997 to $4.8 million at June 30, 1998, and
interest-bearing time deposits, which increased by $2.0 million from June 30,
1997. The increase in these asset categories is also part of management's
strategy to have the liquidity to fund future loan demand and operations.
Loan growth, which totaled $7.5 million, consisted primarily of one- to
four-family residential real estate loans, which increased $4.4 million, home
equity loans, which increased $0.8 million, nonresidential real estate loans
which increased $1.1 million, and consumer and other loans, which increased $1.3
million. These increases reflect a stable local economy coupled with the
interest rate environment during the period. The largest change in the
-7-
<PAGE> 9
consumer loan portfolio between June 30, 1997 and June 30, 1998 was in
automobile and other loans which both increased by $0.5 million. Consumer and
other loans represented 18.5% and 19.0% of gross loans at June 30, 1998 and
1997.
Total deposits decreased $0.7 million from $49.2 million at June 30, 1997 to
$48.5 million at June 30, 1998. The Corporation experienced a decrease in
certificates of deposit of $3.1 million partially offset by a $2.7 million
increase in negotiable order of withdrawal ("NOW") accounts, money market
accounts and noninterest-bearing demand deposit accounts. The shift between
deposit categories resulted from the Corporation being more interest-rate
competitive for money market accounts and less interest-rate competitive for
certificates of deposit compared to the local market. In addition, customers
used funds from certificates of deposit to purchase shares of the Corporation.
Generating deposit growth was a lower priority for the Corporation with the
expected influx of funds from the Conversion. The certificates of deposit
portfolio as a percent of total deposits decreased from 59.3% at June 30, 1997
to 53.8% at June 30, 1998. Almost all certificates of deposit held by the Bank
mature in less than three years with the majority maturing in the next year.
Borrowed funds totaled $1.0 million at June 30, 1998 while no borrowings were
outstanding at June 30, 1997. The Bank borrowed $1.0 million under a ten year
advance from the FHLB to reduce the interest rate risk exposure of originating
fixed rate loans. The advance has a fixed rate for a minimum of five years
convertible to an adjustable rate after the fifth year at the option of the
FHLB. If the convertible option is exercised, the advance may be prepaid at any
time without penalty.
The Bank maintains a $5 million cash management arrangement with the FHLB as an
additional source of liquidity. Advances are variable rate and can be prepaid at
any time without penalty. No advances were outstanding at June 30, 1998 or June
30, 1997 under this line of credit. Additional advances may be obtained from the
FHLB to fund future loan growth and leverage excess capital as needed.
RESULTS OF OPERATIONS
The operating results of the Corporation are affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
regulatory policies of agencies that regulate financial institutions. The
Corporation's cost of funds is influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
influenced by the demand for real estate loans and other types of loans, which
in turn is affected by the interest rates at which such loans are made, general
economic conditions and the availability of funds for lending activities.
The Corporation's net income primarily depends upon its net interest income,
which is the difference between the interest income earned on interest-earning
assets, such as loans and securities, and interest expense incurred on
interest-bearing liabilities, such as deposits and borrowings. The level of net
interest income is dependent upon the interest rate environment and the volume
and composition of interest-earning assets and interest-bearing liabilities. Net
income is also affected by provisions for loan losses, service charges, gains on
the sale of assets, other income, noninterest expense and income taxes.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1998 AND JUNE
30, 1997
NET INCOME. The Corporation's net income for the year ended June 30, 1998 was
$919,000 compared to $595,000 for the year ended June 30, 1997 an increase of
$324,000, or 54.5%. The increase in net income was the result of an increase in
net interest income and a reduction in SAIF deposit insurance premiums partially
offset by increases in the provision for loan losses and salaries and employee
benefits.
NET INTEREST INCOME. Net interest income totaled $3,264,000 for the year ended
June 30, 1998 compared to $2,678,000 for the year ended June 30, 1997, an
increase of $586,000, or 21.9%. The change in net interest income is
attributable to an increase in the ratio of average interest-earning assets to
average interest-bearing liabilities partially offset by a decrease in the
interest rate spread.
Interest and fees on loans increased $582,000, or 14.0%, from $4,163,000 for the
year ended June 30, 1997 to $4,745,000 for the year ended June 30, 1998. The
increase in interest income was due to a combination of a higher average balance
of loans and an increase in the average yield earned on loans.
-8-
<PAGE> 10
Interest earned on securities totaled $390,000 for the year ended June 30, 1998
compared to $265,000 for the year ended June 30, 1997. The increase was a result
of higher average balances of securities partially offset by a decrease in the
average yield earned.
Dividends on FHLB stock increased slightly over the comparable periods due to an
increase in the number of shares of FHLB stock owned combined with an increase
in the dividend rate paid by the FHLB.
Interest on interest-bearing deposits and federal funds sold increased $52,000
for the year ended June 30, 1998 compared to the year ended June 30, 1997. This
increase was the result of higher average balances of interest-bearing deposits
and federal funds sold partially offset by a decrease in the average yield
earned.
Interest paid on deposits increased $161,000 for the year ended June 30, 1998
compared to the year ended June 30, 1997. The increase in interest expense was
due to an increase in the cost of funds combined with an increase in the average
balance of deposits.
Interest on FHLB advances totaled $16,000 for the year ended June 30, 1998. The
Corporation borrowed funds for the first time from the FHLB during fiscal 1998.
These borrowings were used as a source of short-term liquidity to provide
funding for loan demand before the consummation of the Conversion. The
Corporation also borrowed $1.0 million on a ten-year advance at the end of
fiscal 1998 to reduce the interest rate risk of originating fixed rate loans.
The annual interest expense related to this advance, assuming no principal
repayment, will be $57,000 during the first five years in which the interest
rate is fixed at 5.66%.
PROVISION FOR LOAN LOSSES. The Corporation maintains an allowance for loan
losses in an amount that, 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 Corporation's loan portfolio, the economy, 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 quarterly 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 year ended June 30, 1998 totaled $120,000
compared to $6,000 for the year ended June 30, 1997, an increase of $114,000.
Management increased the allowance for loan losses due to growth of the total
loan portfolio, an increase in nonresidential real estate and consumer loans and
management's decision to raise the nonspecific percentage allocation for
nonresidential real estate loans. Previously, the same percentage allocation was
used for nonspecific reserves on nonresidential and residential real estate
loans. The allowance for loan losses totaled $223,000, or 0.39% of gross loans,
at June 30, 1998, compared to $119,000, or 0.24% of gross loans, at June 30,
1997. The Corporation has not experienced significant charge-offs in any of the
periods presented. The Corporation's low charge-off history is the product of a
variety of factors, including the Corporation's underwriting guidelines, which
generally require a loan-to-value or projected completed value ratio of 80% for
purchase or construction of one- to four-family residential properties and 75%
for commercial real estate and land loans, established income information and
defined ratios of debt to income.
NONINTEREST INCOME. Noninterest income includes service fees and other
miscellaneous income. For the year ended June 30, 1998, noninterest income
totaled $177,000 compared to $175,000 for the year ended June 30, 1997.
NONINTEREST EXPENSE. Noninterest expense decreased $14,000, or 0.7%, for the
year ended June 30, 1998 compared to the year ended June 30, 1997. The decrease
in noninterest expense was due to a decrease in federal deposit insurance
premiums which was almost entirely offset by an increase in salaries and
employee benefits.
-9-
<PAGE> 11
Federal deposit insurance was $30,000 for the year ended June 30, 1998 compared
to $321,000 for the year ended June 30, 1997. Included in the year ended June
30, 1997 was a special deposit insurance assessment of $261,000 resulting from
legislation that was enacted into law on September 30, 1996 to recapitalize the
SAIF. The SAIF was below the level required by law because a significant portion
of the assessments paid into the SAIF by thrifts, like the Bank, were used to
pay the cost of prior thrift failures. The legislation called for a one-time
assessment of $.657 for each $100 in deposits held as of March 31, 1995. As a
result of the recapitalization of the SAIF, the disparity between Bank and
thrift insurance assessments was reduced. Thrifts had been paying assessments of
$.23 per $100 of deposits, which, for most thrifts, was reduced to $.064 per
$100 in deposits in January 1997 and will be reduced to $.024 per $100 in
deposits no later than January 2000.
Salaries and employee benefits expense increased $279,000, or 31.4%. The
increase is the result of normal annual merit increases, the addition of new
employees and the added expense of the Corporation's employee stock ownership
plan (ESOP), which totaled $188,000.
INCOME TAX EXPENSE. The volatility of income tax expense is primarily
attributable to the change in income before income taxes. The provision for
income taxes totaled $472,000 for the year ended June 30, 1998 compared to
$309,000 for the year ended June 30, 1997, an increase of $163,000, or 52.8%
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 a special deposit insurance
assessment, discussed previously, combined with an increase in salaries and
employee benefits expense, which were partially offset by an increase in net
interest income.
NET INTEREST INCOME. Net interest income increased $122,000, or 4.8%, from
$2,678,000 for the year ended June 30, 1997 compared to $2,556,000 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 $408,000, or 10.9%, from $3,755,000 for the
year ended June 30, 1996 to $4,163,000 for the year ended June 30, 1997. The
increase in interest income was due to a higher average loan balance partially
offset by a decrease in the average yield earned on loans. 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 a result
of a lower average balance of securities combined with 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 $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 $1,931,000 for the year ended June 30, 1997
compared to $1,703,000 for the year ended June 30, 1996, an increase of
$228,000, or 13.4%. 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
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 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
yield on certificates of deposits 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.
-10-
<PAGE> 12
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 and
361.3% of total nonperforming loans, at June 30, 1997 compared with $117,000, or
0.26% of gross loans and 133.5% of total nonperforming loans, at June 30, 1996.
The increase in the provision for loan losses was the result of a higher balance
of loans at June 30, 1997 compared to 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
$1,532,000 for the year ended June 30, 1996 to $1,943,000 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 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. This increase is due to the special
SAIF assessment discussed previously. The increase in other expense was
primarily due to increases in professional service fees, printing and office
supplies, and credit card and ATM-related expenses, 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.
-11-
<PAGE> 13
YIELDS EARNED AND RATES PAID
The following table sets forth certain information relating to the Corporation'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 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.
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ------------------------- -------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $ 53,212 $4,745 8.92% $47,225 $ 4,163 8.81% $ 42,016 $ 3,755 8.94%
Securities available for sale (2) 6,612 390 5.92 3,521 212 6.02 1,001 62 6.18
Securities held to maturity -- -- -- 845 53 6.29 4,193 270 6.44
Interest-bearing deposits and federal
funds sold 3,992 209 5.23 2,937 156 5.33 2,609 149 5.71
FHLB stock 378 27 7.22 352 25 7.03 328 23 6.99
--------- ------ ------- -------- -------- -------
Total interest-earning assets $ 64,194 5,371 8.37 $54,880 4,609 8.40 $ 50,147 4,259 8.49
========= ------ ======= -------- ======== -------
Interest-bearing liabilities:
Demand deposits $ 9,437 193 2.05 $ 8,275 154 1.85 $ 7,724 152 1.97
Savings accounts 11,174 297 2.66 11,840 295 2.49 11,892 294 2.47
Certificates of deposit 27,878 1,601 5.74 26,383 1,482 5.62 22,592 1,257 5.56
--------- ------ ------- -------- -------- -------
Total deposits 48,489 2,091 4.31 46,498 1,931 4.15 42,208 1,703 4.04
FHLB advances 290 16 5.63 -- -- -- -- -- --
--------- ------ ------- -------- -------- -------
Total interest-
bearing liabilities $ 48,779 2,107 4.32 $46,498 1,931 4.15 $ 42,208 1,703 4.04
========= ------ ======= -------- ======== -------
Net interest income; interest
rate spread (3) $3,264 4.05% $2,678 4.25% $ 2,556 4.45%
====== ==== ====== ==== ======= ====
Net earning assets $ 15,415 $ 8,382 $ 7,939
========= ======= ========
Net interest margin (4) 5.09% 4.88% 5.10%
==== ==== ====
Average interest-earning assets to
interest-bearing liabilities 1.32x 1.18x 1.19x
===== ===== =====
<FN>
- ------------------------
(1) Net of deferred loan fees and costs and loans in process and includes
nonperforming loans.
(2) Average balance includes unrealized gains and losses. Yield is based on
amortized cost.
(3) 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>
-12-
<PAGE> 14
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 Corporation's interest income and expense during the years
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (1) changes in
volume (multiplied by prior year rate), (2) changes in rate (multiplied by prior
year volume) and (3) total changes in rate and volume. The combined effects of
changes in both volume and rate, that are not separately identified, have been
allocated proportionately to the change due to volume and the change due to
rate:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------- -----------------------------
Increase Increase
(decrease) (decrease)
due to due to
--------------------- -----------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans $ 534 $ 48 $ 582 $ 460 $ (52) $ 408
Securities available for sale 181 (3) 178 152 (2) 150
Securities held to maturity (53) -- (53) (211) (6) (217)
Interest-bearing deposits and federal
funds sold 56 (3) 53 18 (11) 7
FHLB stock 1 1 2 2 -- 2
--------- -------- --------- ------- -------- -------
Total interest-earning assets $ 719 $ 43 762 $ 421 $ (71) 350
========= ======== --------- ======= ======== -------
Interest expense attributable to:
Demand deposits $ 22 $ 17 $ 39 $ 11 $ (9) $ 2
Savings accounts (17) 19 2 (1) 2 1
Certificates of deposit 86 33 119 213 12 225
Borrowed funds 16 -- 16 -- -- --
--------- -------- --------- ------- -------- -------
Total interest-bearing liabilities $ 107 $ 69 176 $ 223 $ 5 228
========= ======== --------- ======= ======== -------
Net interest income $ 586 $ 122
========= =======
</TABLE>
ASSET AND LIABILITY MANAGEMENT
The Bank, like other financial institutions, is subject to interest rate risk to
the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. 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
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 securities, management primarily purchases U.S. Treasury
obligations and U.S. Government agency and federally-sponsored corporation
obligations with maturities of five years of less. The Bank does not engage in
hedging activities.
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 may illustrate 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 a theoretical
-13-
<PAGE> 15
basis point (1 basis point equals 0.01%) change 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 an increase or a decrease in market rates.
At June 30, 1998, 2% of the present value of the Bank's assets was $1,673,000.
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 $238,000 at June 30, 1998, which was less than 2% of the present value of
the Bank's assets.
Presented below, as of June 30, 1998, is an analysis of the Bank's interest rate
risk as measured by changes in NPV for instantaneous and sustained parallel
shifts of 100 basis points in market interest rates. As illustrated in the
table, the Bank's NPV is more sensitive to a declining interest rate
environment. In either instance, however, the percent change is relatively
small, ranging from a low of 1.1% decline in NPV with a 200 basis point decline
in interest rates to a high of 1.6% increase in NPV with a 200 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 77.8% of the Bank's loans are
adjustable-rate loans or mature within one year, and approximately 78.1% 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 funds invested in overnight
deposits and federal funds sold, which constituted approximately 7.1% of total
assets and securities maturing within one year, which totaled 11.9% of total
assets at June 30, 1998. 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 changes, contributes 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.
<TABLE>
<CAPTION>
NPV as % of
Portfolio Value
Net Portfolio Value Of Assets
------------------------------------------------------- ----------------------------------
Change Basis Point
in Rates $ Amount $ Change % Change NPV Ratio Change
- -------- -------- -------- -------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400 $21,958 $(213) (1.0)% 26.80% 29 bp
300 22,345 174 0.8 27.03 52
200 22,523 352 1.6 27.07 56
100 22,469 298 1.3 26.90 39
Static 22,171 -- -- 26.51 --
(100) 22,005 (166) (0.7) 26.23 (28)
(200) 21,933 (238) (1.1) 26.03 (48)
(300) 22,030 (141) (0.6) 25.96 (55)
(400) 22,213 42 0.2 25.97 (54)
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and early withdrawal levels from
certificates of deposit would likely deviate significantly from those assumed in
making risk calculations.
-14-
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Corporation'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 years ended June 30, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
Year Ended June 30,
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Net income $ 919 $ 595 $ 770
Adjustments to reconcile net income to net
cash from operating activities 365 104 80
------------- ------------ ------------
Net cash from operating activities 1,284 699 850
Net cash from investing activities (18,692) (6,093) (3,026)
Net cash from financing activities 20,384 4,352 5,340
------------- ------------ ------------
Net change in cash and cash equivalents 2,976 (1,042) 3,164
Cash and cash equivalents at beginning of period 4,681 5,723 2,559
------------- ------------ ------------
Cash and cash equivalents at end of period $ 7,657 $ 4,681 $ 5,723
============= ============ ============
</TABLE>
The Corporation's principal sources of funds are deposits, loan repayments,
maturities of securities and other funds provided by operations. The Corporation
also has the ability to borrow from the FHLB. While scheduled loan repayments
and maturing securities are relatively predictable, deposit flows and early loan
prepayments are more influenced by interest rates, general economic conditions
and competition. The Corporation 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
asset/liability management program.
OTS regulations presently require the Bank to maintain an average daily balance
of investments in U.S. Treasury, federal agency obligations and other
investments 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, which may be changed from time to time by
the OTS to reflect changing economic conditions, is intended to provide a source
of relatively liquid funds on which the Bank may rely, if necessary, to fund
deposit withdrawals or other short-term funding needs. At June 30, 1998, the
Bank's regulatory liquidity was 32.12% At such date, the Corporation had
commitments to originate fixed-rate commercial and residential real estate loans
totaling $134,000, and variable-rate commercial and residential real estate
mortgage loans totaling $1,007,000. Loan commitments are generally for 30 days.
The Corporation considers its liquidity and capital reserves sufficient to meet
its outstanding short- and long-term needs. See Note 14 of the Notes to
Consolidated Financial Statements.
The Bank is required by regulations to meet certain minimum capital
requirements, which must be generally as stringent as the requirements
established for commercial 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 8.0% of risk-weighted assets (assets are weighted at
percentage levels ranging from 0% to 100% depending on their relative risk). The
following table indicates that the requirement for core capital is 4.0% because
that is the level that the OTS prompt corrective action regulations require to
be considered adequately capitalized.
The following table summarizes the Bank's regulatory capital requirements and
actual capital at June 30, 1998.
<TABLE>
<CAPTION>
Excess of Actual
Capital Over Current
Actual Capital Current Requirement Requirement
------------------- ------------------- ------------------ Applicable
Amount Percent Amount Percent Amount Percent Asset Total
------ ------- ------ ------- ------ ------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible Capital $ 20,526 25.1% $ 1,229 1.5% $ 19,297 23.6% $ 81,940
Core Capital 20,526 25.1 3,278 4.0 17,248 21.1 81,940
Total Risk-based
Capital 20,749 51.3 3,238 8.0 17,511 43.3 40,472
</TABLE>
At June 30, 1998, the Bank had no material commitments for capital expenditures.
-15-
<PAGE> 17
IMPACT OF NEW ACCOUNTING STANDARDS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("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 (a) classify items of other
comprehensive income by their nature in a financial statement and (b) 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 will be effective in fiscal 1999 and is not
expected to have a significant impact on the Corporation's financial statements.
SFAS NO. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION" - SFAS No. 131 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. SFAS No. 131 also requires selected information to be reported in
interim financial statements. SFAS No. 131 will be effective in fiscal 1999 and
is not expected to have a significant impact on the Corporation's financial
statements.
SFAS NO. 132, "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS" - SFAS No. 132 amends the disclosure requirements of previous pension
and other postretirement benefit accounting standards by requiring additional
disclosures about such plans as well as eliminating some disclosures no longer
considered useful. SFAS No. 132 also allows greater aggregation of disclosures
for employers with multiple defined benefit plans. Non-public companies are
subject to reduced disclosure requirements, although such entities may elect to
follow the full disclosure requirements of SFAS No. 132. SFAS No. 132 will be
effective in fiscal 1999 and is not expected to have a significant impact on the
Corporation's financial statements.
SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" -
SFAS No. 133 requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. SFAS No.
133 does not allow hedging of a security which is classified as held to
maturity. Upon adoption of SFAS No. 133, companies may reclassify any security
from held to maturity to available for sale if they wish to be able to hedge the
security in the future. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999 with early adoption encouraged for any fiscal quarter
beginning July 1, 1998 or later, with no retroactive application. Management
does not expect the adoption of SFAS No. 133 to have a significant impact on the
Corporation's financial statements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes included herein have been
prepared in accordance with generally accepted accounting principles ("GAAP").
GAAP requires the Corporation 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.
-16-
<PAGE> 18
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
inflation rate. While interest rates are greatly influenced by changes in the
inflation rate, they do not change at the same rate or in the same magnitude as
the inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as on changes in monetary and fiscal
policies.
YEAR 2000 ISSUE
The Bank's lending and deposit activities are almost entirely dependent on
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 uses the services of a
nationally recognized data processing service bureau that 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 on computer
systems.
The Bank is aware of the potential Year 2000 related problems that may affect
the computers that 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 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. If, by the end of 1998, any
of the Bank's suppliers or servicers are unable to certify Year 2000 compliance
with respect to any systems, the failure of which would have a material adverse
effect on the Bank's operations, financial condition or results, the Bank would
then have sufficient time to identify and contract with suppliers and servicers
who are able to certify Year 2000 compliance. The expense of such a change in
suppliers or servicers is not expected to be material to the Bank.
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 on
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. At
this time, however, the expense that may be incurred by the Bank in connection
with Year 2000 issues cannot be determined.
-17-
<PAGE> 19
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Home Loan Financial Corporation
Coshocton, Ohio
We have audited the accompanying consolidated balance sheets of Home Loan
Financial Corporation as of June 30, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended June 30, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Home Loan Financial
Corporation as of June 30, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 1998 in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Columbus, Ohio
July 24, 1998
-18-
<PAGE> 20
HOME LOAN FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,323,331 $ 1,765,821
Interest-bearing deposits in other banks 533,817 165,228
Overnight deposits 1,000,000 1,250,000
Federal funds sold 4,800,000 1,500,000
-------------- ---------------
Total cash and cash equivalents 7,657,148 4,681,049
Interest-bearing time deposits 2,037,137 38,796
Securities available for sale 14,018,560 5,004,296
Loans, net 56,824,312 49,300,124
Premises and equipment, net 471,799 524,061
Federal Home Loan Bank stock 393,000 366,000
Accrued interest receivable 475,183 287,014
Other assets 37,850 199,505
-------------- ---------------
Total assets $ 81,914,989 $ 60,400,845
============== ===============
LIABILITIES
Deposits $ 48,537,875 $ 49,235,430
Federal Home Loan Bank advances 1,000,000 --
Accrued interest payable 480,365 460,029
Accrued expenses and other liabilities 332,115 335,122
-------------- ---------------
Total liabilities 50,350,355 50,030,581
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 500,000 shares authorized,
none outstanding -- --
Common stock, no par value, 9,500,000 shares authorized,
2,248,250 shares issued and outstanding -- --
Additional paid-in capital 21,948,437 --
Retained earnings - substantially restricted 11,285,160 10,366,232
Unearned employee stock ownership plan shares (1,678,690) --
Net unrealized gain on securities available for sale, net of tax 9,727 4,032
-------------- ---------------
Total shareholders' equity 31,564,634 10,370,264
-------------- ---------------
Total liabilities and shareholders' equity $ 81,914,989 $ 60,400,845
============== ===============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-19-
<PAGE> 21
HOME LOAN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 4,744,992 $ 4,162,822 $ 3,755,408
Securities 390,494 265,148 331,584
Dividends on Federal Home Loan Bank stock 27,258 24,721 22,924
Interest-bearing deposits and federal funds sold 208,804 156,639 148,960
-------------- ------------- --------------
Total interest income 5,371,548 4,609,330 4,258,876
INTEREST EXPENSE
Deposits 2,091,597 1,930,924 1,703,208
Federal Home Loan Bank advances 16,363 -- --
-------------- ------------- --------------
Total interest expense 2,107,960 1,930,924 1,703,208
-------------- ------------- --------------
NET INTEREST INCOME 3,263,588 2,678,406 2,555,668
Provision for loan losses 120,000 6,000 --
-------------- ------------- --------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,143,588 2,672,406 2,555,668
NONINTEREST INCOME
Service charges and other fees 136,424 139,297 119,461
Other income 40,113 35,491 45,907
-------------- ------------- --------------
Total noninterest income 176,537 174,788 165,368
NONINTEREST EXPENSE
Salaries and employee benefits 1,168,707 889,697 786,868
Occupancy and equipment 137,713 140,893 129,315
State franchise taxes 144,966 138,490 126,389
Computer processing 103,236 94,951 92,854
SAIF deposit insurance premiums 30,209 320,920 93,368
Legal, audit and supervisory exam fees 69,595 75,817 57,334
Director fees 86,750 78,160 72,810
Other expense 188,316 203,866 173,050
-------------- ------------- --------------
Total noninterest expense 1,929,492 1,942,794 1,531,988
-------------- ------------- --------------
INCOME BEFORE INCOME TAXES 1,390,633 904,400 1,189,048
Income tax expense 471,705 309,152 419,515
-------------- ------------- --------------
NET INCOME $ 918,928 $ 595,248 $ 769,533
============== ============= ==============
EARNINGS PER COMMON SHARE $ .15
=============
</TABLE>
See accompanying notes to consolidated financial statements.
-20-
<PAGE> 22
HOME LOAN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
UNREALIZED
GAIN (LOSS) ON
ADDITIONAL UNEARNED SECURITIES
PAID-IN RETAINED ESOP AVAILABLE
Capital Earnings Shares for Sale Total
------- -------- ------ -------- -----
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1995 $ -- $ 9,001,451 $ -- $ 3,750 $ 9,005,201
Net income -- 769,533 -- -- 769,533
Change in fair value of
securities available
for sale -- -- -- (6,638) (6,638)
--------------- -------------- ------------- --------- ---------------
Balance at June 30, 1996 -- 9,770,984 -- (2,888) 9,768,096
Net income -- 595,248 -- -- 595,248
Change in fair value of
securities available
for sale -- -- -- 6,920 6,920
--------------- -------------- ------------- --------- ---------------
Balance at June 30, 1997 -- 10,366,232 -- 4,032 10,370,264
Net income -- 918,928 -- -- 918,928
Sale of 2,248,250 shares
of no par common
stock, net of
conversion costs 21,880,273 -- -- -- 21,880,273
Shares purchased under
employee stock
ownership plan -- -- (1,798,600) -- (1,798,600)
Commitment to release
employee stock
ownership plan
shares 68,164 -- 119,910 -- 188,074
Change in fair value of
securities available
for sale -- -- -- 5,695 5,695
--------------- -------------- ------------- --------- ---------------
Balance at June 30, 1998 $ 21,948,437 $ 11,285,160 $ (1,678,690) $ 9,727 $ 31,564,634
=============== ============== ============== ========= ===============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-21-
<PAGE> 23
HOME LOAN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 918,928 $ 595,248 $ 769,533
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 78,174 79,329 67,370
Securities amortization and accretion 4,338 2,908 (7,119)
Provision for loan losses 120,000 6,000 --
FHLB stock dividends (27,000) (24,600) (22,800)
Securities gains (121) -- --
Compensation expense on ESOP shares 188,074 -- --
Deferred taxes 40,656 11,334 6,722
Loss on disposition of assets -- -- 12,201
Net change in accrued interest receivable and
other assets (26,514) (55,519) (120,250)
Net change in accrued expenses and other
liabilities (26,262) 80,748 153,634
Net change in deferred loan fees 14,040 3,283 (9,589)
-------------- ------------- --------------
Net cash from operating activities 1,284,313 698,731 849,702
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from maturities 1,500,020 500,000 500,000
Purchases (10,509,871) (3,751,484) (1,497,363)
Securities held to maturity:
Proceeds from maturities -- 2,250,000 3,250,000
Net change in interest-bearing time deposits (1,998,341) 1,873 (40,669)
Net change in loans (7,658,228) (5,015,491) (5,128,693)
Premises and equipment expenditures (25,912) (77,592) (109,247)
-------------- ------------- --------------
Net cash from investing activities (18,692,332) (6,092,694) (3,025,972)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (697,555) 4,351,573 5,340,441
Proceeds from long-term FHLB advances 1,000,000 -- --
Proceeds from issuance of common stock, net
of conversion costs 21,880,273 -- --
Cash provided to ESOP (1,798,600) -- --
-------------- ------------- --------------
Net cash from financing activities 20,384,118 4,351,573 5,340,441
-------------- ------------- --------------
Net change in cash and cash equivalents 2,976,099 (1,042,390) 3,164,171
Cash and cash equivalents at beginning of year 4,681,049 5,723,439 2,559,268
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,657,148 $ 4,681,049 $ 5,723,439
============== ============= ==============
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 2,087,624 $ 1,895,362 $ 1,556,285
Income taxes 402,849 244,818 417,583
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
-22-
<PAGE> 24
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Home Loan Financial Corporation (the "Corporation") and its
wholly-owned subsidiary, The Home Loan Savings Bank (the "Bank"), a state
chartered stock savings and loan association. All significant intercompany
accounts and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS: The Corporation's and Bank's revenues, operating income
and assets are primarily from the financial institutions industry. The Bank is
engaged in the business of residential mortgage lending 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.
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 allowance for loan losses, 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. Cash flows are reported net
for customer loan and deposit transactions, interest-bearing deposits with other
banks and short-term borrowings with original maturities of 90 days or less.
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 shareholders'
equity, net of tax. 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.
LOANS: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, the allowance for loan losses and loans in process.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term.
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.
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.
- -------------------------------------------------------------------------------
(Continued)
-23-
<PAGE> 25
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 portion of the
allowance is allocated so the loan is reported, net, at the present value of
estimated future cash flows using the loan's existing rate or at the fair value
of collateral if repayment is expected solely from the collateral. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more,
or when it is probable that not all principal and interest amounts will be
collected according to the original terms of the loan.
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 a loan is initially
reported at estimated fair value at acquisition. Any reduction to fair value
from the carrying value of the related loan at the time the property is acquired
is accounted for as a loan charge-off. 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 other expenses.
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 bases 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.
CONCENTRATIONS OF CREDIT RISK: The Corporation grants primarily single-family
residential mortgage loans to customers in Coshocton County, Ohio. These
customers' ability to honor their contracts is dependent, to a certain extent,
on the economic conditions of Coshocton County. The Corporation evaluates each
customer's creditworthiness on a case-by-case basis at the time of application.
Residential real estate loans comprise approximately 71% and 72% of the
Corporation's loan portfolio as of June 30, 1998 and 1997.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance sheet
financial instruments do not include the value of anticipated future business or
the values of assets and liabilities not considered financial instruments.
- -------------------------------------------------------------------------------
(Continued)
<PAGE> 26
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER COMMON SHARE: Basic earnings per common share are computed by
dividing net income by the weighted average number of shares outstanding during
the year. Diluted earnings per share further assumes the issuance of any
potentially dilutive common shares. The Corporation currently has no potentially
dilutive common stock equivalents. As more fully discussed in Note 2, the Bank
converted from the mutual to stock form of ownership with the concurrent
formation of a holding company effective March 25, 1998. Accordingly, earnings
per share for 1998 was computed based on net income of the Corporation since
March 25, 1998, which totaled $320,978. The weighted average number of shares
outstanding during the period ended June 30, 1998 was 2,074,386 which is equal
to the weighted average shares outstanding of 2,248,250 less the average
unallocated ESOP shares of 173,864. Unreleased ESOP shares are not considered to
be outstanding shares for determining the weighted average number of shares used
in the earnings per common share calculation. No earnings per common share is
shown for the years ended June 30, 1997 and 1996, as prior to March 25, 1998,
the Bank was a mutual company. The financial information for the year ended June
30, 1997 and 1996 reflects the Bank before the conversion.
RECLASSIFICATIONS: Reclassifications of certain amounts in the 1997 and 1996
consolidated financial statements have been made to conform to the 1998
presentation.
NOTE 2 -CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS AND LOAN
ASSOCIATION WITH THE CONCURRENT FORMATION OF A HOLDING COMPANY
On November 12, 1997, the Board of Directors of the Bank unanimously adopted a
Plan of Conversion to convert 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 conversion was consummated on
March 25, 1998, by amending the Bank's Articles of Incorporation and the sale of
the Corporation's common stock in an amount equal to the pro forma market value
of the Bank after giving effect to the conversion. Common shares of the
Corporation were offered in accordance with the Plan of Conversion. A total of
2,248,250 common shares of the Corporation were sold at $10.00 per share and net
proceeds from the sale were $21,880,273 after deducting the costs of conversion.
The Corporation retained 50% of the net proceeds from the sale of common shares.
The remainder of the net proceeds was invested in the capital stock issued by
the Bank to the Corporation in connection with the Conversion.
At the time of the conversion, the Bank established a liquidation account in an
amount equal to its regulatory capital as of September 30, 1997. 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 shareholders' equity below the required
liquidation account balance.
- -------------------------------------------------------------------------------
(Continued)
-25-
<PAGE> 27
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 2 -CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS AND LOAN
ASSOCIATION WITH THE CONCURRENT FORMATION OF A HOLDING COMPANY
(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.
NOTE 3 - SECURITIES
The amortized cost and estimated fair values of securities at year-end are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1998
----
AVAILABLE FOR SALE
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 5,504,113 $ 15,154 $ (907) $ 5,518,360
U.S. Government agencies 8,499,709 2,024 (1,533) 8,500,200
--------------- ---------- ----------- --------------
$ 14,003,822 $ 17,178 $ (2,440) $ 14,018,560
=============== ========== =========== ==============
1997
----
AVAILABLE FOR SALE
U.S. Treasury notes $ 4,998,188 $ 10,477 $ (4,369) $ 5,004,296
=============== ========== =========== ==============
</TABLE>
The amortized cost and estimated fair values of securities at June 30, 1998, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
AVAILABLE FOR SALE
<S> <C> <C>
Due in one year or less $ 9,755,879 $ 9,766,778
Due after one year through five years 4,247,943 4,251,782
-------------- ---------------
$ 14,003,822 $ 14,018,560
============== ===============
</TABLE>
During 1998, 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 Consolidated Statement of Cash Flows. The gain on this
transaction was $121. No other securities were sold during 1998, 1997 or 1996.
A security with a par value of $1,000,000 at June 30, 1997 was pledged to secure
public deposits and for other purposes. No securities were pledged at June 30,
1998.
- -------------------------------------------------------------------------------
(Continued)
-26-
<PAGE> 28
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 4 - LOANS
Year-end loans were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Residential real estate loans:
1 - 4 family $ 39,551,521 $ 35,155,726
Home equity 1,527,535 728,416
Nonresidential real estate 4,307,546 3,297,105
Real estate construction 1,368,801 553,833
Land 686,453 570,542
-------------- ---------------
Total real estate loans 47,441,856 40,305,622
Consumer and other loans
Home improvement 3,993,214 3,701,588
Automobile 2,997,589 2,505,823
Commercial 1,429,324 1,645,091
Deposit 421,710 219,264
Credit card 410,624 346,704
Other 1,527,817 1,047,289
-------------- ---------------
Total consumer and other 10,780,278 9,465,759
-------------- ---------------
Total loans 58,222,134 49,771,381
Less:
Allowance for loan losses (223,237) (119,218)
Loans in process (1,053,746) (245,240)
Net deferred loan fees and costs (120,839) (106,799)
-------------- ---------------
$ 56,824,312 $ 49,300,124
============== ===============
</TABLE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 119,218 $ 117,513 $ 117,513
Provision for losses 120,000 6,000 --
Loans charged off (17,848) (4,500) --
Recoveries of previous charge-offs 1,867 205 --
------------ ----------- -----------
Ending balance $ 223,237 $ 119,218 $ 117,513
============ =========== ===========
</TABLE>
No loans were on nonaccrual status at June 30, 1998 or 1997. Impaired loans at
June 30, 1998 and 1997, and for the three years in the period ended June 30,
1998, were not material.
- -------------------------------------------------------------------------------
(Continued)
-27-
<PAGE> 29
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 4 - LOANS (Continued)
Certain directors, executive officers and companies with which they are
affiliated were loan customers during the year ended June 30, 1998. The
following is an analysis of such loans, excluding credit card loans. Credit
limits may not exceed $5,000 on credit card loans to directors and officers.
<TABLE>
<S> <C>
Balance July 1, 1997 $ 191,772
New loans 306,000
Repayments (15,453)
-----------
Balance June 30, 1998 $ 482,319
===========
</TABLE>
NOTE 5 - ACCRUED INTEREST RECEIVABLE
Year-end accrued interest receivable was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Loans $ 263,981 $ 226,790
Securities 182,325 60,224
Interest-bearing time deposits 28,877 --
----------- -----------
$ 475,183 $ 287,014
=========== ===========
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 80,434 $ 80,434
Buildings and improvements 665,343 662,470
Furniture and equipment 464,335 441,296
----------- -----------
Total cost 1,210,112 1,184,200
Accumulated depreciation (738,313) (660,139)
----------- -----------
$ 471,799 $ 524,061
=========== ===========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
-28-
<PAGE> 30
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
Year-end deposits consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Noninterest-bearing demand deposits $ 3,141,029 $ 1,069,333
NOW and money market accounts 8,253,047 7,650,333
Savings accounts 11,033,878 11,294,755
Certificates of deposit 26,109,921 29,221,009
-------------- --------------
$ 48,537,875 $ 49,235,430
============== ==============
</TABLE>
The aggregate amount of certificates of deposit accounts with balances of
$100,000 or more at June 30, 1998 and 1997 was $1,656,673 and $2,481,642.
At June 30, 1998, the scheduled maturities of certificates of deposit were as
follows:
<TABLE>
<S> <C> <C>
Year ended June 30, 1999 $ 15,476,322
2000 8,344,813
2001 2,243,351
2002 45,435
--------------
$ 26,109,921
==============
</TABLE>
NOTE 8 - BORROWED FUNDS
At June 30, 1998, the Bank had a cash management line of credit enabling it to
borrow up to $5,000,000 from the Federal Home Loan Bank of Cincinnati ("FHLB").
The line of credit must be renewed on an annual basis. There were no borrowings
outstanding on this line of credit at June 30, 1998 or 1997. As a member of the
FHLB system, the Bank has the ability to obtain additional borrowings up to a
total of $7,860,000, including the line of credit. The Bank had one fixed-rate
borrowing, with an interest rate of 5.66%, totaling $1,000,000 at June 30, 1998.
The interest rate is fixed for five years, then convertible to a variable rate
at the option of the FHLB. The original term of the borrowing is 120 months with
interest due monthly and principal due upon maturity on June 30, 2008. The
maximum month-end balance of advances outstanding was $1,000,000 in 1998 and the
average balance of borrowings outstanding during 1998 was $290,000. There were
no borrowings during 1997. Advances under the borrowing agreements are
collateralized by a blanket pledge of the Bank's residential mortgage loan
portfolio and its FHLB stock.
- -------------------------------------------------------------------------------
(Continued)
-29-
<PAGE> 31
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 9 - SAVINGS ASSOCIATION INSURANCE FUND RECAPITALIZATION
Included in SAIF deposit insurance premium expense in the Consolidated
Statements of Income for the year ended June 30, 1997 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 10 - INCOME TAXES
Income tax expense for the years ended June 30 consisted of the following
components:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current tax expense $ 431,049 $ 297,818 $ 412,793
Deferred tax expense 40,656 11,334 6,722
----------- ----------- -----------
$ 471,705 $ 309,152 $ 419,515
=========== =========== ===========
</TABLE>
Year-end sources of gross deferred tax assets and gross deferred tax liabilities
are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 75,901 $ 40,534
Deferred loan fees 41,085 36,227
Accrued benefits 27,540 77,995
Other 2,639 --
----------- -----------
Total deferred tax assets 147,165 154,756
----------- -----------
Deferred tax liabilities:
Depreciation 8,015 10,439
Federal Home Loan Bank stock 77,771 68,591
Accrual to cash 60,130 34,322
Security discount accretion 1,935 1,434
Unrealized gain on securities available for sale 5,011 2,077
----------- -----------
Total deferred tax liabilities 152,862 116,863
----------- -----------
Net deferred tax (liability) asset $ (5,697) $ 37,893
=========== ===========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
-30-
<PAGE> 32
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (Continued)
The difference between the financial statement income tax expense and amounts
computed by applying the statutory federal income tax rate of 34% to income
before income taxes is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income taxes computed at the statutory
tax rate on pretax income $ 472,815 $ 307,496 $ 404,276
Tax effect of:
ESOP 23,179 -- --
Nondeductible expenses and other (24,289) 1,656 15,239
------------ ----------- -----------
$ 471,705 $ 309,152 $ 419,515
=========== =========== ===========
</TABLE>
The Corporation, 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 special bad debt deductions, included in retained earnings, arising
prior to June 30, 1988, the end of the Bank's base year for purposes of
calculating 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 11 - PENSION PLAN
Effective July 1, 1995, the Corporation amended its defined benefit pension plan
and transferred plan assets into a multi-employer trust. 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 plan. The
Corporation recognizes pension expense equal to contributions made to the plan.
Contributions of $83,483, $84,552 and $87,561 were made for the years ended June
30, 1998, 1997 and 1996.
NOTE 12 - PROFIT-SHARING PLAN
The Corporation 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 $157,911, $128,037 and $104,000 for
the years ended June 30, 1998, 1997 and 1996.
In 1994, the Corporation entered into a deferred compensation agreement with an
officer of the Bank. The agreement entitled the officer to 5% of the annual
increase in equity, not including extraordinary items, for a five-year period
ending June 30, 1998. During 1998, under terms of the plan, the officer received
a payment of $182,014. Expense recognized under this agreement was $36,014,
$38,000 and $36,000 for the years ended June 30, 1998, 1997 and 1996.
- -------------------------------------------------------------------------------
(Continued)
-31-
<PAGE> 33
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 13 - EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation offers an employee stock ownership plan ("ESOP") for the benefit
of substantially all employees of the Corporation and the Bank. The
establishment of the ESOP and the purchase by the ESOP of the common shares of
the Corporation are subject to the receipt of a favorable determination letter
on the qualified status of the ESOP under applicable provisions of the Internal
Revenue Code. Although no assurances can be given, the Corporation expects that
the ESOP will receive a favorable determination letter.
The ESOP borrowed funds from the Corporation with which to acquire common shares
of the Corporation. The loan is secured by the shares purchased with the loan
proceeds and will be repaid by the ESOP with funds from the Bank's discretionary
contributions to the ESOP and earnings on ESOP assets. The shares purchased with
the loan proceeds are held in a suspense account for allocation among
participants as the loan is repaid. As payments are made and the shares are
released from the suspense account, such shares will be validly issued, fully
paid and nonassessible.
Shares pledged as collateral are reported as unearned ESOP shares in the
Consolidated Balance Sheet. As shares are released from collateral, the
Corporation reports compensation expense equal to the current market price of
the shares, and the shares become outstanding for earnings per share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings while dividends on unallocated ESOP shares are recorded as a
reduction of debt and accrued interest. ESOP compensation expense was $188,074
for the year ended June 30, 1998. The ESOP shares as of June 30, 1998 were as
follows:
<TABLE>
<S> <C>
SHARES COMMITTED TO BE RELEASED FOR ALLOCATION 11,991
UNRELEASED SHARES 167,869
-------------
TOTAL ESOP SHARES 179,860
=============
FAIR VALUE OF UNRELEASED SHARES AT JUNE 30, 1998 $ 2,476,068
=============
</TABLE>
NOTE 14 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
Various contingent liabilities are not reflected in the consolidated 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 the Corporation's 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 amounts 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.
- --------------------------------------------------------------------------------
(Continued)
-32-
<PAGE> 34
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
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.
A summary of the notional or contractual amounts of financial instruments with
off-balance sheet risk at year-end follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Lines of credit - variable rate $ 1,728,000 $ 1,595,000
1-4 family residential real estate - variable rate 782,000 446,000
1-4 family residential real estate - fixed rate 134,000 --
Commercial real estate - variable rate 225,000 700,000
Credit card arrangements - fixed rate 771,000 671,000
</TABLE>
The interest rates on fixed-rate commitments range from 7.13% to 13.90% at June
30, 1998 and were 13.90% at June 30, 1997. The interest rates on variable rate
commitments range from 6.75% to 7.00% at June 30, 1998 and 8.00% to 9.50% at
June 30, 1997.
The Bank entered into an employment agreement with an officer of the Corporation
and Bank. The agreement provides for a term of three years and a salary and
performance review by the Board of Directors not less often than annually, as
well as inclusion of the employee in any formally established employee benefit,
bonus, pension and profit-sharing plans for which senior management personnel
are eligible. The agreement provides for extensions for a period of one year on
each anniversary date, subject to review and approval of the extension by
disinterested members of the Board of Directors of the Bank. The employment
agreement also provides for vacation and sick leave in accordance with the
Bank's prevailing policies.
NOTE 15 - 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 June 30, 1998
and 1997, 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 June 30,
1998 and 1997. Management believes no conditions or events have occurred after
June 30, 1998 that would cause the Bank's capital category to change.
- --------------------------------------------------------------------------------
(Continued)
-33-
<PAGE> 35
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 15 - REGULATORY MATTERS (Continued)
At year-end 1998 and 1997, the Bank's actual capital levels and minimum required
levels were:
<TABLE>
<CAPTION>
Minimum
Required To Be Minimum
Adequately Capitalized Required To Be
Under Prompt Well Capitalized
Corrective Under Prompt Corrective
Actual Action Regulations Action Regulations
--------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, 1998
Total capital (to risk-weighted assets) $ 20,749 51.3% $ 3,238 8.0% $ 4,047 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 20,526 50.7 1,619 4.0 2,428 6.0
Tier 1 (core) capital (to adjusted
total assets) 20,526 25.1 3,278 4.0 4,098 5.0
Tangible capital (to adjusted total assets) 20,526 25.1 1,299 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
</TABLE>
In addition to certain federal income tax considerations, OTS regulations impose
limitations on the payment of dividends and other capital distributions by
savings associations. Under OTS regulations applicable to converted savings
associations, the Bank is not permitted to pay a cash dividend on its common
shares if its regulatory capital would, as a result of payment of such
dividends, be reduced below the amount required for the Liquidation Account, or
below applicable regulatory capital requirements prescribed by the OTS.
OTS regulations applicable to all savings and loan associations provide that a
savings association which immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted without OTS
approval (but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half of the amount by which its total capital
to assets ratio exceeded its required capital to assets ratio at the beginning
of the calendar year, or (2) 75% of its net earnings for the most recent
four-quarter period. Savings associations that meet the capital requirements but
have been notified by the OTS that they are in need of more than normal
supervision will be subject to restrictions on dividends. A savings association
that fails to meet current minimum capital requirements is prohibited from
making any capital distributions without the prior approval of the OTS.
- --------------------------------------------------------------------------------
(Continued)
-34-
<PAGE> 36
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 15 - REGULATORY MATTERS (Continued)
The Bank currently meets all of its capital requirements and, unless the OTS
determines that the Bank is an institution requiring more than normal
supervision, the Bank may pay dividends in accordance with the foregoing
provisions of OTS regulations.
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying values and the estimated fair values of the Corporation's financial
instruments at year-end are shown below. Items that are not financial
instruments are not included.
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 7,657,148 $ 7,657,000 $ 4,681,049 $ 4,681,000
Interest-bearing time deposits 2,037,137 2,037,000 38,796 39,000
Securities available for sale 14,018,560 14,019,000 5,004,296 5,004,000
Loans, net of allowance for
loan losses 56,824,312 57,047,000 49,300,124 50,038,000
Federal Home Loan Bank stock 393,000 393,000 366,000 366,000
Accrued interest receivable 475,183 475,000 287,014 287,000
Financial liabilities
Demand, savings and money
market deposit accounts (22,427,954) (22,428,000) (20,014,421) (20,014,000)
Certificates of deposit (26,109,921) (26,256,000) (29,221,009) (29,184,000)
Federal Home Loan Bank advances (1,000,000) (1,000,000) -- --
Accrued interest payable (480,365) (480,000) (460,029) (460,000)
</TABLE>
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 values for time deposits and long-term borrowings are based
on the rates paid at year-end for similar new deposits and long-term borrowings,
applied until maturity. Estimated fair value for other financial instruments and
off-balance sheet loan commitments is considered nominal.
- --------------------------------------------------------------------------------
(Continued)
-35-
<PAGE> 37
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Home Loan Financial Corporation as of June
30, 1998 and for the period beginning March 25, 1998, the effective date of the
conversion, through June 30, 1998 is as follows:
CONDENSED BALANCE SHEET
June 30, 1998
<TABLE>
<S> <C>
Assets
Cash and cash equivalents $ 418,206
Investment in subsidiary 20,536,212
Loans receivable 10,650,136
Other assets 5,480
-----------
Total assets $31,610,034
===========
Liabilities
Other liabilities $ 45,400
SHAREHOLDERS' EQUITY 31,564,634
-----------
Total liabilities and shareholders' equity $31,610,034
===========
CONDENSED STATEMENT OF INCOME
March 25, 1998 - June 30, 1998
Interest on loans $151,756
Operating expenses 18,070
--------
Income before income taxes and equity in
undistributed earnings of subsidiary 133,686
Income tax expense 45,400
--------
Income before equity in undistributed
earnings of subsidiary 88,286
Equity in undistributed earnings of subsidiary 232,692
--------
NET INCOME $320,978
========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
-36-
<PAGE> 38
HOME LOAN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENT OF CASH FLOWS
March 25, 1998 - June 30, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 320,978
Adjustments to reconcile net income
to cash provided by operations:
Equity in undistributed income of subsidiary (232,692)
Net changes in other assets (5,480)
Net change in other liabilities 45,400
--------------
Net cash from operating activities 128,206
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of stock in The Home Loan Savings Bank (10,940,137)
Loan to ESOP (1,798,600)
Loan to subsidiary (9,000,000)
Proceeds from loan principal repayments 148,464
--------------
Net cash from investing activities (21,590,273)
Cash flows from financing activities
Proceeds from issuance of common shares,
net of conversion costs 21,880,273
Net change in cash and cash equivalents 418,206
Cash and cash equivalents at beginning of year --
--------------
CASH AT END OF YEAR $ 418,206
==============
</TABLE>
- -------------------------------------------------------------------------------
-37-
<PAGE> 39
HOME LOAN FINANCIAL CORPORATION
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 4:00 p.m., Coshocton, Ohio
time on October 13, 1998 at the main office of the Bank at 401 Main Street,
Coshocton, Ohio.
STOCK LISTING
Home Loan Financial Corporation common stock is traded on the Nasdaq National
Market under the symbol "HLFC".
PRICE RANGE OF COMMON STOCK
The per share price range of the common shares for each quarter since the common
shares began trading on March 25, 1998 was as follows:
<TABLE>
<CAPTION>
FISCAL 1998 HIGH LOW
<S> <C> <C>
Quarter ended March 31, 1998 (1) $ 15.750 $ 15.375
Quarter ended June 30, 1998 16.750 14.000
</TABLE>
(1) Reflects the period from March 25, 1998 through March 31, 1998.
The stock price information set forth in the table above was provided by The
Nasdaq Stock Market, Inc.
At August 21, 1998, there were 2,248,250 common shares of Home Loan Financial
Corporation issued and outstanding (including unallocated ESOP shares) and there
were 740 holders of record.
SHAREHOLDER AND GENERAL INQUIRIES TRANSFER AGENT
Preston W. Bair, Chief Financial Officer Registrar and Transfer Co.
Home Loan Financial Corporation 10 Commerce Drive
401 Main Street Cranford, NJ 07016
Coshocton, OH 43812-1580
(740) 622-0444
ANNUAL REPORT ON FORM 10-KSB
A copy of Home Loan Financial Corporation's Annual Report on Form 10-KSB for the
year ended June 30, 1998, as filed with the Securities and Exchange Commission,
may be obtained without charge by submitting a written request to Preston W.
Bair, Chief Financial Officer, Home Loan Financial Corporation, 401 Main Street
Coshocton, Ohio 43812-1580.
-38-
<PAGE> 40
HOME LOAN FINANCIAL CORPORATION
CORPORATE INFORMATION
CORPORATION AND BANK ADDRESS
401 Main Street Telephone: (740) 622-0444
Coshocton, OH 43812-1580 Fax: (740) 623-6000
DIRECTORS OF THE CORPORATION AND THE BANK
Robert C. Hamilton (Chairman of the Board) Neal J. Caldwell
President and Chief Executive Officer of Veterinarian
The Home Loan Savings Bank
Robert D. Mauch Charles H. Durmis
Owner of Robert D. Mauch CPA, a private General Surgeon
practice accounting firm
Douglas L. Randles
President of L.W. Randles Cheese, Inc.
Officers of the Corporation and the Bank:
- -----------------------------------------
Robert C. Hamilton, President and Chief Executive Officer
Preston W. Bair, Secretary, Treasurer and Chief Financial Officer
David L. Smailes, Vice President of the Bank
Kyle R. Hamilton, Assistant Vice President of the Bank
Paula K. Carpenter, Assistant Vice President of the Bank
Jennifer S. Lahna, Assistant Vice President of the Bank
Debra K. McFarland, Assistant Vice President of the Bank
Special Counsel Independent Auditors
- --------------- --------------------
Vorys, Sater, Seymour and Pease LLP Crowe, Chizek and Company LLP
221 East Fourth Street One Columbus
Cincinnati, OH 45201 10 West Broad Street
Columbus, OH 43215
-39-
<PAGE> 1
Exhibit 20
HOME LOAN FINANCIAL CORPORATION
401 MAIN STREET
COSHOCTON, OHIO 43812-1580
(740) 622-0444
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the 1998 Annual Meeting of Shareholders of
Home Loan Financial Corporation (the "Company") will be held at the offices of
the Company at 401 Main Street, Coshocton, Ohio, on October 13, 1998, at 4:00
p.m., local time (the "Annual Meeting"), for the following purposes, all of
which are more completely set forth in the accompanying Proxy Statement:
1. To elect five directors of the Company for terms
expiring in 1999;
2. To approve the Home Loan Financial Corporation 1998
Stock Option and Incentive Plan, a copy of which is
attached hereto as Exhibit A;
3. To approve the Home Loan Financial Corporation
Recognition and Retention Plan and Trust Agreement, a
copy of which is attached hereto as Exhibit B;
4. To ratify the selection of Crowe, Chizek and Company
LLP as the auditors of the Company for the current
fiscal year; and
5. To transact such other business as may properly come
before the Annual Meeting or any adjournments
thereof.
Only shareholders of the Company of record at the close of business on
August 21, 1998, will be entitled to receive notice of and to vote at the Annual
Meeting and at any adjournments thereof. Whether or not you expect to attend the
Annual Meeting, we urge you to consider the accompanying Proxy Statement
carefully and to SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY SO THAT YOUR
SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND THE PRESENCE OF A QUORUM
MAY BE ASSURED. The giving of a proxy does not affect your right to vote in
person in the event you attend the Annual Meeting.
By Order of the Board of Directors
Coshocton, Ohio Robert C. Hamilton
August 29, 1998 President
<PAGE> 2
HOME LOAN FINANCIAL CORPORATION
401 MAIN STREET
COSHOCTON, OHIO 43812-1580
(740) 622-0444
PROXY STATEMENT
PROXIES
The enclosed proxy (the "Proxy") is being solicited by the Board of
Directors of Home Loan Financial Corporation (the "Company") for use at the 1998
Annual Meeting of Shareholders of the Company to be held at the offices of the
Company at 401 Main Street, Coshocton, Ohio, on October 13, 1998, at 4:00 p.m.,
local time, and at any adjournments thereof (the "Annual Meeting"). Without
affecting any vote previously taken, the Proxy may be revoked by executing a
later dated proxy which is received by the Company before the Proxy is exercised
or by giving notice of revocation to the Company in writing or in open meeting
before the Proxy is exercised. Attendance at the Annual Meeting will not, of
itself, revoke the Proxy.
Each properly executed Proxy received prior to the Annual Meeting and
not revoked will be voted as specified thereon or, in the absence of specific
instructions to the contrary, will be voted:
FOR the reelection of Neal J. Caldwell, Charles H. Durmis,
Robert C. Hamilton, Robert D. Mauch and Douglas L. Randles as
directors of the Company for terms expiring in 1999;
FOR the approval of the Home Loan Financial Corporation 1998
Stock Option and Incentive Plan (the "Stock Option Plan"), a
copy of which is attached hereto as Exhibit A;
FOR the approval of the Home Loan Financial Corporation
Recognition and Retention Plan and Trust Agreement (the
"RRP"), a copy of which is attached hereto as Exhibit B; and
FOR the ratification of the selection of Crowe, Chizek and
Company LLP ("Crowe, Chizek") as the auditors of the Company
for the current fiscal year.
Proxies may be solicited by the directors, officers and other employees
of the Company and The Home Loan Savings Bank (the "Bank"), in person or by
telephone, telegraph or mail only for use at the Annual Meeting. The Proxy will
not be used for any other meeting. The cost of soliciting Proxies will be borne
by the Company.
Only shareholders of record as of the close of business on August 21,
1998 (the "Voting Record Date"), are entitled to vote at the Annual Meeting.
Each such shareholder will be entitled to cast one vote for each share owned.
The Company's records disclose that, as of the Voting Record Date, there were
2,248,500 votes entitled to be cast at the Annual Meeting.
This Proxy Statement is first being mailed to shareholders of the
Company on or about September 3, 1998.
<PAGE> 3
VOTE REQUIRED
Under Ohio law and the Company's Code of Regulations (the
"Regulations"), the five nominees receiving the greatest number of votes will be
elected as directors. Each shareholder will be entitled to cast one vote for
each share owned. Shares held by a nominee for a beneficial owner which are
represented in person or by proxy but not voted and shares as to which the
authority to vote is withheld ("non-votes") are not counted toward the election
of directors or toward the election of the individual nominees specified on the
Proxy.
The affirmative vote of the holders of a majority of the outstanding
common shares of the Company is necessary to approve the Stock Option Plan and
the RRP and to ratify the selection of Crowe, Chizek as the auditors of the
Company for the current fiscal year. The effect of an abstention or a non-vote
is the same as a vote against the approval of the Stock Option Plan and the RRP
and the ratification of the selection of Crowe, Chizek as the auditors of the
Company for the current fiscal year. If the Proxy is signed and dated by the
shareholder but no vote or instruction to abstain is specified thereon, however,
the shares held by such shareholder will be voted FOR the adoption of the Stock
Option Plan and the RRP and the ratification of the selection of Crowe, Chizek
as the auditors of the Company for the current fiscal year.
VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
only persons known to the Company to own beneficially more than five percent of
the outstanding common shares of the Company as of August 21, 1998:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address Beneficial Ownership Shares Outstanding
- ---------------- -------------------- ------------------
<S> <C> <C>
Home Loan Financial
Corporation Employee
Stock Ownership Plan 179,880(1) 8.00%
1201 Broadway
Quincy, Illinois 62301
- ---------------------------
<FN>
(1) Consists of the shares held by First Bankers Trust Company, N.A., as
the Trustee for the Home Loan Financial Corporation Employee Stock
Ownership Plan (the "ESOP"). The Trustee has voting power over shares
that have not been allocated to an ESOP participant and shares that
have been allocated to an ESOP participant but as to which no voting
instructions are given by the participant. The Trustee has limited
shared investment power over all ESOP shares.
</TABLE>
-2-
<PAGE> 4
The following table sets forth certain information with respect to the
number of common shares of the Company beneficially owned by each director and
by all directors and executive officers of the Company as a group as of August
21, 1998:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address (1) Beneficial Ownership (2) Shares Outstanding
- -------------------- ------------------------ ------------------
<S> <C> <C>
Neal J. Caldwell (3) 30,000 1.33%
Charles H. Durmis (3) 30,000 1.33
Robert C. Hamilton (4) 31,000 1.38
Robert D. Mauch (5) 15,550 0.67
Douglas L. Randles (3) 30,000 1.33
All directors and executive officers of the
Company as a group (6 people) 166,000 7.37
<FN>
- ----------------------------
(1) Each of the persons listed in this table may be contacted at the address of the Company.
(2) All shares are owned directly with sole voting or investment power unless otherwise indicated by footnote.
(3) Includes 15,000 shares as to which the person listed shares voting and investment power with another person.
(4) Includes 16,000 shares as to which the person listed shares voting and investment power with another person.
(5) Includes 550 shares as to which the person listed shares voting and investment power with another person.
</TABLE>
PROPOSAL ONE - ELECTION OF DIRECTORS
ELECTION OF DIRECTORS
The Regulations provide for a Board of Directors consisting of five
persons. In accordance with Section 2.03 of the Regulations, nominees for
election as directors may be proposed only by the directors or by a shareholder
entitled to vote for directors. A nomination by a shareholder with respect to
the election of directors at an annual meeting of shareholders must be submitted
in writing to the Secretary of the Company and received by the Secretary not
later than the sixtieth day before the first anniversary of the most recent
annual meeting of shareholders held for the election of directors. A nomination
by a shareholder with respect to the election of directors at a special meeting
of shareholders must be submitted in writing and received by the Secretary of
the Company not later than the close of business on the seventh day following
the day on which notice of such special meeting was mailed to shareholders. Each
written nomination must state the name, age, business or residence address of
the nominee, the principal occupation or employment of the nominee, the number
of common shares of the Company owned either beneficially or of record by each
such nominee and the length of time such shares have been so owned. No
nominations have been submitted by shareholders for the Annual Meeting.
-3-
<PAGE> 5
The Board of Directors proposes the reelection at the Annual Meeting of
the following persons to terms which will expire in 1999:
<TABLE>
<CAPTION>
Director of Director of
the Company the Bank
Name Age (1) Position(s) held Since (2) Since
- ---- ------- ---------------- ---------- -----------
<S> <C> <C> <C> <C>
Neal J. Caldwell 54 Director 1997 1989
Charles H. Durmis 35 Director 1997 1996
Robert C. Hamilton 55 Director, President and Chairman 1997 1982
Robert D. Mauch 47 Director 1997 1989
Douglas L. Randles 52 Director 1997 1992
- -----------------------------
<FN>
(1) As of September 1, 1998.
(2) Each director of the Company is also a director of the Bank. Each nominee became a director of the Company
in connection with the conversion of the Bank from mutual to stock form (the "Conversion") and the formation
of the Company as the holding company for the Bank.
</TABLE>
If any nominee is unable to stand for election, any Proxies granting
authority to vote for such nominee will be voted for such substitute as the
Board of Directors recommends.
Neal J. Caldwell. Mr. Caldwell has practiced veterinary medicine in
Coshocton, Ohio, since 1972 and is an owner and operator of Coshocton Veterinary
Clinic.
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 services 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. Mr. Randles has been employed by L.W.
Randles Cheese, Inc. since 1969.
MEETINGS OF DIRECTORS
The Board of Directors of the Company met 6 times for regularly
scheduled and special meetings during the fiscal year ended June 30, 1998. The
Board of Directors of the Bank met 16 times for regularly scheduled and special
meetings during the fiscal year ended June 30, 1998.
-4-
<PAGE> 6
COMMITTEES OF DIRECTORS
The Board of Directors of the Company has an Audit Committee. The
Company has no Compensation Committee and the entire board serves as a
nominating committee.
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 did not meet during the year ended June 30, 1998.
The Board of Directors of the Bank has Executive, Compensation and
Audit Committees. The entire board serves as a nominating committee.
The Executive Committee is comprised of Mr. Hamilton, Mr. Caldwell and
Mr. Mauch. The Executive Committee has all of the authority of the Board of
Directors, except with respect to certain matters that by statute may not be
delegated by the Board of Directors. The committee acts only in the intervals
between meetings of the full Board of Directors. It acts usually in those cases
where it is not feasible to convene a special meeting. The Executive Committee
met 12 times during the year ended June 30, 1998.
The Compensation Committee is comprised of Mr. Hamilton, Mr. Caldwell
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, 1998.
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, 1998.
EXECUTIVE OFFICERS
Mr. Hamilton is the President and Chief Executive Officer of the
Company. Preston W. Bair serves as Secretary, Treasurer and Chief Financial
Officer of the Company. 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.
-5-
<PAGE> 7
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Bank to
Robert C. Hamilton, the President of the Company and the Bank, for the fiscal
years ended June 30, 1998 and 1997. No other executive officer of the Company
earned salary and bonus in excess of $100,000 during fiscal 1998.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
-----------------------------------------
Annual Compensation
- ----------------------------------------------------------------------------
Name and principal Year Salary ($)(1) Bonus ($)
position
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Robert C. Hamilton 1998 $158,000 $254,173(2)
President 1997 145,500 103,612(3)
- ----------------------------------------------------------------------------
<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 $182,014 paid pursuant to the Equity Appreciation Agreement
(hereinafter defined) and $72,159 paid pursuant to the Profit Sharing Plan
(hereinafter defined).
(3) 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 (hereinafter defined).
</TABLE>
DIRECTOR COMPENSATION
Each director of the Company receives $2,000 per year. Each director of
the Bank currently receives a retainer of $10,800 per year and $500 per meeting
of the full board attended. Members of the Bank's Executive Committee receive
$250 per Executive Committee meeting attended.
EMPLOYMENT AGREEMENT
The Bank has entered into an employment agreement with Robert C.
Hamilton (the "Employment Agreement"), effective January 1, 1998. The Employment
Agreement provides 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 also provides 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.
-6-
<PAGE> 8
The Employment Agreement is 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 pursuant to the Employment Agreement for any period after such
termination. In the event of termination by the Bank other than for just cause
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 contains 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 Employment 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 the Bank's 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 Internal
Revenue Code of 1986, as amended. "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
Company, the control of the election of a majority of the directors of the Bank
or the Company, or the exercise of a controlling influence over the management
or policies of the Bank or the Company.
PENSION PLAN
The Bank maintains a defined benefit pension plan administered by 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 $83,483, $84,552 and
$87,561 were made for the years ended June 30, 1998, 1997 and 1996.
-7-
<PAGE> 9
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 Equity Appreciation Agreement, 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 minimum return on assets is exceeded.
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. Expense recorded relating to the Equity
Appreciation Agreement was $36,014, $38,000 and $36,000 for the years ended June
30, 1998, 1997 and 1996, respectively. The Equity Appreciation Agreement was
terminated effective February 28, 1998, resulting in a payment of $182,014 to
Mr. Hamilton.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company established the ESOP for the benefit of employees of the
Company and its subsidiaries, including the Bank, who are age 21 or older and
who have completed at least one year of service with the Holding Company and its
subsidiaries. The ESOP purchased 179,880 common shares of the Company in
connection with mutual to stock conversion of the Bank. The purchase price was
financed with a loan from the Company to the ESOP. As the loan is repaid, shares
are allocated to the accounts of participating employees pro rata on the basis
of compensation. As of August 21, 1998, none of the common shares held in the
ESOP Trust had been allocated to the accounts of participants.
A committee appointed by the Board of Directors of the Holding Company
administers the ESOP (the "ESOP Committee"). The common shares and other ESOP
assets are held by the 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 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.
CERTAIN TRANSACTIONS WITH THE BANK
In accordance with the regulations of the Office of Thrift Supervision,
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
$482,319 at June 30, 1998.
-8-
<PAGE> 10
PROPOSAL TWO - APPROVAL OF THE HOME LOAN FINANCIAL CORPORATION
1998 STOCK OPTION AND INCENTIVE PLAN
STOCK OPTION PLAN
GENERAL. The purposes of the Stock Option Plan include promoting and
advancing the interests of the Company by retaining and providing incentives to
the directors, officers and other employees of the Company and any subsidiary by
facilitating their purchase of a stock interest in the Company. Pursuant to the
Stock Option Plan, 224,850 common shares have been reserved for issuance by the
Company upon the exercise of options to be granted to certain directors,
officers and employees of the Company and its subsidiaries from time to time
under the Stock Option Plan.
The following is a summary of the terms of the Stock Option Plan and is
qualified in its entirety by reference to the full text of the Stock Option
Plan, a copy of which is attached hereto as Exhibit A.
ADMINISTRATION AND ELIGIBILITY. The Stock Option Plan is administered
by a committee composed of at least three directors of the Company (the "Stock
Option Committee"). The current members of the Stock Option Committee are Mr.
Hamilton, Mr. Caldwell and Mr. Mauch. The Stock Option Committee may grant
options under the Stock Option Plan at such times as it deems most beneficial to
the Company and its subsidiaries on the basis of the individual participant's
position, duties and responsibilities, the value of their services to the
Company and any subsidiary and any other factors the Stock Option Committee may
deem relevant. Pursuant to the terms of the Stock Option Plan, however, no
employee may receive options to purchase more than 56,212 shares, which is 25%
of the shares initially reserved for issuance under the Stock Option Plan, and
directors who are not employees of the Company or any subsidiary may not receive
options to purchase more than 11,241 shares individually, which is 5% of the
shares initially reserved for issuance under the Stock Option Plan, or 67,455
shares as a group, which is 30% of the shares initially reserved for issuance
under the Stock Option Plan.
The Board of Directors may at any time terminate the Stock Option Plan
or may amend it from time to time in such respects as the Board of Directors may
deem advisable, except that the Board of Directors may not, without the approval
of the shareholders, make any amendment which would (a) increase the aggregate
number of common shares which may be issued under the Stock Option Plan (except
for adjustments to reflect certain changes in the capitalization of the
Company), (b) materially modify the requirements as to eligibility for
participation in the Stock Option Plan, or (c) materially increase the benefits
accruing to participants under the Stock Option Plan. Notwithstanding the
foregoing, the Board of Directors may amend the Stock Option Plan to take into
account changes in applicable securities, federal income tax and other
applicable laws.
OPTION TERMS. Options granted to the officers and employees under the
Stock Option Plan may be "incentive stock options" ("ISOs") within the meaning
of Section 422 of the Code or may be options which do not qualify under Section
422 of the Code ("Non-Qualified Stock Options"). Options granted under the Stock
Option Plan to directors who are not employees of the Company or the Bank will
be Non-Qualified Stock Options.
-9-
<PAGE> 11
The exercise price of each option granted under the Stock Option Plan,
to be determined by the Stock Option Committee at the time the option is
granted, may not be less than 100% of the fair market value of the shares on the
date of the grant. In addition, the exercise price of an ISO may not be less
than 110% of the fair market value of the shares on the date of the grant if the
recipient owns more than 10% of the outstanding common shares of the Company.
The Stock Option Committee will fix the term of each option, except that an ISO
will not be exercisable after the expiration of ten years from the date it is
granted; provided, however, that if a recipient of an ISO owns a number of
shares representing more than 10% of the Company shares outstanding at the time
the ISO is granted, the term of the ISO will not exceed five years. If the fair
market value of shares awarded pursuant to ISOs that are exercisable for the
first time during any calendar year by a participant under the Stock Option Plan
exceeds $100,000, the ISOs will be considered Non-Qualified Stock Options to the
extent of such excess.
An option recipient cannot transfer or assign an option other than by
will or in accordance with the laws of descent and distribution. Termination of
an option recipient's employment for cause, as defined in the Stock Option Plan,
will result in the termination of any outstanding exercisable options. Any
options which have not yet become exercisable will terminate upon the
resignation, removal or retirement of a director of the Company or the Bank, or
upon the termination of employment of an officer or employee of the Company or
the Bank, except in the case of death or disability.
The Company will receive no monetary consideration for the granting of
options under the Stock Option Plan. Upon the exercise of options, the Company
will receive payment of cash or, if acceptable to the Stock Option Committee,
common shares of the Company or outstanding awarded stock options. The market
value of the common shares underlying the options reserved for the Stock Option
Plan is $3,344,271, based upon the number of shares reserved, multiplied by the
$14.875 per share closing sales price of shares of the Company on August 21,
1998, as quoted on the Nasdaq National Market.
TAX TREATMENT OF INCENTIVE STOCK OPTIONS. An optionee who is granted an
ISO will not recognize taxable income either on the date of grant or on the date
of exercise, although the difference between the fair market value of the shares
at the time of exercise and the exercise price is a tax preference item
potentially subject to the alternative minimum tax.
Upon disposition of shares acquired from the exercise of an ISO,
capital gain or loss is generally recognized in an amount equal to the
difference between the amount realized on the sale or disposition and the
exercise price. However, if the optionee disposes of the shares within two years
of the date of grant or within one year from the date of the issuance of the
shares to the optionee (a "Disqualifying Disposition"), then the optionee will
recognize ordinary income, as opposed to capital gain, at the time of
disposition. In general, the amount of ordinary income recognized will be equal
to the lesser of (i) the amount of gain realized on the disposition, or (ii) the
difference between the fair market value of the shares received on the date of
exercise and the exercise price. Any remaining gain or loss is treated as a
short-term, mid-term or long-term capital gain or loss, depending upon the
period of time the shares have been held.
-10-
<PAGE> 12
The Company will not be entitled to a tax deduction upon either the
exercise of an ISO or the disposition of shares acquired pursuant to such
exercise, except to the extent that the optionee recognizes ordinary income in a
Disqualifying Disposition. Ordinary income from a Disqualifying Disposition will
constitute compensation but will not be subject to tax withholding, nor will it
be considered wages for payroll tax purposes.
If the holder of an ISO pays the exercise price, in whole or in part,
with previously acquired shares, the exchange should not affect the ISO tax
treatment of the exercise. Upon such exchange, and except for Disqualifying
Dispositions, no gain or loss is recognized by the optionee upon delivering
previously acquired shares to the Company, and shares received by the optionee
equal in number to the previously acquired common shares exchanged therefor will
have the same basis and holding period for long-term or mid-term capital gain
purposes as the previously acquired shares. (The optionee, however, will not be
able to utilize the prior holding period for the purpose of satisfying the ISO
statutory holding period requirements for avoidance of a Disqualifying
Disposition.) Shares received by the optionee in excess of the number of shares
previously acquired will have a basis of zero and a holding period which
commences as of the date the shares are transferred to the optionee upon
exercise of the ISO. If an ISO is exercised using shares previously acquired
through the exercise of an ISO, the exchange of such previously acquired shares
will be considered a disposition of such shares for the purpose of determining
whether a Disqualifying Disposition has occurred.
TAX TREATMENT OF NON-QUALIFIED STOCK OPTIONS. A recipient of a
Non-Qualified Stock Option does not recognize taxable income on the date of
grant of the option, provided that the option does not have a readily
ascertainable fair market value at the time it is granted. In general, the
optionee must recognize ordinary income at the time of exercise of a
Non-Qualified Stock Option in the amount of the difference between the fair
market value of the shares on the date of exercise and the option exercise
price. The ordinary income recognized will constitute compensation for which tax
withholding by the Company generally will be required. The amount of ordinary
income recognized by an optionee will be deductible by the Company in the year
that the optionee recognizes the income if the Company complies with any
applicable withholding requirement.
If the sale of the shares could subject the optionee to liability under
Section 16(b) of the Securities Exchange Act of 1934, the optionee generally
will recognize ordinary income only on the date that the optionee is no longer
subject to such liability in an amount equal to the fair market value of the
shares on such date less the option exercise price. Nevertheless, the optionee
may elect under Section 83(b) of the Code, within 30 days of the date of
exercise, to recognize ordinary income as of the date of exercise, without
regard to the restriction of Section 16(b).
Shares acquired upon the exercise of a Non-Qualified Stock Option will
have a tax basis equal to their fair market value on the exercise date or other
relevant date on which ordinary income is recognized, and the holding period for
the shares generally will begin on the date of exercise or such other relevant
date. Upon subsequent disposition of the shares, the optionee will recognize
long-term capital gain or loss if the optionee has held the shares for more than
eighteen months prior to disposition, mid-term capital gain or loss if the
optionee has held the shares for at least one year but less than eighteen months
prior to disposition, or short-term capital gain or loss if the optionee has
held the shares for one year or less prior to disposition.
-11-
<PAGE> 13
If an optionee with a Non-Qualified Stock Option pays the exercise
price, in whole or in part, with previously acquired shares, the optionee will
recognize ordinary income in the amount by which the fair market value of the
shares received exceeds the exercise price. The optionee will not recognize gain
or loss upon delivering such previously acquired shares to the Company. Shares
received by an optionee equal in number to the previously acquired shares
exchanged therefor will have the same basis and holding period as such
previously acquired shares. Shares received by an optionee in excess of the
number of such previously acquired shares will have a basis equal to the fair
market value of such additional shares as of the date ordinary income is
recognized. The holding period for such additional shares will commence as of
the date of exercise or such other relevant date.
PROPOSED AWARDS. If the shareholders approve the Stock Option Plan, the
Board of Directors of the Company will grant the following options to the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name of Recipient Shares Subject to Options
----------------- -------------------------
<S> <C>
Neal J. Caldwell 11,241
Charles H. Durmis 11,241
Robert C. Hamilton 56,206
Robert D. Mauch 11,241
Douglas L. Randles 11,241
Preston W. Bair 16,000
</TABLE>
Options to purchase 63,000 common shares of the Company are also
expected to be granted to employees of the Company and the Bank who are not
executive officers of the Company. It is anticipated that all options granted to
employees will be ISOs.
The Stock Option Committee may grant options under the Stock Option
Plan to the directors, officers and employees of the Company and the Bank in the
future at such times as they deem most beneficial to the Company and the Bank on
the basis of the individual participants responsibility, tenure and future
potential.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT THE SHAREHOLDERS
OF THE COMPANY APPROVE THE STOCK OPTION PLAN.
PROPOSAL THREE - APPROVAL OF THE HOME LOAN FINANCIAL CORPORATION
RECOGNITION AND RETENTION PLAN AND TRUST
RECOGNITION AND RETENTION PLAN
GENERAL. The Company has proposed the RRP to compensate directors and
employees for services to the Company and the Bank in a manner which will
provide such persons with an additional incentive to strive for the success of
the Bank and the Company. The Company expects to contribute sufficient funds to
enable the RRP to purchase up to 89,930 shares of the Company. The shares to be
awarded pursuant to the RRP may be purchased by the Company on the open market
or may consist of authorized but unissued shares of the Company. In the event
that all 89,930 shares which may be
-12-
<PAGE> 14
awarded under the RRP consist of authorized but unissued shares of the Company,
the interests of current shareholders will be diluted by approximately 3.85%.
The following is a summary of the terms of the RRP and is qualified in
its entirety by reference to the full text of the RRP, a copy of which is
attached hereto as Exhibit B.
ADMINISTRATION AND ELIGIBILITY. The RRP will be administered by a
committee composed of at least three directors of the Company (the "RRP
Committee"). The current members are Mr. Hamilton, Mr. Caldwell and Mr. Mauch.
The RRP Committee will determine which directors and employees of the Bank and
the Company will be awarded shares under the RRP and the number of shares
awarded; provided, however, that the terms of the RRP provide that the aggregate
number of shares covered by awards to any one employee may not exceed 22,482,
which is 25% of the total RRP shares, and directors who are not employees may
not receive more than 4,496 shares individually, which is 5% of the total RRP
shares, or 26,976 as a group, which is 30% of the total RRP shares.
TERMS. Unless the RRP Committee specifically states a longer period of
time when an award of shares is made, one-fifth of such shares will become
earned and non-forfeitable on each of the first five anniversaries of the date
of the award. Until shares awarded are earned by the participant, such shares
will be forfeited in the event that the participant ceases to be either a
director or an employee of the Bank, except that in the event of the death or
disability of a participant all of the participant's awarded shares will be
deemed to be earned and nonforfeitable.
The shares, together with any cash dividends or distributions paid
thereon, will be distributed as soon as practicable after they are earned. A
participant may direct the voting of all shares which have been earned but have
not yet been distributed to him or her. Shares that have been awarded, but not
earned, will be voted by the RRP trustees.
TAX TREATMENT OF SHARES AWARDED UNDER THE RRP. Persons receiving shares
under the RRP generally will not recognize income upon the award of such shares,
but will recognize ordinary income when and to the extent the restrictions on
such shares lapse, in an amount equal to the fair market value of the shares at
the time such restrictions lapse plus the amount of any dividends distributed to
the participant with respect to such shares. If applicable withholding
requirements are satisfied, the Bank will be entitled to a deduction each year
in an amount equal to the income, if any, recognized by participants for such
year.
Under Section 83(b) of the Code, a participant may elect, within 30
days after the shares are awarded, to recognize ordinary income on the date the
shares are awarded based on the fair market value of the shares on such date. If
the election is made, the Bank would be entitled to a deduction for an
equivalent amount. A participant making such an election will have a tax basis
in the shares equal to the amount of ordinary income recognized, and the
participant's holding period for capital gains purposes for such shares will
commence on the date the shares are awarded. If a Section 83(b) election is
made, however, and the shares are subsequently forfeited, the participant will
not be entitled to either a deduction of the amount previously recognized as
income with respect to such shares or a refund of any tax paid thereon.
-13-
<PAGE> 15
PROPOSED AWARDS. Subject to shareholder approval of the RRP, the RRP
Committee has established the following awards under the RRP to directors and
executive officers of the Company:
<TABLE>
<CAPTION>
Name of Recipient Shares Subject to RRP Awards
----------------- ----------------------------
<S> <C>
Neal J. Caldwell 4,496
Charles H. Durmis 4,496
Robert C. Hamilton 22,482
Robert D. Mauch 4,496
Douglas L. Randles 4,496
Preston W. Bair 7,100
</TABLE>
The RRP Committee also expects to award 25,300 common shares of the
Company to employees of the Company and the Bank who are not executive officers.
The RRP Committee may award shares under the RRP to the directors, officers and
employees of the Company and the Bank in the future at such times as they deem
most beneficial to the Company and the Bank on the basis of the individual
participant's responsibility, tenure and future potential.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT THE SHAREHOLDERS
OF THE COMPANY APPROVE THE RRP.
NEW PLAN BENEFITS
The following table sets forth information regarding the options
expected to be granted pursuant to the Stock Option Plan and the awards expected
to be made pursuant to the RRP:
<TABLE>
<CAPTION>
RRP
Stock Option Plan ---------------------------
Name and Position Shares Subject To Options Dollar Value(1) Shares
----------------- ------------------------- ---------------- ------
<S> <C> <C> <C>
Robert C. Hamilton 56,206 $334,420 22,482
All executive officers, as a
group (2 persons) 71,943 291,282 19,582
All directors who are not
executive officers, as a
group (4 persons) 44,968 267,512 17,984
All employees who are not
executive officers, as a
group (20 persons) 63,000 376,338 25,300
<FN>
(1) Based upon the number of shares to be awarded multiplied by the $14.875 per share closing
sale price quoted by The Nasdaq Stock Market, Inc., on August 21, 1998.
</TABLE>
-14-
<PAGE> 16
PROPOSAL FOUR - RATIFICATION OF SELECTION OF AUDITORS
The Board of Directors has selected Crowe, Chizek as the auditors of
the Company for the current fiscal year and recommends that the shareholders
ratify the selection. Management expects that a representative of Crowe, Chizek
will be present at the Annual Meeting, will have the opportunity to make a
statement if he or she so desires and will be available to respond to
appropriate questions.
PROPOSALS OF SHAREHOLDERS AND OTHER MATTERS
Any qualified shareholder of the Company who intends to submit a
proposal to the Company at the 1999 Annual Meeting of Shareholders (the "1999
Annual Meeting") must submit such proposal to the Company not later than May 7,
1999, to be considered for inclusion in the Company's Proxy Statement and form
of Proxy (the "Proxy Materials") relating to that meeting. If a shareholders
intends to present a proposal at the 1999 Annual Meeting of Shareholders but has
not sought the inclusion of such proposal in the Company's Proxy Materials, such
proposal must be received by the Company prior to July 21, 1999, the Company's
management proxies for the 1999 Annual Meeting will be entitled to use their
discretionary voting authority should such proposal then be raised, without any
discussion of the matter in the Company's Proxy Materials.
Management knows of no other business which may be brought before the
Annual Meeting. It is the intention of the persons named in the enclosed Proxy
to vote such Proxy in accordance with their best judgment on any other matters
which may be brought before the Annual Meeting.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO FILL IN, SIGN AND
RETURN THE PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE.
By Order of the Board of Directors
Coshocton, Ohio Robert C. Hamilton,
August 29, 1998 President
-15-
<PAGE> 17
EXHIBIT A
---------
HOME LOAN FINANCIAL CORPORATION
1998 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE. The purpose of the Home Loan Financial Corporation 1998
Stock Option and Incentive Plan (this "Plan") is to promote and advance the
interests of Home Loan Financial Corporation (the "Company") and its
shareholders by enabling the Company to attract, retain and reward directors,
managerial and other employees of the Company and any Subsidiary (hereinafter
defined), and to strengthen the mutuality of interests between such directors
and employees and the Company's shareholders by providing the directors and
employees with a proprietary interest in pursuing the long-term growth,
profitability and financial success of the Company.
2. DEFINITIONS. For purposes of this Plan, the following terms shall
have the meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended, or any successor thereto, together with the rules, regulations
and interpretations promulgated thereunder.
(c) "Committee" means the Committee of the Board constituted
as provided in Section 3 of this Plan.
(d) "Common Shares" means the common shares, without par
value, of the Company or any security of the Company issued in
substitution, in exchange or in lieu thereof.
(e) "Company" means Home Loan Financial Corporation, an Ohio
corporation, or any successor corporation.
(f) "Employment" means regular employment with the Company or
a Subsidiary and does not include service as a director only.
(g) "Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any successor statute.
<PAGE> 18
(h) "Fair Market Value" shall be determined as follows:
(i) If the Common Shares are traded on a
national securities exchange at the time of grant of the Stock
Option, then the Fair Market Value shall be the average of the
highest and the lowest selling prices on such exchange on the
date such Stock Option is granted or, if there were no sales
on such date, then on the next prior business day on which
there was a sale.
(ii) If the Common Shares are quoted on
either The Nasdaq National Market or The Nasdaq Small Cap
Market at the time of the grant of the Stock Option, then the
Fair Market Value shall be the mean between the closing high
bid and low asked quotation with respect to a Common Share on
such date on such market.
(iii) If the Common Shares are not traded on
a national securities exchange or quoted on The Nasdaq
National Market or The Nasdaq Small Cap Market, then the Fair
Market Value shall be as determined by the Committee.
(i) "Incentive Stock Option" means any Stock Option granted
pursuant to the provisions of Section 7 of this Plan that is intended
to be and is specifically designated as an "incentive stock option"
within the meaning of Section 422 of the Code.
(j) "Non-Qualified Stock Option" means any Stock Option
granted pursuant to the provisions of Section 6 of this Plan that is
not an Incentive Stock Option.
(k) "OTS" means the Office of Thrift Supervision, Department
of the Treasury.
(l) "Participant" means an employee or director of the Company
or a Subsidiary who is granted a Stock Option under this Plan.
Notwithstanding the foregoing, for the purposes of any Incentive Stock
Option under this Plan, the term "Participant" shall include only
employees of the Company or a Subsidiary.
(m) "Plan" means the Home Loan Financial Corporation 1998
Stock Option and Incentive Plan, as set forth herein and as it may be
hereafter amended from time to time.
(n) "Stock Option" means an option to purchase Common Shares
granted pursuant to the provisions of Section 7 of this Plan.
(o) "Subsidiary" means any corporation or entity in which the
Company directly or indirectly controls 50% or more of the total voting
power of all classes of its stock having voting power and includes,
without limitation, The Home Loan Savings Bank.
A-2
<PAGE> 19
(p) "Terminated for Cause" means any removal of a director or
discharge of an employee for personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of a
material provision of any law, rule or regulation (other than traffic
violations or similar offenses), a material violation of a final
cease-and-desist order or any other action of a director or employee
which results in a substantial financial loss to the Company or a
Subsidiary.
3. ADMINISTRATION.
(a) This Plan shall be administered by the Committee, which
shall be comprised of not less than three of the members of the Board.
The members of the Committee shall be appointed from time to time by
the Board. Members of the Committee shall serve at the pleasure of the
Board and the Board may from time to time remove members from, or add
members to, the Committee. A majority of the members of the Committee
shall constitute a quorum for the transaction of business. An action
approved in writing by a majority of the members of the Committee then
serving shall be fully as effective as if the action had been taken by
unanimous vote at a meeting duly called and held.
(b) The Committee is authorized to construe and interpret this
Plan and to make all other determinations necessary or advisable for
the administration of this Plan. The Committee may designate persons
other than members of the Committee to carry out its responsibilities
under such conditions and limitations as it may prescribe. Any
determination, decision or action of the Committee in connection with
the construction, interpretation, administration, or application of
this Plan shall be final, conclusive and binding upon all persons
participating in this Plan and any person validly claiming under or
through persons participating in this Plan. The Company shall effect
the granting of Stock Options under this Plan in accordance with the
determinations made by the Committee, by execution of instruments in
writing in such form as approved by the Committee.
4. TERM OF PLAN. This Plan shall terminate on the date which is ten
(10) years from the effective date of this Plan, except with respect to Stock
Options then outstanding. Notwithstanding the foregoing, no Incentive Stock
Option may be granted under this Plan after the date which is ten (10) years
from the date on which this Plan is adopted by the Board or the date on which
this Plan is approved by the shareholders of the Company, whichever is earlier.
5. COMMON SHARES SUBJECT TO PLAN. The maximum number of Common Shares
in respect of which Stock Options may be granted under this Plan, subject to
adjustment as provided in Section 10 of this Plan, shall be ten percent of the
total Common Shares sold in connection with the conversion of The Home Loan
Savings Bank from mutual to stock form.
A-3
<PAGE> 20
For the purpose of computing the total number of Common Shares
available for Stock Options under this Plan, there shall be counted against the
foregoing limitations the number of Common Shares subject to issuance upon the
exercise or settlement of Stock Options as of the dates on which such Stock
Options are granted. If any Stock Options are forfeited, terminated or exchanged
for other Stock Options, or expire unexercised, the Common Shares which were
theretofore subject to such Stock Options shall again be available for Stock
Options under this Plan to the extent of such forfeiture, termination or
expiration of such Stock Options.
Common Shares which may be issued under this Plan may be either
authorized and unissued shares or issued shares which have been reacquired by
the Company. No fractional shares shall be issued under this Plan.
6. ELIGIBILITY AND GRANTS. Persons eligible for Stock Options under
this Plan shall consist of directors and managerial and other employees of the
Company or a Subsidiary who hold positions with significant responsibilities or
whose performance or potential contribution, in the judgment of the Committee,
will benefit the future success of the Company or a Subsidiary. In selecting the
directors and employees to whom Stock Options will be awarded and the number of
shares subject to such Stock Options, the Committee shall consider the position,
duties and responsibilities of the eligible directors and employees, the value
of their services to the Company and the Subsidiaries and any other factors the
Committee may deem relevant.
7. STOCK OPTIONS. Stock Options granted under this Plan may be in the
form of Incentive Stock Options or Non-Qualified Stock Options, and such Stock
Options shall be subject to the following terms and conditions, as the Committee
shall deem desirable:
(a) Grant. Stock Options may be granted under this Plan on
terms and conditions not inconsistent with the provisions of this Plan
and in such form as the Committee may from time to time approve and
shall contain such additional terms and conditions, not inconsistent
with the express provisions of this Plan, as the Committee shall deem
desirable; provided, however, that no more than 25% of the shares
subject to Stock Options may be awarded to any individual who is an
employee of the Company or a Subsidiary, no more than 5% of such shares
may be awarded to any director who is not an employee of the Company or
a Subsidiary and no more than 30% of such shares may be awarded to
non-employee directors of the Company or a Subsidiary in the aggregate.
(b) Stock Option Price. The per share option exercise price of
a Stock Option shall be determined by the Committee at the time of
grant; provided, however, that in no event shall the exercise price of
a Stock Option be less than 100% of the Fair Market Value of the Common
Shares on the date of the grant of such Stock Option. Notwithstanding
the foregoing, in the case of a Participant who owns Common Shares
representing more than 10% of the outstanding Common Shares at the time
an Incentive Stock Option is granted, the option exercise price shall
in no event be less than 110% of the Fair Market Value of the Common
Shares at the time an Incentive Stock Option is granted to such
Participant.
A-4
<PAGE> 21
(c) Stock Option Terms. Subject to the right of the Company to
provide for earlier termination in the event of any merger, acquisition
or consolidation involving the Company, the term of each Stock Option
shall be fixed by the Committee; except that the term of an Incentive
Stock Option will not exceed ten years after the date the Incentive
Stock Option is granted; provided, however, that in the case of a
Participant who owns a number of Common Shares representing more than
10% of the Common Shares outstanding at the time an Incentive Stock
Option is granted, the term of the Incentive Stock Option granted to
such Participant shall not exceed five years.
(d) Exercisability. Except as set forth in Section 7(f) and
Section 8 of this Plan, Stock Options awarded under this Plan shall
become exercisable at the rate of not more than one-fifth per year
commencing on the date that is one year after the date of the grant of
the Stock Option and shall be subject to such other terms and
conditions as shall be determined by the Committee at the date of
grant.
(e) Method of Exercise. A Stock Option may be exercised, in
whole or in part, by giving written notice of exercise to the Company
specifying the number of Common Shares to be purchased. Such notice
shall be accompanied by payment in full of the purchase price in cash
or, if acceptable to the Committee in its sole discretion, in Common
Shares already owned by the Participant, or by surrendering outstanding
Stock Options. The Committee may also permit Participants, either on a
selective or aggregate basis, to simultaneously exercise Stock Options
and sell Common Shares thereby acquired, pursuant to a brokerage or
similar arrangement, approved in advance by the Committee, and use the
proceeds from such sale as payment of the purchase price of such
shares.
(f) Special Rule for Incentive Stock Options. With respect to
Incentive Stock Options granted under this Plan, to the extent the
aggregate Fair Market Value (determined as of the date the Incentive
Stock Option is granted) of the number of shares with respect to which
Incentive Stock Options are exercisable under all plans of the Company
or a Subsidiary for the first time by a Participant during any calendar
year exceeds $100,000, or such other limit as may be required by the
Code, such Stock Options shall be Non-Qualified Stock Options to the
extent of such excess.
8. TERMINATION OF EMPLOYMENT OR DIRECTORSHIP.
(a) Except in the event of the death or disability of a
Participant, upon the resignation, removal or retirement from the board
of directors of any Participant who is a director of the Company or a
Subsidiary or upon the termination of Employment of a Participant who
is not a director of the Company or a Subsidiary, any Stock Option
which has not yet become exercisable shall thereupon terminate and be
of no further force or effect and, subject to extension by the
Committee, any Stock Option which has become exercisable shall
terminate if it is not exercised within 12 months of such resignation,
removal or retirement.
A-5
<PAGE> 22
(b) Unless the Committee shall specifically state otherwise at
the time a Stock Option is granted, all Stock Options granted under
this Plan shall become exercisable in full on the date of termination
of a Participant's employment or directorship with the Company or a
Subsidiary because of his death or disability, and, subject to
extension by the Committee, all Stock Options shall terminate if not
exercised within 12 months of the Participant's death or disability.
(c) In the event the Employment or the directorship of a
Participant is Terminated for Cause, any Stock Option which has not
been exercised shall terminate as of the date of such termination for
cause.
9. NON-TRANSFERABILITY OF STOCK OPTIONS. No Stock Option under this
Plan and no rights or interests therein shall be assignable or transferable by a
Participant except by will or pursuant to the laws of descent and distribution.
During the lifetime of a Participant, Stock Options are exercisable only by, and
payments in settlement of Stock Options will be payable only to, the Participant
or his or her legal representative.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
(a) The existence of this Plan and the Stock Options granted
hereunder shall not affect or restrict in any way the right or power of
the Board or the shareholders of the Company to make or authorize the
following: any adjustment, recapitalization, reorganization or other
change in the Company's capital structure or its business; any merger,
acquisition or consolidation of the Company; any issuance of bonds,
debentures, preferred or prior preference stocks ahead of or affecting
the Company's capital stock or the rights thereof; the dissolution or
liquidation of the Company or any sale or transfer of all or any part
of its assets or business; or any other corporate act or proceeding,
including any merger or acquisition which would result in the exchange
of cash, stock of another company or options to purchase the stock of
another company for any Stock Option outstanding at the time of such
corporate transaction or which would involve the termination of all
Stock Options outstanding at the time of such corporate transaction.
(b) In the event of any change in capitalization affecting the
Common Shares of the Company, such as a stock dividend, stock split,
recapitalization, merger, consolidation, spin-off, split-up,
combination or exchange of shares or other form of reorganization, or
any other change affecting the Common Shares, such proportionate
adjustments, if any, as the Board in its discretion may deem
appropriate to reflect such change shall be made with respect to the
aggregate number of Common Shares for which Stock Options in respect
thereof may be granted under this Plan, the maximum number of Common
Shares which may be sold or awarded to any Participant, the number of
Common Shares covered by each outstanding Stock Option, and the
exercise price per share in respect of outstanding Stock Options.
A-6
<PAGE> 23
(c) The Committee may also make such adjustments in the number of
shares covered by, and the exercise price or other value of, any
outstanding Stock Options in the event of a spin-off or other
distribution (other than normal cash dividends) of Company assets to
shareholders. In the event that another corporation or business entity
is being acquired by the Company and the Company agrees to assume
outstanding employee stock options and/or the obligation to make future
grants of options or rights to employees of the acquired entity, the
aggregate number of Common Shares available for Stock Options under
Section 5 of this Plan may be increased accordingly.
11. AMENDMENT AND TERMINATION OF THIS PLAN. Without further approval of
the shareholders, the Board may at any time terminate this Plan or may amend it
from time to time in such respects as the Board may deem advisable, except that
the Board may not, without approval of the shareholders, make any amendment
which would (a) increase the aggregate number of Common Shares which may be
issued under this Plan (except for adjustments pursuant to Section 10 of this
Plan), (b) materially modify the requirements as to eligibility for
participation in this Plan, or (c) materially increase the benefits accruing to
Participants under this Plan. The above notwithstanding, the Board may amend
this Plan to take into account changes in applicable securities, federal income
tax and other applicable laws.
12. MODIFICATION OF OPTIONS. The Board may authorize the Committee to
direct the execution of an instrument providing for the modification of any
outstanding Stock Option which the Board believes to be in the best interests of
the Company; provided, however, that no such modification, extension or renewal
shall reduce the exercise price or confer on the holder of such Stock Option any
right or benefit which could not be conferred on him by the grant of a new Stock
Option at such time and shall not materially decrease the Participant's benefits
under the Stock Option without the consent of the holder of the Stock Option,
except as otherwise permitted under this Plan.
13. MISCELLANEOUS.
(a) Tax Withholding. The Company shall have the right to
deduct from any settlement made under this Plan, including the delivery
or vesting of Common Shares, any federal, state or local taxes of any
kind required by law to be withheld with respect to such payments or to
take such other action as may be necessary in the opinion of the
Company to satisfy all obligations for the payment of such taxes. If
Common Shares are used to satisfy tax withholding, such shares shall be
valued based on the Fair Market Value when the tax withholding is
required to be made.
(b) No Right to Employment. Neither the adoption of this Plan
nor the granting of any Stock Option shall confer upon any employee of
the Company or a Subsidiary any right to continued Employment with the
Company or a Subsidiary, as the case may be, nor shall it interfere in
any way with the right of the Company or a Subsidiary to terminate the
Employment of any of its employees at any time, with or without cause.
A-7
<PAGE> 24
(c) Annulment of Stock Options. The grant of any Stock Option
under this Plan payable in cash is provisional until cash is paid in
settlement thereof. The grant of any Stock Option payable in Common
Shares is provisional until the Participant becomes entitled to the
certificate in settlement thereof. In the event the Employment or the
directorship of a Participant is Terminated for Cause, any Stock Option
which is provisional shall be annulled as of the date of such
termination.
(d) Other Company Benefit and Compensation Programs. Payments
and other benefits received by a Participant under a Stock Option made
pursuant to this Plan shall not be deemed a part of a Participant's
regular, recurring compensation for purposes of the termination
indemnity or severance pay law of any country and shall not be included
in, nor have any effect on, the determination of benefits under any
other employee benefit plan or similar arrangement provided by the
Company or a Subsidiary unless expressly so provided by such other plan
or arrangement, or except where the Committee expressly determines that
a Stock Option or portion of a Stock Option should be included to
accurately reflect competitive compensation practices or to recognize
that a Stock Option has been made in lieu of a portion of competitive
annual cash compensation. Stock Options under this Plan may be made in
combination with or in tandem with, or as alternatives to, grants,
stock options or payments under any other plans of the Company or a
Subsidiary. This Plan notwithstanding, the Company or any Subsidiary
may adopt such other compensation programs and additional compensation
arrangements as it deems necessary to attract, retain and reward
directors and employees for their service with the Company and its
Subsidiaries.
(e) Securities Law Restrictions. No Common Shares shall be
issued under this Plan unless counsel for the Company shall be
satisfied that such issuance will be in compliance with applicable
federal and state securities laws. Certificates for Common Shares
delivered under this Plan may be subject to such stock-transfer orders
and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the Securities and
Exchange Commission, any stock exchange upon which the Common Shares
are then listed, and any applicable federal or state securities law.
The Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
(f) Stock Option Agreement. Each Participant receiving a Stock
Option under this Plan shall enter into an agreement with the Company
in a form specified by the Committee agreeing to the terms and
conditions of the Stock Option and such related matters as the
Committee shall, in its sole discretion, determine.
(g) Cost of Plan. The costs and expenses of administering this
Plan shall be borne by the Company.
A-8
<PAGE> 25
(h) Governing Law. This Plan and all actions taken hereunder
shall be governed by and construed in accordance with the laws of the
State of Ohio, except to the extent that federal law shall be deemed
applicable.
(i) Effective Date. This Plan shall be effective upon the
later of adoption by the Board and approval by the Company's
shareholders. This Plan shall be submitted to the shareholders of the
Company for approval at an annual or special meeting of shareholders to
be held no sooner than six months after the effective date of the
conversion of The Home Loan Savings Bank from mutual to stock form.
A-9
<PAGE> 26
EXHIBIT B
HOME LOAN FINANCIAL CORPORATION
RECOGNITION AND RETENTION PLAN AND TRUST AGREEMENT
ARTICLE I
DEFINITIONS
The following words and phrases when used in this Agreement with an
initial capital letter shall have the meanings set forth below. Wherever
appropriate, the masculine pronoun shall include the feminine pronoun and the
singular shall include the plural:
1.01 "Agreement" means The Home Loan Financial Corporation Recognition
and Retention Plan and Trust Agreement.
1.02 "Award" means a right granted to a Director or an Employee under
this Plan to receive Plan Shares.
1.03 "Bank" means The Home Loan Savings Bank, a savings and loan
association organized under the laws of the State of Ohio.
1.04 "Beneficiary" means the person or persons designated by a
Recipient to receive any benefits payable under this Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's estate.
1.05 "Board" means the Board of Directors of the Corporation.
1.06 "Committee" means the Recognition and Retention Plan Committee
appointed by the Board pursuant to Article IV hereof.
1.07 "Common Shares" means common shares of the Corporation.
1.08 "Conversion" means the conversion of the Bank from mutual to stock
form.
1.09 "Corporation" means Home Loan Financial Corporation, a savings and
loan holding company incorporated under the laws of the State of Ohio for the
purpose of holding all of the common shares of the Bank issued in connection
with the Conversion, or any successor thereto.
1.10 "Director" means any person who is a member of the Board of
Directors of the Corporation, the Bank or a Subsidiary.
<PAGE> 27
1.11 "Employee" means any person who is employed by the Corporation,
the Bank or a Subsidiary.
1.12 "Person" means an individual, corporation, partnership, trust,
bank, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
1.13 "Plan" means the Recognition and Retention Plan established by
this Agreement.
1.14 "Plan Shares" means the Common Shares held pursuant to the Trust
or which may be purchased by the Trustee pursuant to Section 5.02 of this
Agreement.
1.15 "Plan Share Reserve" means the Common Shares held by the Trustee
pursuant to Sections 5.02 and 5.03 of this Agreement.
1.16 "Recipient" means any Director or Employee who receives an Award
under the Plan.
1.17 "Subsidiary" means a subsidiary of the Bank, if any, which, with
the consent of the Board, agrees to participate in the Plan.
1.18 "Trust" means the trust established by this Agreement.
1.19 "Trustee" means the person or persons or entity approved by the
Board pursuant to Sections 4.01 and 4.02 to hold legal title to the assets of
the Plan for the purposes set forth herein.
ARTICLE II
ESTABLISHMENT OF THE PLAN AND TRUST
2.01 The Corporation hereby establishes a Recognition and Retention
Plan and Trust upon the terms and subject to the conditions set forth in this
Agreement.
2.02 The Trustee hereby accepts the Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions of this Agreement.
B-2
<PAGE> 28
ARTICLE III
PURPOSE OF THE PLAN
3.01 The purpose of the Plan is to reward and retain the Directors and
Employees of the Corporation, the Bank and the Subsidiaries by providing such
Directors and Employees with an equity interest in the Corporation as reasonable
compensation for their contributions to the Corporation, the Bank and any
Subsidiary.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, which shall consist of not less than three members
of the Board. The Committee shall have all of the powers set forth in this Plan.
The interpretation and construction by the Committee of any provisions of this
Agreement or of any Award granted hereunder shall be final, conclusive and
binding. The Committee shall act by the vote, or the written consent, of a
majority of its members. The Committee shall report actions and decisions with
respect to the Plan to the Board upon request by the Board.
4.02 ROLE OF THE BOARD. The members of the Committee and the Trustee
shall be appointed or approved by and shall serve at the pleasure of the Board.
The Board may in its discretion from time to time remove members from or add
members to the Committee and may remove, replace or add one or more Trustees.
4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee,
nor any Trustee, shall be liable for any determination made in good faith with
respect to the Plan or any Plan Shares or Awards granted under the Plan. If a
member of the Board or of the Committee or any Trustee 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, by
reason of anything done or not done by such member in such capacity under or
with respect to this Plan, the Bank shall indemnify such member against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such member in connection with such action,
suit or proceeding if such member acted in good faith and in a manner such
member reasonably believed to be in or not opposed to the best interests of the
Corporation, the Bank and any Subsidiary and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such member's conduct
was unlawful.
B-3
<PAGE> 29
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the
amounts, or the method of computing the amounts, to be contributed by the
Corporation or the Bank to the Trust. Such amounts shall be paid to the Trustee
at the time of contribution. No contributions to the Trust by Directors or
Employees shall be permitted.
5.02 INVESTMENT OF TRUST ASSETS. The Trust shall not purchase a number
of Common Shares greater than four percent (4%) of the number of Common Shares
issued in connection with the Conversion. After such investment, the Common
Shares purchased shall be held by the Trustee in the Plan Share Reserve until
such Common Shares are subject to one or more Awards. Any funds held by the
Trust shall be invested by the Trustee in such accounts at the Bank or elsewhere
or such other instruments or investments as the Trustee shall determine to be
appropriate.
5.03 EFFECT OF ALLOCATIONS, RETURNS AND FORFEITURES UPON PLAN SHARE
RESERVES. Upon the allocation of Awards pursuant to Section 6.02 of this
Agreement, or the decision of the Committee to return Plan Shares to the
Corporation, the Plan Share Reserve shall be reduced by the number of Plan
Shares so allocated or returned. Any Plan Shares subject to an Award which is
forfeited by the Recipient pursuant to Section 7.01(b) of this Agreement shall
be retained in the Plan Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 ELIGIBILITY. Directors and Employees are eligible to receive
Awards within the sole discretion of the Committee.
6.02 ALLOCATIONS. The Committee will determine in its sole discretion
which of the Directors and Employees will be granted Awards and the number of
Plan Shares covered by each Award; provided, however, if this Plan is
implemented prior to the first anniversary of the effective date of the
Conversion, the following restrictions shall apply: (a) the aggregate number of
Plan Shares covered by Awards to any one Employee shall not exceed 25% of the
total number of Plan Shares, (b) no more than 5% of the Plan Shares shall be
awarded to any Director who is not an Employee, and (c) no more than 30% of the
Plan Shares shall be awarded in the aggregate to Directors who are not
Employees. In the event that Plan Shares are forfeited for any reason, the
Committee may, from time to time, determine which of the Employees and Directors
will be granted additional Awards to be awarded from forfeited Plan Shares.
In selecting the Directors and Employees to whom Awards will be granted
and the number of shares covered by such Awards, the Committee shall consider
the position, duties and responsibilities of the eligible Directors and
Employees, the value of their services to the
B-4
<PAGE> 30
Corporation, the Bank and any Subsidiary and any other factors the Committee may
deem relevant.
6.03 FORM OF ALLOCATION. As promptly as practicable after a
determination is made pursuant to Section 6.02 of this Agreement that an Award
is to be made, the Committee shall notify the Recipient in writing of the grant
of the Award, the number of Plan Shares covered by the Award and the terms upon
which the Plan Shares subject to the Award may be earned. The date on which the
Committee determines that an Award is to be made or a later date designated by
the Committee shall be considered the date of grant of the Award. The Committee
shall maintain records as to all grants of Awards.
6.04 ALLOCATIONS NOT REQUIRED. None of the Directors or Employees,
either individually or as a group, shall have any right or entitlement to
receive an Award. The Committee may, with the approval of the Board, and shall,
if so directed by the Board, return all Common Shares and other assets in the
Plan Share Reserve to the Corporation at any time and thereafter cease issuing
Awards.
6.05 SHAREHOLDER APPROVAL. If this Plan is implemented prior to the
first anniversary of the effective date of the Conversion, this Agreement shall
be submitted to the shareholders of the Corporation for approval at an annual or
special meeting to be held no sooner than six months after the effective date of
the Conversion and no Awards shall be granted hereunder until the shareholders
of the Corporation approve this Agreement.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Unless the Committee shall specifically
state a longer period of time over which Awards shall be earned and
non-forfeitable at the time an Award is granted, Plan Shares covered by each
Award shall become earned and non-forfeitable by a Recipient over a period of
five years at the rate of one-fifth per year commencing on the date which is one
year after the date of the grant of such Award, if this Plan is implemented
prior to the first anniversary of the effective date of the Conversion. As Plan
Shares become earned and non-forfeitable, any cash dividends, returned capital
and earnings thereon shall also become earned and non-forfeitable.
(b) REVOCATION. Unless otherwise permitted by applicable laws
and regulations, any Plan Shares and any cash dividends, returned capital and
earnings thereon that have not become earned and non-forfeitable in accordance
with Section 7.01(a) of this Agreement shall be forfeited in the event that a
Recipient is no longer a Director or an Employee, except as otherwise provided
in subsection (c) of this Section 7.01.
B-5
<PAGE> 31
(c) EXCEPTION FOR TERMINATIONS DUE TO DEATH OR DISABILITY. All
Plan Shares and cash dividends, returned capital and earnings thereon subject to
an Award held by a Recipient whose service as a Director or Employee terminates
due to (i) death or (ii) disability (as determined by the Committee) shall be
deemed fully earned and non-forfeitable as of the later of the Recipient's last
day of service as a Director or as an Employee and shall be distributed as soon
as practicable thereafter.
7.02 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Except as otherwise
provided in this Agreement, Plan Shares shall be distributed to the Recipient or
his or her Beneficiary, as the case may be, as soon as practicable after they
become earned and non-forfeitable, together with any cash distributions,
returned capital and earnings with respect to such Plan Shares.
(b) FORM OF DISTRIBUTION. All distributions of Plan Shares,
together with any shares representing stock dividends, shall be distributed in
the form of Common Shares. No fractional shares shall be distributed. Payments
representing cash dividends, returned capital and earnings thereon shall be made
in cash.
(c) WITHHOLDING. The Trustee may withhold from any cash
payment made pursuant to this Plan sufficient amounts to cover any applicable
withholding and employment taxes and, if the amount of such cash payment is not
sufficient, the Trustee may require the Recipient or Beneficiary to pay to the
Trustee the amount required to be withheld as a condition of delivering the Plan
Shares which have become earned and non-forfeitable. The Trustee shall pay over
to the Bank, the Corporation or the Subsidiary which employs or employed such
Recipient or which the Recipient serves or served as a Director, any such amount
withheld from or paid by the Recipient or Beneficiary.
(d) REGULATORY EXCEPTIONS. Notwithstanding anything to the
contrary in this Agreement, no Plan Shares, upon becoming earned and
non-forfeitable, shall be distributed unless and until all of the requirements
of all applicable laws and regulations shall have been met.
7.03 VOTING OF PLAN SHARES. All Common Shares held by the Trustee in
the Plan Share Reserve which have not yet been earned by a Recipient pursuant to
Section 7.01 of this Agreement shall be voted by the Trustee. A Recipient shall
be entitled to direct the voting of Plan Shares which have been earned pursuant
to Section 7.01 of this Agreement but have not yet been distributed to him.
B-6
<PAGE> 32
ARTICLE VIII
TRUST
8.01 TRUST. The Trustee shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and the Trust and the applicable directions, rules,
regulations, procedures and policies established by the Committee pursuant to
this Agreement.
8.02 MANAGEMENT OF TRUST. The Trustee shall have complete authority and
discretion with respect to the management and control of the Trust. The Trustee
shall have the power to do all things and execute such instruments as may be
deemed necessary or proper with respect to the duties of the Trustee hereunder,
including the following powers:
(a) To invest up to 100% of all Trust assets in Common
Shares without regard to any law now or hereafter in force limiting
investments for trustees or other fiduciaries. In making such
investment, the Trustee is authorized to purchase Common Shares from
the Corporation or from any other source. Such Common Shares so
purchased may be outstanding, newly issued or treasury shares;
(b) To invest any Trust assets not otherwise invested in
Common Shares in such other investments as the Trustee considers
appropriate. Such investments may include deposit accounts and
certificates of deposit issued by the Bank;
(c) To sell, exchange or otherwise dispose of any property
at any time held or acquired by the Trust;
(d) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of words
indicating that such security is an asset of the Trust (but accurate
records shall be maintained showing that such security is an asset of
the Trust);
(e) To hold cash without interest in such amounts as may be
reasonable, in the opinion of the Trustee, for the proper operation of
the Plan and the Trust;
(f) To employ brokers, agents, custodians, consultants and
accountants;
(g) To hire counsel to render advice with respect to the
rights, duties and obligations of the Trustee hereunder, and such other
legal services or representation as the Trustee may deem desirable; and
(h) To hold funds and securities representing the amounts to
be distributed to a Recipient or his or her Beneficiary as a
consequence of a dispute as to the disposition thereof, whether in a
segregated account or held in common with other assets of the Trust.
B-7
<PAGE> 33
Notwithstanding anything herein contained to the contrary, the Trustee shall not
be required to make any inventory, appraisal or settlement or report to any
court, or to secure any order of court for the exercise of any power herein
contained, or to give bond.
8.03 RECORDS AND ACCOUNTS. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Committee.
8.04 EARNINGS. All earnings, gains and losses with respect to Trust
assets shall be allocated, in accordance with a reasonable procedure adopted by
the Committee, to bookkeeping accounts for Recipients or to the general account
of the Trust, depending on the nature and allocation of the assets generating
such earnings, gains and losses. Without limiting the generality of the
foregoing, any earnings on cash dividends or returned capital received with
respect to Plan Shares shall be allocated (a) to accounts for Recipients, if
such shares which are the subject of outstanding Awards, and shall become earned
and distributed as specified in Article VII of this Agreement or (b) otherwise
to the Plan Share Reserve if such Plan Shares are not the subject of outstanding
awards.
8.05 EXPENSES. All costs and expenses incurred in the operation and
administration of the Plan shall be paid by the Bank.
ARTICLE IX
MISCELLANEOUS
9.01 ADJUSTMENTS FOR CAPITAL CHANGES. The aggregate number of Plan
Shares available for issuance pursuant to the Awards and the number of Plan
Shares to which any Award relates shall be proportionately adjusted for any
increase or decrease in the total number of outstanding Common Shares issued
subsequent to the effective date of the Plan if such increase or decrease
resulted from any split, subdivision or consolidation of shares or other capital
adjustment, or other increase or decrease in such shares effected without
receipt or payment of consideration by the Corporation.
9.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution,
at any time amend or terminate the Plan. The power to amend or terminate the
Plan shall include the power to direct the Trustee to return to the Corporation
or the Bank all or any part of the assets of the Trust, including Common Shares
held in the Plan Share Reserve, as well as Common Shares and other assets
subject to Awards which are not yet earned by the Directors or Employees to whom
they are allocated; provided, however, that the termination of the Trust shall
not affect a Recipient's right to earn Awards and to the distribution of Common
Shares relating thereto, including earnings thereon, in accordance with the
terms of this Agreement and the grant by the Committee or the Board.
B-8
<PAGE> 34
9.03 NONTRANSFERABLE. Awards shall not be transferable by a Recipient.
During the lifetime of the Recipient, an Award may only be earned by and paid to
the Recipient who was notified in writing of the Award by the Committee pursuant
to Section 6.03 of this Agreement. No Recipient or Beneficiary shall have any
right in or claim to any assets of the Plan or the Trust, nor shall the
Corporation, the Bank or any Subsidiary be subject to any claim for benefits
hereunder.
9.04 DIRECTORSHIP RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Director to continue to serve as a Director of the
Corporation, the Bank or any Subsidiary.
9.05 EMPLOYMENT RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Employee to continue in the employ of the Corporation, the
Bank or any Subsidiary.
9.06 VOTING AND DIVIDEND RIGHTS. No Recipient shall have any voting or
dividend rights or other rights of a shareholder in respect of any Plan Shares
covered by an Award, except as expressly provided in Sections 7.01, 7.02 and
7.03 of this Agreement, prior to the time such Plan Shares are actually
distributed to such Recipient.
9.07 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Ohio, except to the extent that federal law shall
be deemed applicable.
9.08 EFFECTIVE DATE. Subject to Section 6.05 of this Agreement, this
Agreement shall be effective as of the 13th day of October, 1998.
9.09 TERM OF PLAN. The Plan shall remain in effect until the earlier of
(a) the termination of the Plan by the Board or (b) the distribution of all
assets from the Trust. The termination of the Plan shall not affect any Awards
previously granted and such Awards shall remain valid and in effect until they
have been earned and paid or by their terms expire or are forfeited.
9.10 TAX STATUS OF TRUST. It is intended that the trust established
hereby be treated as a grantor trust of the Corporation under the provisions of
Section 671, ET SEQ., of the Internal Revenue Code of 1986, as amended (26
U.S.C. sec. 671 ET SEQ.).
B-9
<PAGE> 35
IN WITNESS WHEREOF, the following Trustees execute this Agreement,
accepting and binding themselves to undertake and perform the obligations and
duties of the Trustee hereunder and consenting to the foregoing Agreement
effective the 13th day of October, 1998.
By: (Trustee)
-----------------------------
By: (Trustee)
-----------------------------
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized officer and duly attested, all as of the 13th
day of October, 1998.
Attest: HOME LOAN FINANCIAL CORPORATION
By:
- ---------------------------- ---------------------------------
Preston W. Bair Robert C. Hamilton
Secretary its President
B-10
<PAGE> 1
Exhibit 21
SUBSIDIARIES
Name State of Incorporation
- ----- -----------------------
The Home Loan Savings Bank Ohio
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
FOR THE FISCAL YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,323,331
<INT-BEARING-DEPOSITS> 2,570,954
<FED-FUNDS-SOLD> 5,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,018,560
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 56,824,312
<ALLOWANCE> 223,237
<TOTAL-ASSETS> 81,914,989
<DEPOSITS> 48,537,875
<SHORT-TERM> 0
<LIABILITIES-OTHER> 812,480
<LONG-TERM> 1,000,000
0
0
<COMMON> 0
<OTHER-SE> 31,564,634
<TOTAL-LIABILITIES-AND-EQUITY> 81,914,989
<INTEREST-LOAN> 4,744,992
<INTEREST-INVEST> 417,752
<INTEREST-OTHER> 208,804
<INTEREST-TOTAL> 5,371,548
<INTEREST-DEPOSIT> 2,091,597
<INTEREST-EXPENSE> 2,107,960
<INTEREST-INCOME-NET> 3,263,588
<LOAN-LOSSES> 120,000
<SECURITIES-GAINS> 121
<EXPENSE-OTHER> 1,929,492
<INCOME-PRETAX> 1,390,633
<INCOME-PRE-EXTRAORDINARY> 918,928
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 918,928
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
<YIELD-ACTUAL> 5.09
<LOANS-NON> 0
<LOANS-PAST> 245,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 119,218
<CHARGE-OFFS> 17,848
<RECOVERIES> 1,867
<ALLOWANCE-CLOSE> 223,237
<ALLOWANCE-DOMESTIC> 223,237
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,000
</TABLE>
