As filed with the Securities and Exchange Commission on July 10, 1998
Registration No. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FIRST NILES FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 6035 Applied For
-------- ---- -----------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
55 N. Main Street, Niles, Ohio 44446-5097
(330) 652-2539
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
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William L. Stephens, President
First Niles Financial, Inc.
55 N. Main Street
Niles, Ohio 44446-5097
(330) 652-2539
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Please send copies of all communications to:
James S. Fleischer, P.C.
Michael S. Sadow, P.C.
SILVER, FREEDMAN & TAFF, L.L.P.
(a limited liability partnership including professional corporations)
1100 New York Avenue, NW
Seventh Floor, East Tower
Washington, DC 20005-3934
(202) 414-6100
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Aggregate Amount of
Securities to be Registered Registered(1) Per Share (1) Offering Price(1) Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per shares 2,645,000 shares $10.00 $26,450,000 $7,802.75(1)
====================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
[Logo]
FIRST NILES FINANCIAL, INC.
(Proposed Holding Company for Home Federal Savings and Loan Association
of Niles)
Up to 2,615,000 Shares of Common Stock
$10.00 Per Share
Home Federal Savings and Loan Association of Niles ("Home Federal" or the
"Association") is converting from the mutual to the stock form of organization
(the "Conversion"). As part of the Conversion, Home Federal will become a wholly
owned subsidiary of First Niles Financial, Inc. First Niles Financial, Inc. was
formed in July 1998 and upon consummation of the Conversion will own all of the
shares of Home Federal. The common stock of First Niles Financial, Inc. is being
offered for sale to the public in accordance with a plan of conversion. The plan
of conversion must be approved by the Office of Thrift Supervision and by a
majority of the votes eligible to be cast by members of Home Federal. No common
stock will be sold if Home Federal does not receive these approvals or if First
Niles Financial, Inc. does not receive orders for at least the minimum number of
shares.
Terms of the Offering
Keller & Co., Inc., an independent appraisal firm, has estimated the pro forma
market value of Home Federal, on a converted basis, to be between $17,000,000
and $23,000,000. Based on this estimate, First Niles Financial, Inc. will offer
between 1,670,000 shares and 2,270,000 shares, to depositors, borrowers,
directors and officers of Home Federal, and the public. In addition, we intend
to issue 30,000 shares of First Niles Financial, Inc. common stock to a
charitable foundation. Home Federal may increase the number of shares offered to
up to 2,615,000 shares, subject to regulatory approval. Based on these
estimates, First Niles Financial, Inc. is making the following offering of
shares of common stock:
Adjusted
Minimum Midpoint Maximum Maximum
------- -------- ------- -------
Per Share Price ........ $ 10.00 $ 10.00 $ 10.00 $ 10.00
Number of Shares ....... 1,670,000 1,970,000 2,270,000 2,615,000
Underwriting Commission
and Other Expenses ... 582,596 624,000 665,387 712,991
Net Proceeds ........... $16,117,404 $19,076,000 $22,034,613 $25,437,009
Net Proceeds per share . $ 9.65 $ 9.68 $ 9.71 $ 9.73
Please refer to Risk Factors beginning on page 8 of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
For information on how to subscribe, call the Stock Information Center at (___)
___-____.
First Niles Financial, Inc. anticipates that its common stock will be traded on
the Nasdaq National Market.
CHARLES WEBB & COMPANY,
a Division of Keefe, Bruyette & Woods, Inc.
The date of this Prospectus is ___________, 1998
<PAGE>
[INSERT MAP]
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to the financial statements of Home
Federal Savings and Loan Association of Niles. References in this document to
"Home Federal", the "Association", "we", "us", and "our" refer to Home Federal
Savings and Loan Association of Niles either in its present form or as a stock
savings association following the Conversion. References in this document to the
"Company" refer to First Niles Financial, Inc. In certain instances where
appropriate, the "Company" refers collectively to First Niles Financial, Inc.
and to Home Federal Savings and Loan Association of Niles.
The Company:
First Niles Financial, Inc.
55 North Main Street
Niles, Ohio 44446-5097
(330) 652-2539
First Niles Financial, Inc. is not an operating company and has not engaged in
any significant business to date. It was formed in July 1998 as a
Delaware-chartered corporation to be the holding company for Home Federal. The
holding company structure will provide greater flexibility in terms of
operations, expansion and diversification. See "First Niles Financial, Inc." on
page 14.
The Association:
Home Federal Savings and Loan Association of Niles
55 North Main Street
Niles, Ohio 44446-5097
(330) 652-2539
Home Federal was established in Niles, Ohio in 1897. We are a community
and customer oriented federal mutual savings association serving primarily the
Niles, Ohio area through our one office located in Niles. We provide financial
services to individuals, families and small businesses. Historically, we have
emphasized residential mortgage lending, primarily originating one- to
four-family mortgage loans. Deposits at the Association are insured up to the
applicable limits by the Federal Deposit Insurance Corporation. At April 30,
1998, Home Federal had total assets of $72.5 million, deposits of $57.8 million,
and retained earnings of $12.2 million. See "Home Federal Savings and Loan
Association of Niles" on pages 13 and 14.
The Conversion
On July 6, 1998, we adopted a Plan of Conversion, pursuant to which we
will convert from a federally chartered mutual savings institution to a
federally chartered stock savings institution and immediately thereafter become
a wholly owned subsidiary of the Company. The Conversion will include adoption
of a federal stock charter and bylaws which will authorize us to issue capital
stock.
<PAGE>
Under the Plan, Home Federal common stock is being sold to the Company and
Company common stock is being offered to the public on a priority basis. In
addition, 30,000 shares of Company Common Stock will be issued to a charitable
foundation (the "Foundation").
Currently, in our mutual form, our depositors and borrowers are members
and have voting rights. Subsequent to Conversion, voting rights will be vested
exclusively in the Company as the sole stockholder of the Association. Voting
rights as to the Company will be held exclusively by its stockholders. Our
members will have the opportunity to vote on the Plan of Conversion and the
stock contribution to the Foundation at our Special Meeting of Members to be
held on _____________, 1998. See "The Conversion" on pages 78 to 101.
Important Risks in Owning First Niles Financial, Inc.'s Common Stock
Before you decide to purchase stock in the offering, you should read
the "Risk Factors" section on pages 8-13 of this document, in addition to the
other sections of this Prospectus. The Common Stock is subject to investment
risk, including the possible loss of principal invested.
The Stock Offering
First Niles Financial, Inc. is offering between 1,670,000 and 2,270,000
shares of common stock ("Common Stock") at $10.00 per share. The Company may
increase the offering to 2,615,000 shares without further notice to you. Any
increase over 2,615,000 shares would require the approval of the Office of
Thrift Supervision (the "OTS"). You may not change or cancel any stock order
previously delivered to us as a result of an increase in the offering within
these limits.
Stock Purchase Priorities and Limitations
The shares of Common Stock will be offered on the basis of priorities.
Certain of our depositors and borrowers and the Employee Stock Ownership Plan
established by the Association will receive subscription rights to purchase
shares of Common Stock. Any shares not subscribed for by depositors and
borrowers will be offered in a direct community offering or a public offering.
Subscriptions for shares of Common Stock will be subject to the maximum and
minimum purchase limitations set forth in the Plan of Conversion and as further
described in this Prospectus. See "The Conversion - Offering of Holding Company
Common Stock" on pages 89 to 92.
Prohibition on Transfer of Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law and may result in the forfeiture of
your subscription rights.
Stock Pricing and Number of Shares to be Issued
First Niles Financial, Inc.'s board of directors set the purchase price
per share of the Common Stock at $10.00. It is the price most commonly used in
stock offerings involving conversions of mutual savings institutions. The number
or range of shares of Common Stock to be issued in the offering is based on an
independent appraisal of the pro forma market value of the Common Stock
-2-
<PAGE>
by Keller & Company, Inc. ("Keller & Company"). Keller & Company is an appraisal
firm experienced in appraisals of savings institutions. The independent
valuation prepared by Keller & Company estimates that as of June 26, 1998, the
pro forma market valuation range (the "Estimated Valuation Range" or "EVR") of
First Niles Financial, Inc. was between $17,000,000 and $23,000,000 (with a
midpoint of $20,000,000). The pro forma market valuation represents the
estimated market value of First Niles Financial, Inc. after giving effect to the
sale of the Common Stock in this offering and the issuance of 30,000 shares to
the Foundation. Based on this valuation and the $10.00 per share price, the
number of shares of Common Stock that First Niles Financial, Inc. will issue
will range from between 1,700,000 shares to 2,300,000 shares. The establishment
of the Foundation had the effect of reducing the market valuation of First Niles
Financial, Inc. See "Risk Factors - The Expense and Dilutive Effect of the Stock
Contribution to the Charitable Foundation" on pages 8 and 9 and "Comparison of
Valuation and Pro Forma Information With No Stock Contribution" on pages 22 to
24.
The appraisal was based both upon our financial condition and
operations and upon the effect of the additional capital we will raise in this
offering. The independent appraisal will be updated before we complete the
Conversion. Changes in market and financial conditions and demand for the Common
Stock may cause the Estimated Valuation Range to increase by up to 15%, to up to
$26,450,000. If this occurs, the maximum number of shares that can be sold in
this offering can increase to up to 2,615,000 shares (plus the 30,000 shares to
be issued to the Foundation). Subscribers for Common Stock will not be notified
if the maximum number of shares to be sold increases by 15% or less. If,
however, the Estimated Valuation Range of the Common Stock is either below
$17,000,000 or above $26,450,000, then you will be notified and will have the
opportunity to modify or cancel your order. See "The Conversion - Stock Pricing
and Number of Shares to be Issued" on pages 87 to 89.
The independent valuation prepared by Keller & Company is not a
recommendation as to the advisability of purchasing the Common Stock.
Accordingly, you should not buy the Common Stock based on the independent
valuation.
Termination of the Offering
The subscription offering will terminate at __:__ _.m., Niles, Ohio
time, on ________, 1998. Any direct community offering or public offering may
terminate at any time without notice, but no later than ________, 1998, without
approval by the OTS. If the offering is not completed by __________, 1998, all
subscribers will be notified and will be given the opportunity to cancel or
modify their order.
Benefits to Management and Employees from the Offering
Our employees will participate in the offering through individual
purchases. Our employees will also participate in Home Federal's Employee Stock
Ownership Plan ("ESOP"), which is a type of retirement plan that will purchase
shares of Common Stock in the offering. The ESOP was established by Home Federal
in connection with the Conversion. We also intend to implement a restricted
stock plan and a stock option plan, which may benefit the officers, employees
and directors. If we adopt the restricted stock plan, such individuals will be
awarded stock at no cost to them. The
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<PAGE>
restricted stock plan and stock option plan may not be adopted until six months
after the Conversion and are subject to stockholder approval and, if adopted
prior to one year following conversion, compliance with OTS regulations. We
intend to enter into employment agreements with certain executive officers
following completion of the offering. See "Management of the Association-Benefit
Plans" on pages 75 to 77.
The Charitable Foundation
To further our commitment to the local community, we intend to
establish the Foundation as part of the Conversion. We will make a contribution
to the Foundation, in the form of shares of Common Stock, in a total amount
equal to $300,000. The Foundation will be dedicated exclusively to supporting
charitable causes and community development activities in the Niles, Ohio area.
Due to the issuance of additional shares of Common Stock to the Foundation,
persons purchasing shares in the offering will have their ownership and voting
interest in First Niles Financial, Inc. diluted by 1.50% (at the midpoint of the
EVR). First Niles Financial, Inc. will incur an expense equal to the full amount
of the contribution to the Foundation, offset in part by a corresponding tax
benefit, during the quarter in which the contribution is made. Such expense will
reduce First Niles Financial, Inc.'s earnings. See "Risk Factors - The Expense
and Dilutive Effect of the Stock Contribution to the Charitable Foundation" on
pages 8 and 9, "Pro Forma Data" on pages 18 to 24 and "The Conversion - Stock
Contribution to the Charitable Foundation" on pages 81 to 87.
Use of the Proceeds Raised from the Sale of Common Stock
First Niles Financial, Inc. will use the net proceeds received from the
offering as follows. The percentages used are estimates.
* 50% will be used to buy all of the capital stock of Home Federal.
* 8% will be loaned to the ESOP to fund its purchase of Common
Stock.
* 42% will be retained and initially be placed in short-term
investments, which may later be used as a possible source of
funds for stock repurchases, the payment of dividends to
stockholders, and for other general corporate purposes.
The proceeds received by Home Federal will increase our capital and
will be available for expansion of our retail banking franchise through future
lending and investment, in addition to general corporate purposes. See "Use of
Proceeds" on pages 15 and 16.
Dividends
First Niles Financial, Inc. has not made a decision regarding the
future declaration of dividends. A dividend policy may, however, be established
in the future. See "Dividends" on pages 16 and 17.
Market for the Common Stock
We anticipate the Common Stock to be traded on the Nasdaq National
Market System under the symbol "_____". An active and liquid trading market,
however, may not develop or be
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<PAGE>
maintained. Investors should have a long-term investment intent. Persons
purchasing shares may not be able to sell their shares when they desire or sell
them at a price equal to or above $10.00. Webb has informed us that Keefe,
Bruyette & Woods, Inc. ("KBW") has agreed to make a market in the Common Stock.
KBW will, however, not be subject to any obligation with respect to such
efforts. See "Market for the Common Stock" on page 17.
Prospectus Delivery and Procedures for Purchasing Common Stock
To ensure that each person or entity is properly identified as to such
party's stock purchase priorities, such party must list all deposit accounts on
the order form accompanying this prospectus, giving all names on each account
and the account numbers at the applicable date. The failure to provide accurate
and complete account information on the order form may result in a reduction
or elimination of your order.
Only orders submitted on original order forms will be accepted for
processing. Photocopies or facsimile copies of order forms or the form of
certification will not be accepted. Payment by cash, check, money order, bank
draft or withdrawal from an existing account at Home Federal must accompany your
order form. No wire transfers will be accepted. See "The Conversion - Method of
Payment for Subscriptions" on pages 95 to 97.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The summary information presented below under "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years ended December 31 is derived from Home Federal's audited financial
statements. The selected data presented below as of April 30, 1998, and for the
four months ended April 30, 1998 and 1997 is derived from Home Federal's
unaudited financial statements. The following information is only a summary and
you should read it in conjunction with our financial statements and notes
beginning on page F-1.
<TABLE>
<CAPTION>
December 31,
April 30, ------------------------------------
1998 1997 1996 1995
------ ------ ------ -----
(In Thousands)
Selected Financial Condition Data:
<S> <C> <C> <C> <C>
Total assets......................................... $72,539 $72,497 $71,213 $70,221
Loans receivable, net................................ 36,151 36,744 33,183 29,514
Mortgage-backed and related securities............... 12,589 12,359 12,900 13,908
Investment securities................................ 17,184 17,741 22,098 23,762
Deposits............................................. 57,765 57,854 57,673 57,774
Total borrowings..................................... 400 400 500 ---
Retained earnings.................................... 12,186 11,899 11,513 11,087
</TABLE>
<TABLE>
<CAPTION>
Four Months Ended
April 30, Years Ended December 31
----------------- ---------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Selected Operations Data:
<S> <C> <C> <C> <C> <C>
Total interest income..................................... $1,671 $1,652 $5,002 $4,780 $4,649
Total interest expense.................................... 824 793 2,476 2,402 2,290
------ ------ ------ ------ ------
Net interest income.................................... 847 859 2,526 2,378 2,359
Provision for loan losses................................. 20 --- 700 40 60
-------- -------- ------- -------- -------
Net interest income after provision for loan losses..... 827 859 1,826 2,338 2,299
Fees and service charges.................................. 6 6 18 17 18
Gain on sales of investment securities.................... 461 --- 4 --- ---
Other non-interest income................................. 2 2 5 6 8
--------- --------- --------- --------- --------
Total non-interest income................................. 469 8 27 23 26
Total non-interest expense................................ 890 457 1,380 1,751 1,213
------- ------- ------ ------ ------
Income before taxes and extraordinary item.............. 406 410 473 610 1,112
Income tax provision...................................... 119 112 87 184 378
------- ------- -------- ------- -------
Net income.............................................. $ 287 $ 298 $ 386 $ 426 $ 734
====== ====== ===== ====== ======
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Four Months
Ended
April 30, Years Ended December 31,
--------------- ------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets (ratio of net income to
average total assets)(1)......................................... 1.19% 1.25% 0.54% 0.60% 1.05%
Return on average retained earnings (ratio of
net income to average retained earnings)(1)...................... 7.15 7.67 3.27 3.75 6.84
Interest rate spread:
Average during period............................................ 2.77 2.92 2.83 2.66 2.77
End of period.................................................... 2.62 3.01 2.82 2.85 2.73
Net interest margin(2)............................................. 3.58 3.67 3.58 3.40 3.43
Ratio of operating expense to average total assets................. 3.62 1.86 1.86 2.42 1.74
Ratio of average interest-earning assets to average interest-
bearing liabilities............................................ 1.23 1.22 1.22 1.21 1.20
Quality Ratios:
Non-performing assets to total assets at end of period............. 2.33 1.34 2.29 1.37 1.77
Allowance for loan losses to non-performing loans, end
of period..................................................... 50.29 31.19 51.38 30.90 21.05
Allowance for loan losses to loans receivable, net, end
of period...................................................... 2.36 0.85 2.32 0.91 0.88
Capital Ratios:
Retained earnings to total assets at end of period................. 16.80 16.45 16.41 16.17 15.79
Average retained earnings to average assets........................ 16.61 16.31 16.37 16.07 15.43
Other Data:
Number of full-service offices..................................... 1 1 1 1 1
</TABLE>
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(1) Percentages for the four-month periods have been annualized.
(2) Net interest income divided by average interest earning assets.
-7-
<PAGE>
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in the
Common Stock.
Decreased Return on Average Equity and Increased Expenses Immediately After
Conversion
As a result of the Conversion, our equity will increase substantially.
Expenses are expected to increase due to the costs associated with our employee
stock ownership plan, our restricted stock plan, and being a public company.
Because of the increases in our equity and expenses, our return on equity may
decrease as compared to our performance in previous years. A lower return on
equity could limit the trading price potential of the Common Stock. See "Use of
Proceeds" and "Pro Forma Data."
The Expense and Dilutive Effect of the Stock Contribution to the Charitable
Foundation
The Stock Contribution is subject to the approval of our members at the
Special Meeting. If approved by members, the Stock Contribution will be made
within 12 months following the completion of the Conversion and will be expensed
when the Conversion is completed, which is expected in the fourth quarter of
1998.
Negative Impact on Earnings. Assuming approval of the Stock
Contribution by our members, the Stock Contribution will have an adverse impact
on the Company's earnings. The Company will recognize an expense in the amount
of $300,000 ($198,000 net of taxes at the statutory rate) in the quarter in
which the Conversion is completed, which is expected to be the fourth quarter of
1998. Such expense will have a material adverse impact on the Company's earnings
in the quarter and year recorded. We have been advised by counsel that the Stock
Contribution will be tax deductible, subject to a limitation based on 10% of the
Company's annual taxable income. If the Stock Contribution had been made at
April 30, 1998, we would have reported net income of $89,000 rather than
$287,000 for the prior four-month period.
The Company may make additional contributions to the Foundation in the
future. The amount of future contributions, if any, will be based upon, among
other factors, an assessment of the Company's then current and anticipated
financial position, operations, and prospects and on the need for charitable
activities in our market area. Any such contributions, regardless of form, will
result in an increase in noninterest expense and thus a reduction in net
earnings. In addition, any contributions of authorized but unissued shares would
dilute the interests of outstanding shares. However, the Company currently
anticipates that any contributions of shares by it to the Foundation will be
funded through shares repurchased in the open market. The Company does not
intend to make any contributions to the Foundation which are not deductible for
federal income tax purposes.
Dilution of Stockholder's Interests. The Stock Contribution will
involve the donation of 30,000 shares of Common Stock, or the sale of such
shares for their aggregate par value ($300), to the Foundation. Upon completion
of the Conversion and the Stock Contribution, the Company will have 2,000,000
shares issued and outstanding at the midpoint of the Estimated Valuation Range,
of
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<PAGE>
which the Foundation will own 30,000 shares, or 1.5%. As a result, persons
purchasing shares in the Conversion will have their share ownership and voting
interest in the Company diluted by approximately 1.50% (at the midpoint of the
EVR). See "Pro Forma Data."
Possible Nondeductibility of the Stock Contribution. The Internal
Revenue Service has determined that the Foundation is exempt from federal income
tax under Section 501(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), as an organization described in Section 501(c)(3) of the Code. As such,
the Company will be entitled to a deduction in the amount of the Stock
Contribution, subject to an annual limitation based on 10% of the Company's
annual taxable income. The Company, however, would be able to carry forward any
unused portion of the deduction for five years following the Stock Contribution
for federal and state tax purposes. The Company currently estimates that the
Stock Contribution should be fully deductible for federal tax and state
purposes. However, no assurances can be made that the Company will have
sufficient pre-tax income over the five-year period following the year in which
the Stock Contribution is made to utilize fully the carryover related to the
excess contribution.
Potential Change in Valuation if the Stock Contribution is Not Made.
The Stock Contribution was taken into account by Keller & Company in determining
the Estimated Valuation Range of the Company. The Estimated Valuation Range of
the shares being offered for sale in the Conversion is currently between $16.7
million and $22.7 million, with a midpoint of $19.7 million. If the Stock
Contribution is not part of the Conversion, the Estimated Valuation Range of the
shares being offered would be estimated to be between $17.3 million and $23.5
million. See "Comparison of Valuation and Pro Forma Information with No Stock
Contribution."
Potential Challenges. The Stock Contribution may be subject to
potential challenges notwithstanding that we have carefully considered the
various factors involved in the establishment of the Foundation in reaching our
determination to make the Stock Contribution as part of the Conversion. In
conjunction with the approval of the Conversion, we determined to submit the
Stock Contribution to a vote of members so that members have a right to vote on
whether the Stock Contribution should be made. If an action were instituted
seeking to require us to eliminate the Stock Contribution in connection with the
Conversion, no assurances can be made that the resolution of such action would
not result in a delay in the consummation of the Conversion or that any
objecting persons would not be ultimately successful in obtaining such removal
or other equitable relief or monetary damages against the Company or the
Association. Additionally, if we are forced to eliminate the Stock Contribution,
we may be required to resolicit subscribers in the offering.
Approval of Members. The Stock Contribution is subject to the approval
of a majority of the total outstanding votes of our members eligible to be cast
at the Special Meeting. The Stock Contribution will be considered as a separate
matter from the proposal to approve the Plan of Conversion. If our members
approve the Plan of Conversion, but not the Stock Contribution, we intend to
complete the Conversion without the Stock Contribution. Failure to approve the
Stock Contribution may increase the pro forma market value of the Common Stock
being offered for sale in the offering since the Estimated Valuation Range, as
set forth herein, takes into account the expense related to the Stock
Contribution. Any change in the Estimated Valuation Range must be approved by
the OTS. "See The Conversion - Stock Pricing."
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<PAGE>
Potential Impact of Changes in Interest Rates
Our ability to make a profit largely depends on our net interest
income. Net interest income is the difference between what we earn on
interest-earning assets (such as loans, mortgage-backed and related securities
and investment securities) and what we pay on interest-bearing liabilities (such
as deposits and borrowings). The rates we earn on assets and pay on liabilities
are generally established for a contractual period of time. We, like many
savings institutions, have liabilities that generally have shorter contractual
maturities than our assets. This imbalance can create significant earnings
volatility, since market interest rates change over time. In a period of rising
interest rates, the interest income earned on our assets may not increase as
rapidly as the interest expense paid on our liabilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management" and "Business of Home Federal."
Changes in interest rates can also affect the average life of loans and
mortgage-backed and related securities. Historically, a reduction in interest
rates has resulted in increased prepayments of loans and mortgage-backed and
related securities, as borrowers refinanced their mortgages in order to reduce
their borrowing cost. Under these circumstances, we are subject to reinvestment
risk to the extent that we are not able to reinvest such prepayments at rates
which are comparable to the rates on the prepaid loans or securities.
ESOP Compensation Expense
In November 1993 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 93-6 "Employers' Accounting for Employee
Stock Ownership Plans" ("SOP 93-6"). SOP 93-6 requires an employer to record
compensation expense in an amount equal to the fair value of shares committed to
be released to employees from an employee stock ownership plan. Assuming shares
of Common Stock appreciate in value over time, the adoption of SOP 93-6 will
increase compensation expense relating to the ESOP to be established in
connection with the Conversion. It is impossible to determine at this time the
extent of such impact on future net income.
Possible Dilutive Effect of Restricted Stock Plan and Stock Options
The Company expects to ask stockholders to approve a restricted stock
plan and stock option plan approximately one year following completion of the
Conversion. If approved, we will issue stock and options to purchase stock to
our directors, officers and employees through these plans. If the shares for the
restricted stock plan and stock options are issued from our authorized but
unissued stock, your voting interests may be diluted by up to approximately
12.3% and the trading price of our stock may be limited. See "Pro Forma Data,"
"Management of the Association - Benefit Plans" and "- Other Stock Benefit
Plans."
Possible Voting Control of Shares by the Board, Management and Employee Plans
Our Board of Directors and executive officers intend to purchase
approximately 8.82% (at the minimum of the EVR), 7.50% (at the midpoint of the
EVR), 6.52% (at the maximum of the EVR) and 5.67% (at the adjusted maximum of
the EVR) of the Common Stock issued in the Conversion. These purchases, together
with the purchase of shares by the ESOP (anticipated to equal 8% of the
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<PAGE>
shares issued in the offering), as well as the potential acquisition of Common
Stock through the proposed stock option plan and restricted stock plan, together
with the votes of a few supporters, could make it difficult for a stockholder to
obtain majority support for stockholder proposals which are opposed by our
management and board of directors. In addition, the voting of those shares could
block the approval of transactions (including, but not limited to, business
combinations and amendments to the Company's certificate of incorporation and
bylaws) requiring the approval of 80% of the stockholders under the Company's
certificate of incorporation. See "Management - Benefit Plans," "Description of
Capital Stock" and "Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions."
Geographical Concentration of Loans
At April 30, 1998, substantially all of our real estate mortgage loans
were secured by properties located in the Niles, Ohio area. While we currently
believe that our loans are adequately secured or reserved for, in the event that
real estate prices in our market area substantially weaken or economic
conditions in our market area deteriorate, some borrowers may default and the
value of the real estate collateral may be insufficient to fully secure the
loan. In such events, we may experience increased levels of delinquencies and
related losses which could adversely impact net income.
Absence of Prior Market for Common Stock
Home Federal, as a mutual thrift institution, and the Company, as a
newly organized company, have never issued capital stock. Consequently, there is
not at this time an existing market for the Common Stock. We expect the Common
Stock of the Company to be traded on the Nasdaq National Market. If the Common
Stock cannot be quoted and traded on the Nasdaq National Market, it is expected
that transactions in the Common Stock will be traded on the Nasdaq SmallCap
Market. Webb has informed us that KBW has agreed to make a market in the
Company's Common Stock upon completion of the offering. However, KBW will not be
subject to any obligation with respect to such efforts.
An active trading market may not develop or be maintained. If an active
market does not develop, you may not be able to sell your shares promptly or at
a price equal to or above the price you paid for them. See "Market for the
Common Stock."
Risk of Delay In Completion of the Offering
The completion of the offering is subject to market conditions and
other factors beyond our control. No assurance can be given as to the length of
time that will be required to complete the sale of shares being offered in the
Conversion following the meeting of our members at which the Plan of Conversion
is being submitted for approval. If delays are experienced, significant changes
may occur in our estimated pro forma market value upon Conversion together with
corresponding changes in the offering price and the net proceeds to be realized
by us from the sale of the shares. In the event the Conversion is terminated, we
will charge all Conversion expenses against current income and any funds
collected by us in the offering will be promptly returned, with interest, to
each potential investor.
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<PAGE>
The subscription offering will expire at ___:___ _.m., Niles, Ohio time
on _________, 1998 unless extended by us. All orders generally will be
irrevocable unless the Conversion is not completed by ___________, 199_. If the
Conversion is not completed by ________, 199_, subscribers for Common Stock will
have the right to modify or rescind their subscriptions and to have their
subscription funds returned with interest.
Competition
We experience strong competition in our local market area in
originating loans and attracting deposits. This competition arises from a highly
competitive market area with numerous savings institutions and commercial banks,
as well as credit unions, mortgage bankers and, with respect to deposits,
banking institutions and other financial intermediaries. We recognize the need
to monitor competition and modify our products and services as necessary and as
possible, taking into consideration the cost impact. As a result, such
competition may limit our future growth and profitability. See "Business of Home
Federal - Competition" and "- Loan Originations, Purchases and Repayments."
Certain Anti-Takeover Provisions
Provisions in the Company's certificate of incorporation and bylaws,
the General Corporation Code of Delaware, and certain federal regulations may
make it difficult for someone to pursue a tender offer, change in control or
takeover attempt which is opposed by our management and board of directors.
These provisions include: restrictions on the acquisition of the Company's
equity securities by certain stockholders and limitations on voting rights; the
classification of the terms of the members of the board of directors; certain
provisions relating to meetings of stockholders; denial of cumulative voting to
stockholders in the election of directors; the ability to issue preferred stock
and additional shares of Common Stock without shareholder approval; and
super-majority provisions for the approval of certain business combinations. As
a result, stockholders who may desire to participate in such a transaction may
not have such an opportunity. These provisions will also render the removal of
the current board of directors or management of the Company more difficult. In
addition, the effect of these provisions could be to limit the trading price
potential of the Common Stock. See "Restrictions on Acquisition of Stock and
Related Takeover Defensive Provisions."
Restrictions on Repurchase of Shares
Generally, during the first year following the Conversion, the Company
may not repurchase its shares without regulatory approval. During each of the
second and third years following the Conversion, the Company may repurchase up
to 5% of its outstanding shares, with additional repurchases subject to
regulatory approval. During those periods, even if the Company believes that
additional repurchases would be a good use of funds, we would not be able to do
so without first obtaining OTS approval. There is no assurance that OTS approval
would be given. See "The Conversion - Restrictions on Repurchase of Stock."
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<PAGE>
Possible Year 2000 Computer Problems
A great deal of information has been disseminated about the widespread
computer problems that may arise in the year 2000. Computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date,
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operation of Home Federal. Data
processing is also essential to most other financial institutions and many other
companies.
All our material data processing that could be affected by this problem
is provided by a third party service bureau. The service bureau used by Home
Federal has advised us that it expects to resolve this potential problem by
October 1998, and to begin testing the system in November 1998. If by the end of
this year it appears that our primary data processing service bureau will be
unable to resolve this problem in a timely manner, then we will identify a
secondary data processing service provider to complete the task. If we are
unable to do this, we will identify those steps necessary to minimize the
negative impact the computer problems could have on us. If we are unable to
resolve this potential problem in time, we will likely experience significant
data processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the financial condition and results
of operation of the Association. At this time we cannot determine the expense
that may be incurred in connection with year 2000 issues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation -Year
2000 Issues."
In addition to expenses related to our own systems, we could incur
losses if loan payments are delayed due to year 2000 problems affecting any of
our significant borrowers or impairing the payroll systems of large employers in
our market area. We have been communicating with our vendors to assess their
progress in evaluating their systems and implementing any corrective measures
required by them to be prepared for the year 2000. To date, we have not been
advised by such parties that they do not have plans in place to address and
correct the issues associated with the year 2000 problem; however, no assurance
can be given as to the adequacy of such plans or to the timeliness of their
implementation.
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NILES
Home Federal, established in 1897, is a federally chartered mutual
savings institution located in Niles, Ohio. We currently serve primarily the
Niles, Ohio area. We serve this area through our one full service office located
at 55 North Main Street, Niles, Ohio; our telephone number at that address is
(330) 652-2539. Deposits at the Association are insured up to the applicable
limits by the Federal Deposit Insurance Corporation (the "FDIC"). At April 30,
1998, we had total assets of $72.5 million, deposits of $57.8 million, and
retained earnings of $12.2 million.
We intend to continue to be a community-oriented financial institution
offering a variety of financial services to meet the needs of our community. Our
principal business consists of attracting retail deposits from the general
public and investing those funds primarily in permanent and construction loans
secured by first mortgages on one- to four-family residences. We also originate
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permanent and construction loans secured by first mortgages on commercial and
multi-family real estate and, to a much lesser extent we originate consumer and
commercial business loans. While our primary business is the origination of one-
to four-family residential mortgage loans funded through retail deposits,
competition from other financial institutions has limited the volume of loans
the Association has been able to originate and place in its portfolio. As a
result, we invest our excess funds into short-term, lower-yielding investment
and mortgage-backed and related securities.
At April 30, 1998, our gross loan portfolio totaled $39.3 million,
including $25.0 million of one- to four-family residential mortgage loans. We
also had on that date $17.2 million of investment securities (excluding Federal
Home Loan Bank stock) and $12.6 million of mortgage-backed and related
securities, which consisted primarily of short-term mutual funds and
collateralized mortgage obligations (issued by United States agencies and
government-sponsored enterprises).
FIRST NILES FINANCIAL, INC.
First Niles Financial, Inc. was formed at our direction in July 1998
for the purpose of owning all of the outstanding stock of Home Federal issued in
the Conversion. The Company is incorporated under the laws of the State of
Delaware, and authorized to do business in the State of Ohio, and generally is
authorized to engage in any activity that is permitted by the Delaware General
Corporation Law. Initially, the business of the Company will consist only of the
business of Home Federal. The holding company structure will, however, provide
the Company with greater flexibility than the Association has to diversify its
business activities, through existing or newly formed subsidiaries, or through
acquisitions or mergers of both mutual and stock thrift institutions as well as
other companies. Although there are no current arrangements, understandings or
agreements regarding any such activity or acquisition, the Company will be in a
position after the Conversion, subject to regulatory restrictions, to take
advantage of any favorable acquisition opportunities that may arise.
The assets of the Company initally will consist of the stock of Home
Federal, the loan to the ESOP and 50% (less the amount loaned to the ESOP) of
the net proceeds from the Conversion. Initially, any activities of the Company
are anticipated to be funded by these retained proceeds and the income generated
thereon and dividends from Home Federal, if any. See "Dividends" and "Regulation
- - Holding Company Regulation." Thereafter, activities of the Company may also be
funded through sales of additional securities, through borrowings and through
income generated by other activities of the Company. At this time, there are no
plans regarding such other activities other than the intended loan to the ESOP
to facilitate its purchase of Common Stock in the Conversion.
The executive offices of the Company are located at 55 North Main
Street, Niles, Ohio 44446. Its telephone number at that address is (330)
652-2539.
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USE OF PROCEEDS
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. It is presently anticipated,
however, that such net proceeds will be between $16.1 million and $22.0 million
(or up to $25.4 million if the Estimated Valuation Range is increased up to the
adjusted maximum). See "Pro Forma Data" and "The Conversion - Stock Pricing and
Number of Shares to be Issued" as to the assumptions used to arrive at such
amounts.
The Company will contribute approximately 50% of the net proceeds
received from the sale of its Common Stock in exchange for all of the common
stock of Home Federal issued in the Conversion. The proceeds we receive from the
Company in exchange for the common stock of Home Federal will become part of our
general funds for use in our business and will be used to support the
Association's existing operations. We anticipate initially investing such
proceeds into short-term assets similar to those currently in the Association's
portfolio. Thereafter, we will redirect the net proceeds to the origination of
loans and the purchase of investment and mortgage-backed and related securities,
subject to market conditions.
Furthermore, the Company intends to lend a portion of the net proceeds
to the ESOP to fund the ESOP's purchase of 8% of the Common Stock. Based upon
the initial purchase price of $10.00 per share, the dollar amount of the ESOP
loan would range from $1.4 million to $1.8 million (or up to $2.1 million based
upon the sale of shares at the adjusted maximum of the Estimated Valuation
Range). The interest rate to be charged by the Company on the ESOP loan will be
based upon the IRS prescribed applicable federal rate at the time of
origination. It is anticipated that the ESOP will repay the loan through
periodic tax-deductible contributions from the Association over a twelve-year
period.
The remainder of the net proceeds will be retained by the Company. The
Company anticipates that initially the remaining proceeds will be invested in
short-term investments similar to those currently in the Association's
portfolio. These funds would be available for general corporate purposes which
may include expansion of operations through acquisitions of other financial
service organizations and diversification into other related or unrelated
businesses, or for investment purposes. See "Regulation - Holding Company
Regulation" for a discussion of OTS activity restrictions. Currently, there are
no specific plans being considered for the expansion of the business of the
Company. In addition, the funds may be used to infuse additional capital into
the Association when and if appropriate.
The Company also may use a portion of the proceeds to fund a restricted
stock plan, subject to shareholder approval of such plan. Compensation expense
related to the restricted stock plan will be recognized as share awards vest.
See "Pro Forma Data." Following shareholder ratification of the restricted stock
plan, such plan will be funded either with shares purchased in the open market
or with authorized but unissued shares. Based upon the initial purchase price of
$10.00 per share, the amount required to fund the restricted stock plan through
open-market purchases would range from $680,000 to $920,000 (or up to $1.1
million based upon the sale of shares at the adjusted maximum of the Estimated
Valuation Range). In the event that the per share price of the Common Stock
increases above the initial $10.00 per share purchase price following completion
of the offering, the amount necessary to fund the restricted stock plan would
also increase. The use of authorized
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but unissued shares to fund the restricted stock plan could dilute the holdings
of shareholders who purchase the Common Stock. See "Management - Benefit Plans
- -- Other Stock Benefit Plans."
The Board of Directors of the Company may use the net proceeds received
in the Conversion to repurchase (at prices which may be above or below the
initial offering price) shares of Common Stock, subject to regulatory
restrictions. Under current OTS regulations, no repurchases may be made within
the first year following Conversion except with OTS approval. During the second
and third years following Conversion, OTS regulations permit, subject to certain
limitations, the repurchase of up to five percent of the outstanding shares of
stock during each twelve-month period with a greater amount permitted with OTS
approval. The OTS regulations generally do not restrict repurchases after the
third year following the Conversion; however, after the Conversion, the
principal source of funds for the Company will be dividends from the
Association. OTS regulations do place limits on the Association's ability to pay
dividends to the Company. For a description of these restrictions, see
"Dividends" and "The Conversion - Restrictions on Repurchase of Stock."
The Company will make decisions relating to the repurchase of the
Common Stock based on its view of the appropriateness of the repurchase price of
the Common Stock as well as the Company's and the Association's investment
opportunities, capital needs, current and projected results of operations and
asset/liability structure, the economic environment and tax and other regulatory
considerations. Other facts and circumstances that may influence the Company's
decision to repurchase shares of Common Stock in the future include but are not
limited to (i) market and economic factors such as the price at which the stock
is trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and the effect on the Company's return on
equity; (ii) the avoidance of dilution to shareholders by not having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and (iii) any other circumstances in which repurchases
would be in the best interests of the Company and its shareholders. A stock
repurchase program may have the effect of: (a) reducing the overall market value
of the Company; (b) increasing the overall cost of capital; (c) promoting a
temporary demand for Common Stock; and (d) increasing the percentage of shares
outstanding held by shareholders, including management. The Company currently
has no specific plan to repurchase any of its stock.
DIVIDENDS
The Company may consider a policy of paying cash dividends on the
Common Stock after the completion of the Conversion. No decision has been made,
however, as to the amount or timing of such dividends, if any. Dividends, when
and if paid, will be subject to determination and declaration by the Board of
Directors at its discretion, which will take into account the Company's
consolidated financial condition and results of operations, tax considerations,
industry standards, economic conditions, regulatory restrictions, general
business practices and other factors. The Company may also consider making a one
time only special dividend or distribution (including a tax-free return of
capital) provided that the Company will take no steps toward making such a
distribution for at least one year following the completion of the Conversion.
No assurances can be given that dividends will be declared.
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It is not presently anticipated that the Company will conduct
significant operations independent of those of Home Federal for some time
following the Conversion. As such, the Company does not expect to have any
significant source of income other than earnings on the net proceeds from the
Conversion retained by the Company (which proceeds are currently estimated to
range from $6.7 million to $10.6 million based on the minimum and the adjusted
maximum of the EVR, respectively) and dividends from Home Federal, if any.
Consequently, the ability of the Company to pay cash dividends to its
shareholders will be dependent upon these retained proceeds and income
generated, and upon the ability of Home Federal to pay dividends to the Company.
Home Federal, like all savings associations regulated by the OTS, is
subject to certain restrictions on capital distributions, including the payment
of dividends, based on its net income, its capital in excess of the regulatory
capital requirements, and the amount of regulatory capital required for the
liquidation account to be established in connection with the Conversion. See
"The Conversion - Effects of Conversion to Stock Form on Depositors and
Borrowers of the Association -- Liquidation Rights in Proposed Converted
Institution" and "Regulation - Regulatory Capital Requirements," "- Limitations
on Dividends and Other Capital Distributions" and "- Federal and State
Taxation." At April 30, 1998, Home Federal had available $5.0 million (without
giving effect to any proceeds received upon Conversion) which could be
distributed pursuant to OTS regulations.
MARKET FOR THE COMMON STOCK
Home Federal, as a mutual thrift institution, and First Niles
Financial, Inc., as a newly organized company, have never issued capital stock.
Consequently, there is not at this time an existing market for the Common Stock.
Following the completion of the offering, it is anticipated that the Common
Stock will be traded on the Nasdaq National Market under the symbol "____". In
order to be quoted on the Nasdaq National Market, among other criteria, there
must be at least three market makers for the Common Stock. Webb has informed us
that KBW has agreed, subject to certain conditions, to act as a market maker for
the Common Stock following the offering, and to assist in securing additional
market makers to do the same.
A public market having the desirable characteristics of depth,
liquidity and orderliness depends upon the presence in the marketplace of both
willing buyers and sellers of the Common Stock at any given time, which is not
within the control of the Company or any market maker. There can be no assurance
that an active or liquid trading market will develop for the Common Stock, or if
a market develops, that it will continue. Accordingly, there can be no assurance
that purchasers of the Common Stock will be able to sell their shares at or
above the amount that they paid for such Common Stock.
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<PAGE>
PRO FORMA DATA
The following tables set forth the historical net income, equity and
per share data of Home Federal at and for the four months ended April 30, 1998
and the fiscal year ended December 31, 1997, and after giving effect to the
Conversion, the pro forma net income, capital stock and shareholders' equity and
per share data of the Company at and for the four months ended April 30, 1998
and the fiscal year ended December 31, 1997. The pro forma data has been
computed on the assumptions that (i) the specified number of shares of Common
Stock was sold at the beginning of the specified periods and yielded net
proceeds to the Company as indicated, (ii) 30,000 shares were donated to the
Foundation upon the completion of the Conversion, (iii) 50% of such net proceeds
were retained by the Company and the remainder were used to purchase all of the
stock of Home Federal, and (iv) such net proceeds, less the amount to fund the
ESOP and restricted stock plan, were invested by the Association and Company at
the beginning of the periods to yield a pre-tax return of 5.39% and 5.30% for
the four months ended April 30, 1998 and for the fiscal year ended December 31,
1997, respectively. The after-tax rate of return is 3.56% and 3.50%,
respectively, assuming a combined federal and state income tax rate of 34%. The
assumed return is based upon the market rate of one-year U.S. Government
Treasury Securities as of the end of the periods indicated. The use of this rate
is viewed to be more relevant than the use of an arithmetic average of the
weighted average yield earned by the Association on its interest-earning assets
and the weighted average rate paid on its interest-bearing liabilities during
such periods. In calculating the underwriting fees to be paid as part of the
offering, the table assumes that (i) no commission was paid on $1,500,000 of
shares sold to directors, officers and employees, (ii) 8% of the total shares
sold in the Conversion were sold to the ESOP at no commission, and (iii) the
remaining shares were sold at a 1.5% commission. (These assumptions represent
management's estimate as to the distribution of stock orders in the Conversion.
However, there can be no assurance that such estimate will be accurate and that
a greater proportion of shares will not be sold at a higher commission, thus
increasing offering expenses.) Fixed expenses are estimated to be $400,000.
Actual Conversion expenses may be more or less than those estimated because the
fees paid to Webb and other brokers will depend upon the categories of
purchasers, the purchase price and market conditions and other factors. The pro
forma net income amounts derived from the assumptions set forth herein should
not be considered indicative of the actual results of operations of the Company
that would have been attained for any period if the Conversion had been actually
consummated at the beginning of such period, and the assumptions regarding
investment yields should not be considered indicative of the actual yields
expected to be achieved during any future period.
The total number of shares to be issued in the Conversion may be
increased or decreased significantly, or the price per share decreased, to
reflect changes in market and financial conditions prior to the close of the
offering. However, if the aggregate purchase price of the Common Stock sold in
the Conversion is below $16,700,000 (the minimum of the EVR) or more than
$26,150,000 (the adjusted maximum of the EVR), subscribers will be offered the
opportunity to modify or cancel their subscriptions. See "The Conversion - Stock
Pricing and Number of Shares to be Issued."
The following tables assume that the Common Stock contribution to the
Foundation is approved as part of the Conversion and therefore gives effect to
the issuance of authorized but unissued shares of the Common Stock to the
Foundation concurrently with the completion of the Conversion.
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<TABLE>
<CAPTION>
At or For the Four Months Ended April 30, 1998
--------------------------------------------------------------
Adjusted
Minimum Midpoint Maximum Maximum
1,670,000 1,970,000 2,270,000 2,615,000
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
per Share per Share per Share per Share
--------- --------- --------- ---------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Pro forma market capitalization ................................ $ 17,000 $ 20,000 $ 23,000 $ 26,450
Less shares issued to Foundation(1) ............................ 300 300 300 300
----------- ----------- ----------- -----------
Gross proceeds of public offering .............................. 16,700 19,700 22,700 26,150
Less offering expenses and commissions ......................... (583) (624) (665) (713)
----------- ----------- ----------- -----------
Estimated net conversion proceeds ............................. 16,117 19,076 22,035 25,437
Less ESOP shares ............................................... (1,360) (1,600) (1,840) (2,116)
Less restricted stock plan shares .............................. (680) (800) (920) (1,058)
----------- ----------- ----------- -----------
Estimated proceeds available for investment(2) ................ $ 14,077 $ 16,676 $ 19,275 $ 22,263
=========== =========== =========== ===========
Net Income:
Historical ................................................... $ 287 $ 287 $ 287 $ 287
Pro Forma Adjustments:
Net earnings from proceeds(3) ............................... 167 198 229 264
ESOP(4) ..................................................... (25) (29) (34) (39)
Restricted stock plan (5) ................................... (30) (35) (40) (47)
----------- ----------- ----------- -----------
Pro forma net income(6) ................................... $ 399 $ 421 $ 442 $ 465
=========== =========== =========== ===========
Net Income Per Share:
Historical(7) .............................................. $ 0.18 $ 0.16 $ 0.14 $ 0.12
Pro forma Adjustments:
Net earnings from proceeds ................................ 0.11 0.11 0.11 0.11
ESOP(3) ................................................... (0.02) (0.02) (0.02) (0.02)
Restricted stock plan(5) .................................. (0.02) (0.02) (0.02) (0.02)
----------- ----------- ----------- -----------
Pro forma net income per share(5) ..................... $ 0.25 $ 0.23 $ 0.21 $ 0.19
=========== =========== =========== ===========
Ratio of offering price to pro forma net income per share
(annualized) ................................................ 13.33x 14.49x 15.87x 17.54x
Number of shares used in calculating EPS(4) ................ 1,567,777 1,844,444 2,121,111 2,433,400
Shareholders' Equity (Book Value)(8):
Historical ................................................... $ 13,282 $ 13,282 $ 13,282 $ 13,282
Pro Forma Adjustments:
Estimated net Conversion proceeds ............................ 16,117 19,076 22,035 25,437
Plus tax benefit of Stock Contribution ....................... 102 102 102 102
Less common stock acquired by:
ESOP(4) ..................................................... (1,360) (1,600) (1,840) (2,116)
Restricted stock plan(5) .................................... (680) (800) (920) (1,058)
----------- ----------- ----------- -----------
Pro forma shareholder's equity(5) ....................... $ 27,461 $ 30,060 $ 32,659 $ 35,647
=========== =========== =========== ===========
Shareholders' Equity (Book Value)(8):
Per Share(7):
Historical ................................................... $ 7.81 $ 6.64 $ 5.77 $ 5.02
Pro Forma Adjustments:
Estimated net Conversion proceeds ............................ 9.48 9.54 9.58 9.62
Plus tax benefit of Stock Contribution ....................... .06 .05 .04 .04
Less: Common stock acquired by:
ESOP(4) ..................................................... (0.80) (0.80) (0.80) (0.80)
Restricted stock plan(5) .................................... (0.40) (0.40) (0.40) (0.40)
----------- ----------- ----------- -----------
Pro forma book value per share(6) ....................... $ 16.15 $ 15.03 $ 14.19 $ 13.48
=========== =========== =========== ===========
Pro forma price to book value .................................. 61.92% 66.53% 70.47% 74.18%
Number of shares (including Foundation shares) ................. 1,700,000 2,000,000 2,300,000 2,645,000
</TABLE>
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<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1997
--------------------------------------------------------------
Adjusted
Minimum Midpoint Maximum Maximum
1,670,000 1,970,000 2,270,000 2,615,000
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
per Share per Share per Share per Share
--------- --------- --------- ---------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Pro forma market capitalization ................................ $ 17,000 $ 20,000 $ 23,000 $ 26,450
Less shares issued to Foundation(1) ............................ 300 300 300 300
----------- ----------- ----------- -----------
Gross proceeds of public offering .............................. 16,700 19,700 22,700 26,150
Less offering expenses and commissions ......................... (583) (624) (665) (713)
----------- ----------- ----------- -----------
Estimated net conversion proceeds ............................. 16,117 19,076 22,035 25,437
Less ESOP shares ............................................... (1,360) (1,600) (1,840) (2,116)
Less restricted stock plan shares .............................. (680) (800) (920) (1,058)
----------- ----------- ----------- -----------
Estimated proceeds available for investment(2) ................ $ 14,077 $ 16,676 $ 19,275 $ 22,263
=========== =========== =========== ===========
Net Income:
Historical ................................................... $ 386 $ 386 $ 386 $ 386
Pro Forma Adjustments:
Net earnings from proceeds(3) ............................... 492 583 674 779
ESOP(4) ..................................................... (75) (88) (101) (116)
Restricted stock plan(4) .................................... (90) (106) (121) (140)
----------- ----------- ----------- -----------
Pro forma net income(6) ................................... $ 713 $ 775 $ 838 $ 909
=========== =========== =========== ===========
Net Income Per Share:
Historical(7) .............................................. $ 0.25 $ 0.21 $ 0.18 $ 0.16
Pro forma Adjustments:
Net earnings from proceeds ................................ 0.31 0.31 0.32 0.32
ESOP(3) ................................................... (0.05) (0.05) (0.05) (0.05)
Restricted stock plan(5) .................................. (0.06) (0.06) (0.06) (0.06)
----------- ----------- ----------- -----------
Pro forma net income per share(5) ..................... $ 0.45 $ 0.41 $ 0.39 $ 0.37
=========== =========== =========== ===========
Ratio of offering price to pro forma net income per share ..... 22.22x 24.39x 25.64x 27.03x
Number of shares used in calculating EPS(4) ........... 1,575,333 1,853,333 2,131,333 2,451,033
Shareholders' Equity (Book Value)(8):
Historical ................................................... $ 13,163 $ 13,163 $ 13,163 $ 13,163
Pro Forma Adjustments:
Estimated net Conversion proceeds ............................ 16,117 19,076 22,035 25,437
Plus tax benefit of Stock Contribution ....................... 102 102 102 102
Less common stock acquired by:
ESOP(4) ..................................................... (1,360) (1,600) (1,840) (2,116)
Restricted stock plan(5) .................................... (680) (800) (920) (1,058)
----------- ----------- ----------- -----------
Pro forma shareholders' equity(5) ....................... $ 27,342 $ 29,941 $ 32,540 $ 35,528
=========== =========== =========== ===========
Shareholders' Equity (Book Value)(8):
Per Share(7):
Historical ................................................... $ 7.74 $ 6.58 $ 5.72 $ 4.98
Pro Forma Adjustments:
Estimated net Conversion proceeds ............................ 9.48 9.54 9.58 9.62
Plus tax benefit of Stock Contribution ....................... .06 .05 .04 .04
Less: Common stock acquired by:
ESOP(4) ..................................................... (0.80) (0.80) (0.80) (0.80)
Restricted stock plan(5) .................................... (0.40) (0.40) (0.40) (0.40)
----------- ----------- ----------- -----------
Pro forma book value per share(6) ....................... $ 16.08 $ 14.97 $ 14.14 $ 13.44
=========== =========== =========== ===========
Pro forma price to book ........................................ 62.19% 66.80% 70.72% 74.40%
Number of shares (including Foundation shares) ................. 1,700,000 2,000,000 2,300,000 2,645,000
</TABLE>
-20-
<PAGE>
- -------------
(1) Subject to member approval, the Company intends to contribute 30,000 shares
of Common Stock to the Foundation within 12 months following the completion
of the Conversion. See "The Conversion - Stock Contribution to the
Charitable Foundation." The contributed shares will be donated or sold for
nominal consideration; accordingly, they will not add to the gross
proceeds. Such shares are, however, issued and outstanding and therefore
add to the Company's market capitalization. The amount of the Common Stock
contributed to the Foundation will be accrued as an expense in the fiscal
quarter in which the Conversion is completed. The pro forma earnings data
does not reflect such non-recurring accrual. Both the historical and pro
forma per share data assume that the Common Stock contribution to the
Foundation is made.
(2) Reflects a reduction to net proceeds for the cost of the ESOP and the
restricted stock plan (assuming shareholder ratification is received) which
it is assumed will be funded from the net proceeds retained by the Company.
(3) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion. For purposes of
calculating pro forma net income, proceeds attributable to purchases by the
ESOP and restricted stock plan, which purchases are to be funded by the
Company and the Association, have been deducted from net proceeds.
(4) It is assumed that 8% of the shares of Common Stock issued in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP from the Company. The Association
intends to make contributions to the ESOP in amounts at least equal to the
principal and interest requirement of the debt. The Association's payment
of the ESOP debt is based upon equal installments of principal and interest
over a 12-year period. Interest income earned by the Company on the ESOP
debt will offset the interest paid by the Association. Accordingly, the
only expense to the Company on a consolidated basis will be related to the
allocations of earned ESOP shares which will be based on the number of
shares committed to be released to participants for the year at the average
market value of the shares during the year tax-effected at 34%. The amount
of ESOP debt is reflected as a reduction of shareholders' equity. In the
event that the ESOP were to receive a loan from an independent third party,
both ESOP expense and earnings on the proceeds retained by the Company
would be expected to increase. For purposes of calculating earnings per
share, unallocated ESOP shares are not considered to be outstanding. In
addition, the ESOP shares committed to be released at the end of the year
are assumed to be outstanding at the beginning of the year. For the interim
period, shares committed to be released for the year have been allocated on
a pro rata basis.
(5) Adjustments to both book value and net earnings have been made to give
effect to the proposed open market purchase (based upon an assumed purchase
price of $10.00 per share) following Conversion by the restricted stock
plan (assuming shareholder ratification of such plan is received) of an
amount of shares equal to 4% of the shares of Common Stock issued in the
Conversion for the benefit of certain directors, officers and employees. It
is assumed that the sale of the shares to the restricted stock plan
occurred at the beginning of the period. Funds used by the restricted stock
plan to purchase the shares will be contributed to the restricted stock
plan by the Company if the restricted stock plan is ratified by
shareholders following the Conversion. Therefore, this funding is assumed
to reduce the proceeds available for reinvestment. For financial accounting
purposes, the amount of the contribution will be recorded as a compensation
expense (although not an actual expenditure of funds) over the period of
vesting. These grants are expected to vest in equal annual installments
over a period of years following shareholder ratification of the restricted
stock plan. In the event the restricted stock plan is unable to purchase a
sufficient number of shares of Common Stock to fund the restricted stock
plan, the restricted stock plan may issue authorized but unissued shares of
Common Stock from the Company to fund the remaining balance. In the event
the restricted stock plan is funded by the issuance of authorized but
unissued shares in an amount equal to 4% of the shares sold in the
Conversion, the interests of existing shareholders would be diluted up to
approximately 3.8%.
In the event that the restricted stock plan is funded through authorized
but unissued shares, for the four months ended April 30, 1998 and year
ended December 31, 1997, pro forma net income per share would be $0.27,
$0.24, $0.22 and $0.21 and $0.50, $0.47, $0.45 and $0.42, respectively, and
pro forma shareholders' equity per share would be $15.92, $14.84, $14.04
and $13.34 and $15.85, $14.78, $13.99 and $13.30,
-21-
<PAGE>
respectively, in each case at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range.
(6) No effect has been given to the shares to be reserved for issuance under
the proposed Stock Option Plan which is expected to be adopted by the
Company following the Conversion, subject to shareholder approval. In the
event the Stock Option Plan is funded by the issuance of authorized but
unissued shares in an amount equal to 10% of the shares sold in the
Conversion, at $10.00 per share, and issued to the Foundation, the
interests of existing shareholders would be diluted as follows: pro forma
net income per share for the four months ended April 30, 1998 and the year
ended December 31, 1997 would be $0.23, $0.21, $0.19 and $0.17 and $0.41,
$0.38, $0.35 and $0.33, respectively, and pro forma shareholders' equity
per share would be $14.69, $13.66, $12.91 and $12.25 and $14.62, $13.61,
$12.86 and $12.21, respectively, in each case at the minimum, midpoint,
maximum and adjusted maximum of the Estimated Valuation Range. In the
alternative, the Company may purchase shares in the open market to fund the
Stock Option Plan following shareholder approval of such plan. To the
extent the entire 10% of the shares to be reserved for issuance under the
Stock Option Plan is funded through open market purchases at the purchase
price of $10.00 per share, proceeds available for reinvestment would be
reduced by $1,700,000, $2,000,000, $2,300,000 and $2,645,000 at the
minimum, midpoint, maximum and adjusted maximum of the Estimated Valuation
Range. See "Management - Benefit Plans -- Other Stock Benefit Plans."
(7) Historical per share amounts have been computed as if the shares of Common
Stock indicated had been outstanding at the beginning of the periods or on
the dates shown, but without any adjustment of historical net income or
historical equity to reflect the investment of the estimated net proceeds
of the sale of shares in the Conversion as described above. All ESOP shares
have been considered outstanding for purposes of computing book value per
share. Pro forma share amounts have been computed by dividing the pro forma
net income or shareholders' equity (book value) by the number of shares
indicated as outstanding under SOP 93-6.
(8) "Book value" represents the difference between the stated amounts of the
Association's assets (based on historical cost) and liabilities computed in
accordance with generally accepted accounting principles. The amounts shown
do not reflect the effect of the Liquidation Account which will be
established for the benefit of Eligible and Supplemental Eligible Account
Holders in the Conversion, or the federal income tax consequences of the
restoration to income of the Association's special bad debt reserves for
income tax purposes which would be required in the unlikely event of
liquidation. See "The Conversion - Effects of Conversion to Stock Form on
Depositors and Borrowers of the Association" and "Regulation - Federal and
State Taxation." The amounts shown for book value do not represent fair
market values or amounts, if any, distributable to shareholders in the
unlikely event of liquidation.
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO
STOCK CONTRIBUTION
In the event that the Common Stock contribution to the Foundation is
not made, Keller & Company has estimated that the amount of Common Stock offered
for sale in the Conversion would increase by approximately $700,000 and that the
overall market capitalization would increase by $400,000, all at the midpoint of
the Estimated Valuation Range as of April 30, 1998. Under such circumstances,
pro forma shareholder equity of the Company would be approximately $30.6
million, at the midpoint, which is approximately $10,000 greater than the pro
forma shareholder equity of the Company would be if the Common Stock
contribution is made to the Foundation. In preparing this estimate, it has been
assumed that the pro forma price to book value ratio and pro forma price to
earnings ratio would be approximately the same under both the current appraisal
and the estimate of the value of the Company without the Common Stock
contribution to the Foundation at the midpoint of the Estimated Valuation Range.
Further, assuming the midpoint of the Estimated Valuation Range, pro forma
shareholders' equity per share and pro forma earnings per share would be
substantially the
-22-
<PAGE>
same with the Common Stock contribution as without the such contribution. In
this regard, pro forma shareholders' equity and pro forma net income per share
at and for the period ended April 30, 1998 would be $15.00 and $0.23
respectively, at the midpoint of the estimate, assuming no Common Stock
contribution to the Foundation, and $15.03 and $0.23, respectively, with the
Common Stock contribution. The pro forma price to book value ratio and the pro
forma price to earnings ratio at and for the period ended April 30, 1998 are
66.67% and 14.49x, respectively, at the midpoint of the estimate, assuming no
Common Stock contribution, and are 66.53% and 14.49x, respectively, with the
Common Stock contribution. This estimate by Keller & Company was prepared at the
request of the OTS and is solely for purposes of providing members with
sufficient information with which to make an informed decision on the Common
Stock contribution. There is no assurance that in the event the Common Stock
contribution is not approved at the Special Meeting of members that the
appraisal prepared at that time would conclude that the pro forma market value
of the Company would be the same as that estimated herein.
If the Common Stock contribution is not made to the Foundation, Keller
& Company has estimated that the adjusted maximum of the Estimated Valuation
Range would be $26.45 million. Nevertheless, if the pro forma market value of
the common stock to be sold by the Company without the Common Stock contribution
is either greater than $26.15 million or less than $16.7 million or if the OTS
otherwise requires a resolicitation of subscribers, the Association will
establish a new Estimated Valuation Range and commence a resolicitation of
subscribers (i.e., subscribers will be permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest.) Any change in the Estimated Valuation
Range must be approved by the OTS. "See the Conversion - Stock Pricing and
Number of Shares to be Issued."
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
adjusted maximum of the Estimated Valuation Range, assuming the Conversion was
completed at April 30, 1998.
-23-
<PAGE>
<TABLE>
<CAPTION>
At the Maximum
At the Minimum At the Midpoint At the Maximum as Adjusted
----------------- ------------------- ------------------ -------------------
With No With No With No With No
Stock Stock Stock Stock Stock Stock Stock Stock
Contri- Contri- Contri- Contri- Contri- Contri- Contri- Contri-
bution bution bution bution bution bution bution bution
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering amount .......... $16,700 $17,340 $19,700 $20,400 $22,700 $23,460 $26,150 $26,979
Pro forma market capitalization .... 17,000 17,340 20,000 20,400 23,000 23,460 26,450 26,979
Total assets ....................... 86,616 87,215 89,215 89,867 91,814 92,519 94,802 95,568
Total liabilities .................. 59,257 59,257 59,257 59,257 59,257 59,257 59,257 59,257
Pro forma shareholders' equity ..... 27,461 27,958 30,060 30,610 32,659 33,262 35,647 36,311
Pro forma consolidated net
earnings(1) ...................... 399 405 421 426 442 449 465 437
Pro forma shareholders' equity
per share ........................ 16.15 16.12 15.03 15.00 14.19 14.18 13.48 13.46
Pro forma consolidated net
earnings per share(1) ............ 0.25 0.25 0.23 0.23 0.21 0.21 0.19 0.19
Pro Forma Pricing Ratios:
Offering price as a percentage
of pro forma shareholders'
equity per share ............... 13.33x 13.33x 14.49x 14.49x 15.87x 15.87x 17.54x 17.54x
Offering price to pro forma net
earnings per share(1) .......... 61.92% 62.03% 66.53% 66.67% 70.47% 70.52% 74.18% 74.29%
Offering price to assets ......... 19.63% 19.88% 22.42% 22.70% 25.05% 25.36% 27.90% 28.23%
Pro Forma Financial Ratios:
Return on assets(2) ............. 1.38% 1.39% 1.42% 1.42% 1.44% 1.46% 1.47% 1.49%
Return on shareholders' equity(2) 4.37% 4.36% 4.21% 4.18% 4.07% 4.06% 3.92% 3.91%
Shareholders' equity to assets .. 31.70% 32.06% 33.70% 34.06% 35.57% 35.96% 37.60% 37.99%
</TABLE>
- -----------
(1) For the four-month period ended April 30, 1998.
(2) Ratios for the four-month periods have been annualized.
-24-
<PAGE>
PRO FORMA REGULATORY CAPITAL ANALYSIS
At April 30, 1998, the Association exceeded each of the OTS regulatory
capital requirements. Set forth below is a summary of the Association's
compliance with the OTS regulatory capital requirements as of April 30, 1998
based on historical capital and also assuming that the indicated number of
shares were sold as of such date using the assumptions contained under the
caption "Pro Forma Data."
<TABLE>
<CAPTION>
Pro Forma at April 30, 1998
------------------------------------------------------------------------------
1,670,000 1,970,000 2,270,000 2,615,000
Historical Shares Sold at Shares Sold at Shares Sold at Shares Sold at
at April 30, 1998 Minimum Midpoint Maximum Adjusted Maximum
------------------ ---------------- --------------- ---------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital(1)............ $13,282 18.3% $19,301 24.6% $20,420 25.6% $21,540 26.7% $22,627 27.8%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Tangible Capital(2):
Capital level............ $12,186 17.1% $18,205 23.5% $19,324 24.6% $20,444 25.7% $21,731 26.6%
Requirement.............. 1,072 1.5 1,162 1.5 1,179 1.5 1,196 1.5 1,215 1.5
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Excess................... $11,114 15.6% $17,043 22.0% $18,145 23.1% $19,248 24.2% $20,516 25.3%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Core Capital(2):
Capital level(3)......... $12,186 17.1% $18,205 23.5 % $19,324 24.6% $20,444 25.7% $21,731 26.8%
Requirement.............. 2,143 3.0 2,324 3.0 2,357 3.0 2,391 3.0 2,430 3.0
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Excess................... $10,043 14.1% $15,881 20.5% $16,967 21.6% $18,052 22.7% $19,301 23.8%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Risk-Based Capital(2):
Capital level(4)(5)...... $12,683 31.9% $18,702 43.4% $19,821 45.3 % $20,941 47.2% $22,228 49.4%
Requirement.............. 3,184 8.0 3,448 8.0 3,497 8.0 3,546 8.0 3,803 8.0
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Excess................... $ 9,500 23.9% $15,254 35.4% $16,324 37.3% $17,395 39.2% $18,525 41.4%
======== ==== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
- --------------
(1) Total equity as calculated under generally accepted accounting principles
("GAAP"). Assumes that the Association receives 50% of the net proceeds,
offset in part by the aggregate purchase price of Common Stock acquired at
a price of $10.00 per share by the ESOP in the Conversion and the
anticipated expenses associated with the restricted stock plan.
(2) Tangible and core capital figures are determined as a percentage of total
adjusted assets; risk-based capital figures are determined as a percentage
of risk-weighted assets. Adjusted assets assumed for tangible and core
capital are $71.4 million, $77.5 million, $78.6 million, $79.7 million and
$81.0 million at historical, minimum, midpoint, maximum and adjusted
maximum. Risk-weighted assets are assumed to be $39.1 million, $42.4
million, $43.0 million, $43.6 million and $44.4 million at historical,
minimum, midpoint, maximum and adjusted maximum, respectively. See Note K
of the Notes to Consolidated Financial Statements.
(3) In April 1991, the OTS proposed a core capital requirement for savings
associations comparable to the requirement for national banks that became
effective on November 30, 1990. This proposed core capital ratio is 3% of
total adjusted assets for thrifts that receive the highest supervisory
rating for safety and soundness ("CAMEL" rating), with a 4% to 5% core
capital requirement for all other thrifts. See "Regulation - Regulatory
Capital Requirements."
(4) Includes $853,000 of general valuation allowances, of which $489,000
qualifies as supplementary capital. See "Regulation - Regulatory Capital
Requirements."
(5) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 54.9% risk-weight.
-25-
<PAGE>
CAPITALIZATION
Set forth below is the capitalization, including deposits, of Home
Federal as of April 30, 1998, and the pro forma capitalization of the Company at
the minimum, the midpoint, the maximum and the adjusted maximum of the Estimated
Valuation Range, after giving effect to the Conversion and based on other
assumptions set forth in the table and under the caption "Pro Forma Data."
<TABLE>
<CAPTION>
Company - Pro Forma
Based Upon Sale at $10.00 per share
-----------------------------------------------
Adjusted
Home Federal Minimum Midpoint Maximum Maximum
Existing 1,670,000 1,970,000 2,270,000 2,615,000
Capitalization Shares Shares Shares Shares
-------------- ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(1) ........................................ $ 57,765 $ 57,765 $ 57,765 $ 57,765 $ 57,765
Borrowings ......................................... 400 400 400 400 400
-------- -------- -------- -------- --------
Total Deposits and borrowed funds .................. $ 58,165 $ 58,165 $ 58,165 $ 58,165 $ 58,165
======== ======== ======== ======== ========
Shareholders' Equity:
Serial Preferred Stock ($0.01 par value)
authorized - 500,000 shares; none to be
outstanding ..................................... $ -- $ -- $ -- $ -- $ --
Common Stock ($0.01 par value)
authorized - 6,500,000 shares; to be
outstanding (as shown)(2) ...................... -- 17 20 23 26
Additional paid-in capital ....................... -- 16,100 19,058 22,012 25,411
Shares issued to the Foundation .................. -- 300 300 300 300
Retained earnings, substantially
restricted(3) .................................. 12,186 12,186 12,186 12,186 12,186
Net unrealized gain (loss) on securities
available for sale ............................. 1,096 1,096 1,096 1,096 1,096
Less:
Foundation contribution expense, net of
tax benefit(4) ................................. -- 198 198 198 198
Common Stock acquired by ESOP(5) ................. -- (1,360) (1,600) (1,840) (2,116)
Common Stock acquired by restricted
stock plan(5) .................................. -- (680) (800) (920) (1,058)
-------- -------- -------- -------- --------
Total Shareholders' Equity(6) ...................... $ 13,282 $ 27,461 $ 30,060 $ 33,659 $ 35,654
======== ======== ======== ======== ========
</TABLE>
- --------------
(1) No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing Common Stock in the Conversion. Any such withdrawals
will reduce pro forma deposits by the amount of such withdrawals.
(2) Does not reflect the shares of Common Stock that may be reserved for
issuance pursuant to the Stock Option Plan.
(3) See "Dividends" and "Regulation - Limitations on Dividends and Other
Capital Distributions" regarding restrictions on future dividend payments
and "The Conversion - Effects of Conversion to Stock Form on Depositors and
Borrowers of the Association" regarding the liquidation account to be
established upon Conversion.
(4) Represents the tax effect of the contribution of Common Stock to the
Foundation based on a 34% tax rate. The realization of the tax benefit is
limited annually to 10% of the Company's annual taxable income, subject to
the ability of the Company to carry forward any unused portion of the
deduction for five years following the year in which the contribution is
made.
(5) Assumes that 8% of the shares issued in the Conversion will be purchased by
the ESOP. The funds used to acquire the ESOP shares will be borrowed from
the Company. The Association intends to make contributions to the ESOP
sufficient to service and ultimately retire the ESOP's debt over a
twelve-year period. Also assumes that an amount of shares equal to 4% of
the
-26-
<PAGE>
amount of shares issued in the Conversion will be acquired by the
restricted stock plan, following shareholder ratification of such plan
after completion of the Conversion. In the event that the restricted stock
plan is funded solely by the issuance of authorized but unissued shares,
the interest of existing shareholders would be diluted by approximately
3.8%. The amount to be borrowed by the ESOP and the Common Stock acquired
by the restricted stock plan is reflected as a reduction of shareholders'
equity. See "Management - Benefit Plans - Employee Stock Ownership Plan"
and "- Other Stock Benefit Plans."
(6) If the Common Stock Contribution to the Foundation is approved by the
Association's members, the amount of initial contribution will be accrued
as an expense in the fiscal quarter in which the Conversion is completed.
See "The Conversion Stock Contribution to the Charitable Foundation."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is intended to assist you in understanding the financial condition
and results of operations of Home Federal. The information contained in this
section should also be read in conjunction with our Financial Statements and
Notes to the Financial Statements included elsewhere in this document.
General
The Company has recently been formed and, accordingly, has no results
of operations. The following discussion relates only to Home Federal's financial
condition and results of operations. Our results of operations depend primarily
on net interest income, which is determined by (i) the difference between rates
of interest we earn on interest-earning assets, consisting primarily of mortgage
loans, collateralized mortgage obligations and other investments, and the rates
we pay on interest-bearing liabilities, consisting primarily of deposits and
borrowings, and (ii) the relative amounts of such interest-earning assets and
interest-bearing liabilities. The level of noninterest income, such as fees
received from customer deposit account service charges and gains on sales of
investments, and the level of noninterest expense, such as federal deposit
insurance premiums, salaries and benefits, office occupancy costs, and data
processing costs, also affect our results of operations. Finally, our results of
operations may also be affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, all of which are
beyond our control.
Financial Condition
April 30, 1998 Compared to December 31, 1997. Total assets of $72.5
million and total liabilities of $59.3 million at April 30, 1998 remained
relatively unchanged compared to December 31, 1997. Loans receivable and
investment securities categorized as available for sale declined $593,000 and
$263,000, respectively, between December 31, 1997 and April 30, 1998 as a result
of such loans and investments maturing and being repaid. These declines were
partially offset by a $230,000 increase in securities, primarily collateralized
mortgage obligations ("CMOs"), categorized by the Association as held to
maturity at April 30, 1998.
Equity increased $119,000 from December 31, 1997 to April 30, 1998 as a
result of $287,000 of net income earned during such four-month period and a
$168,000 decrease in unrealized gains for securities categorized as available
for sale.
-27-
<PAGE>
December 31, 1997 Compared to December 31, 1996. Total assets increased
$1.3 million, or 1.8%, to $72.5 million at December 31, 1997 from $71.2 million
at December 31, 1996. The increase in total assets resulted from a $3.6 million
increase in the loan portfolio to $36.7 million and a $2.6 million increase in
cash and cash equivalents to $4.9 million at December 31, 1997. These increases
were partially offset by a $4.9 million decline in the securities portfolio at
December 31, 1997, as a result of sales and maturities of such securities. The
increase in the loan portfolio is attributable to a reduction in loan
prepayments in 1997. Proceeds from the sales and maturities of securities were
used to fund loan growth.
Total liabilities increased $284,000 to $59.3 million at December 31,
1997. The increase was attributable to a $181,000 increase in deposits to $57.9
million.
Equity increased $1.0 million, or 8.2%, as a result of $386,000 of net
income earned by the Association and a $614,000 increase on unrealized gains for
securities categorized as available for sale.
-28-
<PAGE>
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances.
<TABLE>
<CAPTION>
Four Months Ended April 30, Year Ended December 31,
-------------------------------------------------------- ----------------------------
1998 1997 1997
----------------------------- ------------------------ ----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
Interest-Earning Assets: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1)..................... $36,447 $1,016 8.36% $34,165 $ 936 8.22% $35,507 $2,959 8.33%
Mortgage-backed and related securities.. 12,502 250 6.00 11,588 237 6.14 11,677 665 5.70
Investment securities................... 17,300 321 5.57 22,068 434 5.90 19,210 1,150 5.99
FHLB stock.............................. 297 7 7.07 276 6 6.52 283 20 7.07
Interest bearing deposits............... 4,337 77 5.33 2,077 38 5.49 3,791 208 5.49
------- ------ ------- ----- ------- -----
Total interest-earning assets(1)....... $70,883 1,671 7.07 $70,174 1,651 7.06 $70,468 5,002 7.10
======= ------ ======= ----- ======= -----
Interest-Bearing Liabilities:
Savings deposits........................ $25,392 259 3.06 $26,176 267 3.06 $26,340 806 3.06
Demand and NOW deposits................. 2,951 30 3.05 2,754 28 3.05 2,885 88 3.05
Certificate accounts.................... 28,770 523 5.45 28,102 483 5.16 28,231 1,539 5.45
Borrowings.............................. 400 12 9.00 500 15 9.00 488 43 8.81
------- ------ ------- ----- ------- -----
Total interest-bearing liabilities..... $57,513 824 4.30 $57,532 793 4.14 $57,944 2,476 4.27
======= ------ ======= ----- ======= -----
Net interest income...................... $ 847 $ 858 $2,526
====== ===== ======
Net interest rate spread................. 2.77% 2.92% 2.83%
==== ==== ====
Net earning assets....................... $13,370 $12,642 $12,524
======= ======= =======
Net yield on average interest-
earning assets......................... 3.58% 3.67% 3.58%
==== ==== ====
Average interest-earning assets to average
interest-bearing liabilities........... 1.23x 1.22x 1.22x
==== ==== ====
</TABLE>
Year Ended December 31,
-----------------------------
1996
-----------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable(1)............................ $30,753 $2,510 8.16%
Mortgage-backed and related securities......... 14,536 845 5.81
Investment securities.......................... 21,756 1,266 5.82
FHLB stock..................................... 263 18 6.84
Interest bearing deposits...................... 2,631 141 5.36
------- ------
Total interest-earning assets(1).............. $69,939 4,780 6.83
======= ======
Interest-Bearing Liabilities:
Savings deposits............................... $27,320 836 3.06
Demand and NOW deposits........................ 2,820 86 3.05
Certificate accounts........................... 27,453 1,475 5.37
Borrowings..................................... 62 5 8.06
------- ------
Total interest-bearing liabilities........... $57,655 2,402 4.17
======= ------
Net interest income............................. $2,378
======
Net interest rate spread........................ 2.66%
====
Net earning assets.............................. $12,284
=======
Net yield on average interest-earning assets.... 3.40%
====
Average interest-earning assets
to average interest-bearing liabilities....... 1.21x
====
- ----------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves. Includes non-accrual loans.
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<PAGE>
Rate/Volume Analysis of Net Interest Income
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the changes
related to outstanding balances and that due to the changes in interest rates.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Four Months Ended
April 30, Years Ended December 31,
1997 vs. 1998 1996 vs. 1997
--------------------------- -----------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------- Increase ------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
Interest-Earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable......................... $ 69 $ 11 $ 80 $399 $ 50 $449
Mortgage-backed and related securities... 18 (5) 13 (164) (16) (180)
Investment securities.................... (90) (23) (113) (155) 39 (116)
Interest bearing deposits and other...... 40 (1) 39 64 5 69
------ ------ ------- ------- ----- -------
Total interest-earning
assets.............................. $ 37 $(18) 19 $144 $ 78 222
==== ==== ------ ==== ==== ----
Interest-Bearing liabilities:
Savings deposits......................... $ (8) $ --- $ (8) $ (30) $ --- $ (30)
Demand and NOW deposits.................. 2 --- 2 2 --- 2
Borrowings............................... (3) --- (3) 37 1 38
Certificate accounts..................... 12 28 40 42 22 64
----- ----- ------ ---- ---- ------
Total interest-bearing
liabilities......................... $ 3 $ 28 31 $ 51 $ 23 74
==== ==== ------ ==== ==== -----
Net interest income........................ $ (12) $148
===== ====
</TABLE>
-30-
<PAGE>
Interest Rate Spreads
The following table presents the weighted average yields earned on
loans, investments and other interest-earning assets, and the weighted average
rates paid on savings deposits and the resultant interest rate spreads at the
dates indicated. Weighted average balances are based on monthly balances.
At December 31,
April 30, -----------------
1998 1997 1996
---- ---- ----
Weighted average yield on:
Loans receivable ............................. 8.04% 8.34% 8.27%
Mortgage-backed and related securities ....... 6.06 5.96 5.69
Investment securities ........................ 5.46 5.52 6.00
FHLB stock ................................... 7.25 7.31 7.04
Interest bearing deposits .................... 5.44 6.56 6.85
Combined weighted average yield
on interest-earning assets ................. 6.89 7.13 7.04
Weighted average rate paid on:
Savings deposits ............................. 3.06 3.06 3.06
Demand and NOW deposits ...................... 3.05 3.05 3.05
Certificate accounts ......................... 5.41 5.52 5.32
Borrowings ................................... 8.88 8.88 8.88
Combined weighted average rate paid
on interest-bearing liabilities ............ 4.27 4.31 4.19
Spread ........................................ 2.62 2.82 2.85
Results of Operations
Comparison of Operating Results for the Four Months Ended April 30,
1998 and 1997
Net Income. Net income was $287,000 for the four months ended April 30,
1998, compared to $298,000 for the four months ended April 30, 1997,
representing a decrease of 3.7%. Interest income increased $19,000, primarily as
a result of an increase in our outstanding balance of loans, and noninterest
income increased $461,000, as a result of gains on the sales of securities.
These increases were mostly offset by the $31,000 increase in interest expense
resulting from higher certificate account balances and the $433,000 increase in
noninterest expense relating to bonuses paid to directors, officer and
employees. Our provision for loan losses was also $20,000 higher for the four
months ended April 30, 1998 compared to the same period in 1997. For the four
months ended April 30, 1998 and 1997, the annualized returns on assets were
1.19% and 1.25%, respectively, while the returns on retained earnings were 7.15%
and 7.67%, respectively.
Net Interest Income. Net interest income was $847,000 for the four
months ended April 30, 1998 compared to $859,000 for the four months ended April
30, 1997, representing a decrease of 1.4%. Interest income increased $19,000 to
$1,671,000 for the four months ended April 30, 1998 compared to the same period
in 1997, as a result of a $709,000 increase in the average outstanding balance
of interest-earning assets and a slight shift in our asset mix from
lower-yielding securities and
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<PAGE>
interest-bearing deposits to higher yielding mortgage loans. However, the
increase in interest income was more than offset by the $31,000 increase in
interest expense to $824,000 for the four months ended April 30, 1998, compared
to $793,000 for the four months ended April 30, 1997, primarily as a result of
the higher rate paid on, and the higher average outstanding balance of,
certificate accounts. See "- Average Balances, Interest Rates and Yields" and "-
Rate Volume Analysis of Net Interest Income."
Our average outstanding balance of interest-earning assets to
interest-bearing liabilities remained relatively constant at 1.23x for the four
months ended April 30, 1998, compared to 1.22x for the same period in 1997.
Proceeds received from maturing lower-yielding investment and mortgage-related
securities were redeployed into higher-yielding mortgage loans, which resulted
in the increase in interest income. Our average outstanding balance of loans
receivable was $2,282,000 higher for the four months ended April 30, 1998
compared to the same period in 1997, while our average outstanding balance of
our mortgage-backed and related securities, investment securities and
interest-bearing deposits was $1,594,000 lower during the same periods. The
average yield on our loan portfolio also increased to 8.36% for the four months
ended April 30, 1998, compared to 8.22% for the same period in 1997. However,
our net interest rate spread decreased to 2.77% for the four months ended April
30, 1998, compared to 2.92% for same period in 1997, as a result of the
increased balance of higher costing certificate accounts.
Provision for Loan Losses. The provision for loan losses is a result of
management's periodic analysis of the adequacy of the allowance for loan losses.
The provision was $20,000 for the four months ended April 30, 1998. No provision
was made during the four months ended April 30, 1997. The increase in the
provision was primarily the result of the increased amount of loans held in
portfolio and increased nonperforming assets, as well as management's continuing
reassessment of the portfolio. At April 30, 1998 our allowance for loan losses
totaled $853,000, or 2.36% of net loans receivable and 50.29% of total
non-performing loans. See "Business of Home Federal - Asset Quality."
It is our policy to provide valuation allowances for estimated losses
on loans based upon past loss experience, current trends in the level of
delinquent and specific problem loans, loan concentrations to single borrowers,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current and anticipated
economic conditions in our market area. Accordingly, the calculation of the
adequacy of the allowance for loan losses is not based directly on the level of
non-performing assets.
We will continue to monitor our allowance for loan losses and make
future additions to the allowance through the provision for loan losses as
economic conditions dictate. Although we maintain our allowance for loan losses
at a level which we consider to be adequate to provide for losses, there can be
no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods. In
addition, our determination as to the amount of the allowance for loan losses is
subject to review by the OTS and the FDIC, as part of their examination process,
which may result in the establishment of an additional allowance.
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<PAGE>
Noninterest Income. Our noninterest income consists primarily of
service fees charged on transaction accounts and gains on sales of securities.
Noninterest income was $469,000 for the four months ended April 30, 1998,
compared to $8,000 for the same period in 1997. This increase was the result of
a $461,000 gain on the sale of investment securities as management chose to
realize gains on approximately 20% of its Federal Home Loan Mortgage Corporation
stock, which at the time of sale was at or near record price levels.
Noninterest Expense. Noninterest expense was $890,000 for the four
months ended April 30, 1998 compared to $457,000 for the same period in 1997,
representing a 95% increase. This increase was primarily attributable to
salaries and employee benefits, our largest noninterest expense which was
$745,000 for the four month period ended April 30, 1998 compared to $297,000 for
the same period in 1997, representing an increase of 151%. The increase in
salaries and benefits was the result of a bonus paid to directors, officers and
employees.
Federal Income Taxes. Federal income taxes were $119,000 for the four
months ended April 30, 1998, compared to $112,000 for the same period in 1997.
The increase in federal income taxes, despite the slightly lower taxable income
earned by the Association for the period, was the result of a reduction in the
tax credits generated by our investment in a limited partnership. See
"Subsidiaries and Other Activities." Our effective tax rates were 29.3% and
27.3% for the four months ended April 30, 1998 and 1997, respectively.
Comparison of Operating Results for the Years Ended December 31, 1997
and 1996
Net Income. Net income was $386,000 for the year ended December 31,
1997 compared to $426,000 for the year ended December 31, 1996, representing a
decrease of 9.4%. Net income decreased as a result of a $660,000 increase to our
provision for loan losses as a result of the increased loan balance and
increased nonperforming assets, as well as management's continued assessments of
the portfolio. Net interest income increased $148,000, primarily as a result of
the increase in our average outstanding balance of loans during 1997, and
noninterest expense decreased $371,000, primarily as a result of the absence of
the one-time SAIF assessment paid in November 1996. Absent the SAIF assessment,
net income for 1996 would have been $675,000, or $289,000 higher than net income
in 1997. For the years ended December 31, 1997 and 1996, the returns on assets
were 0.54% and 0.60% (0.95% excluding the SAIF assessment), respectively, while
the returns on retained earnings were 3.27% and 3.75% (5.94% excluding the SAIF
assessment), respectively.
Net Interest Income. Net interest income was $2,526,000 for the year
ended December 31, 1997, compared to $2,378,000 for the year ended December 31,
1996, representing a 6.2% increase. The increase was the result of a $222,000
increase in interest income to $5,002,000 for the year ended December 31, 1997.
Interest expense also increased, but only slightly, to $2,476,000 for 1997
compared to $2,402,000 for 1996, partially offsetting the increase in interest
income.
While our average outstanding balance of interest-earning assets to
interest-bearing liabilities remained relatively constant at 1.22x during 1997
compared to 1.21x during 1996, we were successful in redeploying proceeds
received from maturing lower-yielding securities into higher- yielding loans,
which resulted in increased interest income. Our average outstanding balance of
mortgage loans increased $4.8 million from 1996 to 1997, while our average
outstanding balance of
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<PAGE>
securities and interest-bearing deposits decreased $4.2 million during the same
period. The average yield on our loan portfolio also increased 17 basis points
to 8.33% for 1997, compared to 8.16% for 1996. In addition, our net interest
rate spread increased to 2.83% for the year ended December 31, 1997, compared to
2.66% for the year ended December 31, 1996 as a result of the shift in our asset
mix.
The increase in interest expense was due to a $778,000 increase in the
average outstanding balance of certificate accounts and, to a lesser extent, an
8 basis point increase in the rate paid on such accounts. The increased
borrowings associated with our equity investment in a limited partnership to
construct low-cost multi-family housing units also contributed to the increase
in interest expense. See "Subsidiary and Other Activities." These increases were
partially offset by a $1,000,000 decline in our lower costing transaction
accounts. See "- Average Balances, Interest Rates and Yields" and "- Rate/Volume
Analysis of Net Interest Income."
Provision for Loan Losses. During the year ended December 31, 1997, we
recorded a provision for loan losses of $700,000, compared to $40,000 during
1996. The increase in the provision was the result of the increased amount of
loans held in portfolio and increased nonperforming loans, as well as
management's continuing reassessment of the portfolio. At December 31, 1997, our
allowance for loan losses totaled $854,000, or 2.32% of net loans receivable and
51.38% of total non-performing loans. See "Business of Home Federal - Asset
Quality."
Noninterest Income. Noninterest income was $27,000 for the year ended
December 31, 1997, compared to $23,000 for 1996. The $4,000 increase was related
to a gain on the sale of an investment security in 1997.
Noninterest Expense. Noninterest expense decreased by $371,000, or
21.2%, to $1,380,000 for the year ended December 31, 1997 from $1,751,000 for
the year ended December 31, 1996. The decrease primarily was due to the absence
in 1997 of the $378,000 special assessment paid in 1996 to recapitalize the
SAIF. Absent the SAIF assessment, noninterest expense would have increased
$7,000.
Salaries and employee benefits, our largest noninterest expense,
increased $47,000 from 1996 to 1997, representing an increase of 5.7%. The
increase in salaries and benefits was the result of normal wage adjustments and
the addition of one full-time employee. Other operating expenses increased
$60,000, or 19.9%, from 1996 to 1997, primarily as a result of increased data
processing costs.
Federal Income Taxes. Federal income taxes were $87,000 for the year
ended December 31, 1997, compared to $184,000 for the same period in 1996. We
paid less federal income taxes during 1997 as a result of earning less income
and the effect of tax credits generated by our investment in a limited
partnership. Our effective tax rates were 18.4% and 30.2% for 1997 and 1996,
respectively.
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<PAGE>
Asset/Liability Management
As stated above, we derive our income primarily from the excess of
interest collected over interest paid. The rates of interest we earn on assets
and pay on liabilities generally are established contractually for a period of
time. Market interest rates change over time. Accordingly, our results of
operations, like those of many financial institutions, are impacted by changes
in interest rates and the interest rate sensitivity of our assets and
liabilities.
In an attempt to manage our exposure to changes in interest rates and
comply with applicable regulations, we monitor the Association's interest rate
risk. In monitoring interest rate risk we continually analyze and manage assets
and liabilities based on their payment streams and interest rates, the timing of
their maturities, and their sensitivity to actual or potential changes in market
interest rates.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more rapidly or to a greater extent than our liabilities, then
net portfolio value and net interest income would tend to increase during
periods of rising interest rates and decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, then net portfolio value and net interest income
would tend to decrease during periods of rising interest rates and increase
during periods of falling interest rates. Our policy has been to address the
interest rate risk inherent in the historical savings institution business of
originating long-term loans funded by short-term deposits by maintaining
sufficient liquid assets for material and prolonged changes in interest rates.
To manage the interest rate risk, we attempt to originate
adjustable-rate loans; however, due to the low interest rate environment over
the past several years, customer demand for fixed-rate loans has been strong. At
April 30, 1998, ARM loans totaled $21.9 million or 55.7% of our total loan
portfolio. We also maintain a large portfolio of liquid assets which includes
investment securities. Maintaining liquid assets, however, tends to reduce
potential net income because liquid assets usually provide a lower yield than
other interest-earning assets.
Our Board of Directors is responsible for reviewing our asset and
liability position. The Board meets quarterly to review interest rate risk and
trends, liquidity and capital ratios and related regulatory requirements. In
addition, the Board reviews simulations of the effect of interest rates on the
Association's capital, net interest income and net income under various interest
rate scenarios. Management of the Association is responsible for implementing
the policies and decisions of the Board of Directors with respect to our asset
and liability goals and strategies. The Association has operated for the last
three years within the Board's defined asset/liability parameters.
Net Portfolio Value
In order to encourage savings associations to reduce their interest
rate risk, the OTS adopted a rule incorporating an interest rate risk ("IRR")
component into the risk-based capital rules. The IRR component is a dollar
amount that will be deducted from total capital for the purpose of calculating
an institution's risk-based capital requirement and is measured in terms of the
sensitivity of its net portfolio value ("NPV") to changes in interest rates. NPV
is the difference between
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<PAGE>
incoming and outgoing discounted cash flows from assets, liabilities, and
off-balance sheet contracts. An institution's IRR is measured by the change to
its NPV as a result of a hypothetical 200 basis point ("bp") change in market
interest rates. A resulting change in NPV of more than 2% of the estimated
present value of total assets ("PV") will require the institution to deduct from
its capital 50% of that excess change. Based on the Association's asset size and
risk-based capital, we have been informed by the OTS that Home Federal is
exempted from this rule. Nevertheless, the following table presents an estimate
of the change in our NPV at March 31, 1998 as calculated by our personnel, based
on quarterly financial information.
March 31, 1998
----------------------------------------------------------------------------
Net Portfolio Value NPV as % of PV of Asset
-------------------------------------------------- -----------------------
Change in
Rate $ Amount $ Change % Change NPV Ratio BP Change
--------- -------- -------- -------- --------- ---------
(Dollars in Thousands)
+400 bp $10,172 $(3,683) (26.6)% 14.54% (428)
+300 11,403 (2,452) (17.7) 16.02 (280)
+200 12,459 (1,396) (10.1) 17.25 (157)
+100 13,260 (595) (4.3) 18.16 (66)
-- 13,855 -- -- 18.82 --
- -100 14,473 618 4.5 19.49 67
- -200 14,854 999 7.2 19.90 108
- -300 15,006 1,151 8.3 20.07 125
- -400 15,142 1,287 9.3 20.21 139
In the above table, the first column on the left presents the basis
point increments of yield curve shifts. The second column presents the overall
dollar amount of NPV at each basis point increment. The third and fourth columns
present the Association's actual position in dollar change and percentage change
in NPV at each basis point increment. The remaining columns present the
Association's percentage change and basis point change in its NPV as a
percentage of portfolio value of assets.
Were the Association subject to the IRR component at March 31, 1998, it
would not have been considered to have had a greater than normal level of
interest rate exposure and a deduction from capital would not have been
required. Although we have been advised by the OTS that Home Federal is not
subject to the IRR component discussed above, it is still subject to interest
rate risk and, as can be seen above, rising interest rates will reduce the
Association's NPV. The OTS has the authority to require otherwise exempt
institutions to comply with the rule concerning interest rate risk. See
"Regulation - Regulatory Capital Requirements."
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including interest rates, loan
prepayment rates, deposit decay rates, and the market values of certain assets
under the various interest rate scenarios and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in the method of
analysis presented in the computation of NPV. Although certain assets and
liabilities may have similar maturities or
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<PAGE>
periods within which they reprice, they may react differently to changes in
market interest rates. 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. In the
event of a change in interest rates, prepayments and early withdrawal levels
could deviate significantly from those assumed in making the calculations set
forth above.
Liquidity and Capital Resources
Our primary sources of funds are deposits, repayments and prepayments
of loans and securities and interest income. Although maturity and scheduled
amortization of loans and securities are relatively predictable sources of
funds, deposit flows and prepayments on loans and securities are influenced
significantly by general interest rates, economic conditions and competition.
Our primary investment activity is originating one- to four-family
residential mortgages and, to a lesser extent, commercial, multi-family and
construction real estate loans to be held to maturity. For the four months ended
April 30, 1998, and the fiscal years ended December 31, 1997 and 1996, we
originated loans for our portfolio in the amount of $3.2 million, $7.0 million
and $9.5 million, respectively. For the four months ended April 30, 1998, and
the fiscal years ended December 31, 1997 and 1996, these activities were funded
from repayments of loans and securities of $7.1 million, $12.6 million and $15.8
million, respectively. Excess funds are generally invested in short-term
investment securities and collateralized mortgage obligations.
Our most liquid assets are cash and cash equivalents. At April 30,
1998, and December 31, 1997 and 1996, cash and cash equivalents were $5.5
million, $4.9 million, and $2.2 million, respectively. The Association's
management monitors and reviews its liquidity and maintains a $2.0 million line
of credit with a commercial bank which can be accessed immediately.
Liquidity management is an ongoing and long-term function of our
asset/liability management strategy. Excess funds generally are invested in
interest-bearing overnight deposits at other financial institutions and in
short-term investment securities. If we require funds beyond our ability to
generate deposits, additional sources of funds are available through certain
other assets as collateral for such advances. We believe, based on our current
balance sheet structure and our ability to acquire funds from the FHLB of
Cincinnati and other sources, that the Association's liquidity is adequate.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary impact of inflation on our
operations is reflected in increased operating costs. Unlike most industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates, generally, have
a more significant impact on a financial institution's performance than does
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
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<PAGE>
Year 2000 Issues
The approaching millennium is causing organizations of all types to
review their computer systems for the ability to properly accommodate the year
2000. When computer systems were first developed, two digits were used to
designate the year in date calculations and "19" was assumed for the century. As
a result, there is significant concern about the integrity of date sensitive
calculations when the calendar rolls over to January 1, 2000. An older system
could interpret 01/01/00 as January 1, 1900 potentially causing major problems
calculating interest, payment, delinquency or maturity dates. An internal
committee of the Association, comprised of two officers and an outside director,
has been formed to address the potential risk that year 2000 poses for the
Association.
Accurate data processing is essential to our operations and a lack of
accurate processing by our vendors or by us could have a significant adverse
impact on the Association's financial condition and results of operations. We
have been assured by our data processing service bureau that their computer
services will function properly on and after January 1, 2000. Our data
processing service bureau has advised Management that it, in fact, anticipates
completing programming corrections by October 1998, and will commence testing in
November 1998. If by the end of this year it appears that our primary data
processing service bureau will be unable to resolve this problem in a timely
manner, then we will identify a secondary data processing service provider to
complete the task. If we are unable to do this, we will identify those steps
necessary to minimize the negative impact the computer problems. At this time we
cannot determine the expense that may be incurred in connection with year 2000
issues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -Year 2000 Issues."
In addition to expenses related to our own systems, we could incur
losses if loan payments are delayed due to year 2000 problems affecting any of
our significant borrowers or impairing the payroll systems of large employers in
our market area. We have been communicating with our vendors to assess their
progress in evaluating their systems and implementing any corrective measures
required by them to be prepared for the year 2000. To date, we have not been
advised by such parties that they do not have plans in place to address and
correct the issues associated with the year 2000 problem; however, no assurance
can be given as to the adequacy of such plans or to the timeliness of their
implementation.
Recent Accounting Pronouncements
FASB Statement on Reporting Comprehensive Income. In June 1997, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 130. SFAS No. 130 will require the Company to
classify items of other comprehensive income by their nature in the financial
statements and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of equity. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The adoption of this standard is not expected
to have a material impact on the Company's consolidated financial statements.
FASB Statement on Earnings Per Share. In March 1997, FASB issued SFAS
No. 128. SFAS No. 128 establishes standards for computing and presenting
earnings per share and applies to
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<PAGE>
entities with publicly held common stock or potential common stock. This
statement simplifies the standards for computing earnings per share previously
found in Accounting Principles Board ("APB") Opinion No. 15, Earnings per Share
("EPS"), and makes them comparable to international EPS standards. It replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and the denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 supersedes Opinion 15
and AICPA Accounting Interpretation 1-102 of Opinion 15. This statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The Company intends to adopt SFAS No. 128 in
the initial reporting period following consummation of the offering.
FASB Statement on Disclosure of Information about Capital Structure. In
February 1997, the FASB issued SFAS No. 129. SFAS No. 129 incorporates the
disclosure requirements of APB Opinion No. 15, Earnings per Share, and makes
them applicable to all public and nonpublic entities that have issued securities
addressed by the Statement. APB Opinion No. 15 requires disclosure of
descriptive information about securities that is not necessarily related to the
computation of earnings per share. This statement continues the previous
requirements to disclose certain information about an entity's capital structure
found in APB Opinions No. 10, Omnibus Opinion- 1966, and No. 15, Earnings per
Share, and FASB Statement No. 47, Disclosure of Long-Term Obligations, for
entities that were subject to the requirements of those standards. SFAS No. 129
eliminates the exemption of nonpublic entities from certain disclosure
requirements of Opinion 15 as provided by FASB Statement No. 21, Suspension of
the Reporting of Earnings per Share and Segment Information by Nonpublic
Enterprises. It supersedes specific disclosure requirements of Opinions No. 10
and No. 15 and FASB Statement No. 47 and consolidates them in this Statement for
ease of retrieval and for greater visibility to nonpublic entities. FASB No. 129
is effective for financial statements for periods ending after December 15,
1997. SFAS No. 129 will be adopted by the Company and the Association in the
initial period following consummation of the offering.
FASB Statement on Accounting for Stock-Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB has encouraged all entities to adopt the fair
value based method, however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by APB Opinion No. 25. Under the
intrinsic value based method, compensation cost is the excess of the market
price of the stock at the grant date over the amount an employee must pay to
acquire the stock. However, most stock option plans have no intrinsic value at
the grant date and, as such, no compensation cost is recognized under APB
Opinion No. 25. Entities electing to continue use of the accounting treatment of
APB Opinion No. 25 must make certain pro forma disclosures as if the fair value
based method had ben applied. The accounting requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years beginning
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after December 15, 1995. Pro forma disclosures must include the effects of all
awards granted in fiscal years beginning after December 15, 1994. The Company
expects to use the "intrinsic value based method" as prescribed by APB Opinion
No. 25.
FASB Statement on Disclosures about Segments of an Enterprise and
Related Information. In June 1997, the FASB issued SFAS No. 131. SFAS No. 131
establishes standards for the way public enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. The adoption of this standard is not
expected to have a material impact on the Company's consolidated financial
statements.
FASB Statement on Employers' Disclosures about Pensions and Other
Post-retirement Benefits. In February 1998, the FASB issued SFAS No. 132. SFAS
NO. 132 revises employers' disclosures about pension and other post-retirement
benefit plans. SFAS No. 132 does not change the measurement or recognition of
those plans and is effective for fiscal years beginning after December 15, 1997.
The adoption of this standard is not expected to have a material impact on the
Company's consolidated financial statements.
BUSINESS OF HOME FEDERAL
General
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent and construction
loans secured by first mortgages on owner-occupied, one- to four-family
residences. We also originate loans secured by first mortgages on
nonowner-occupied, one- to four-family residences, permanent and construction
loans secured by commercial real estate and multi-family real estate and, to a
much lesser extent, consumer and commercial business loans. While our primary
business is the origination of one- to four-family residential mortgage loans
funded through retail deposits, competition from other financial institutions
has limited the volume of loans the Association has been able to originate and
place in its portfolio. As a result, we invest our excess funds into short-term,
lower-yielding investment and mortgage-related securities.
Our revenues are derived principally from interest on mortgage and
other loans, and interest and dividends on investment and mortgage-related
securities.
We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include passbook and statement savings
accounts, money market deposit accounts, NOW and interest-bearing checking
accounts and certificate accounts with varied terms ranging from 91 days to
three years. We only solicit deposits in our primary market area and we do not
accept brokered deposits.
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Market Area
We intend to continue to be a community-oriented financial institution
offering a variety of financial services to meet the needs of the community we
serve. We primarily serve the Niles, Ohio area. Our primary lending area
consists generally of the area within a 30 mile radius of the City of Niles. We
may grant a loan outside of this 30 mile radius on occasion and only with the
approval of our Board of Directors. We do not grant loans outside the State of
Ohio.
Trumbull County, where the Association is located, consists primarily
of suburban and rural communities with manufacturing and wholesale distribution
activities serving as the basis of the local economy. Major employers in the
area include General Motors Corp. and WCI Steel, Inc.
Our market area has experienced a higher current unemployment rate than
Ohio and the United States. In April 1998, Trumbull County had an unemployment
rate of 4.5%, compared to an unemployment rate of 3.8% in Ohio, and 4.3 % in the
United States. Furthermore, the population of Niles has remained relatively
stagnant from 1990 to 1997, and is projected to remain relatively the same
through the year 2002.
Lending Activities
General. Our primary lending activity is the origination of loans
secured by first mortgages on one- to four-family residential properties. We
also make permanent and construction loans on multi-family and commercial
properties, and a limited number of consumer and commercial business loans. Our
mortgage loans carry either a fixed or an adjustable interest rate. Mortgage
loans are generally long-term and amortize on a monthly basis with principal and
interest due each month. At April 30, 1998, our net loan portfolio totaled $36.2
million, which constituted 50.0% of our total assets.
All loans are originated by management, subject to ratification by the
Board of Directors. Commercial real estate loans and multi-family loans are
generally reviewed by the Board prior to a lending commitment being extended.
Management is responsible for presenting to the Board information about
the credit-worthiness of a borrower and the estimated value of the subject
property. Information pertaining to credit-worthiness of a borrower generally
consists of a summary of the borrower's credit history, employment, employment
stability, net worth and income. The estimated value of the property must be
supported by an appraisal report prepared in accordance with our appraisal
policy.
At April 30, 1998, the maximum amount which we could have loaned to any
one borrower and the borrower's related entities was approximately $1.9 million.
Except as described below, at April 30, 1998, we had no loans or groups of loans
to related borrowers with outstanding balances in excess of this amount. At that
date, our largest lending relationship to a single borrower or a group of
related borrowers consisted of 12 loans totaling $2.6 million (of which
approximately $808,000 was unfunded at April 30, 1998). Of the 12 loans, three
loans were for the construction of a residential housing development, six loans
were for individual home construction, and three loans were secured by apartment
rental units and commercial office space. This lending relationship was
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within federal regulatory guidelines pursuant to exceptions for residential
housing developments. The second largest lending relationship at April 30, 1998,
consisted of two purchased participation loans totaling $1.9 million (of which
approximately $803,000 was unfunded at April 30, 1998) for the construction of
an apartment complex and a warehouse/office complex in Columbus, Ohio. Each of
these loans was current and performing in accordance with its terms at April 30,
1998.
Our third largest lending relationship at April 30, 1998 totaled $1.4
million and consisted of six loans secured by commercial and residential real
estate. At April 30, 1998, three of the six loans were nonperforming. The three
nonperforming loans totaled approximately $1.0 million at April 30, 1998. See "-
Asset Quality - Nonperforming Assets."
The next two largest lending relationships at April 30, 1998, consisted
of one loan totaling $994,000 secured by 114 nonowner-occupied, single family
residences and one loan totaling $942,000 secured by an apartment complex. Each
of these loans was current and performing in accordance with its terms at April
30, 1998. The loan secured by the apartment complex was paid in full during June
1998.
We had only four other lending relationships which exceeded $700,000 at
April 30, 1998, all of which were current and performing generally in accordance
with their loan terms at such date.
Loan Portfolio Composition. The following table sets forth information
concerning the composition of our loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
April 30, --------------------------------------------
1998 1997 1996
---------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family.................... $25,054 63.74% $25,634 64.29% $22,310 62.99 %
Commercial............................. 4,680 11.91 4,603 11.54 4,746 13.40
Multi-family........................... 3,057 7.78 4,143 10.39 3,299 9.31
Construction or development............ 5,310 13.51 4,231 10.61 3,681 10.39
------- ------- ------- ------- ------- ------
Total real estate loans............ 38,101 96.94 38,611 96.83 34,036 96.09
------- ------- ------- ------- ------- ------
Other Loans:
Consumer Loans:
Home equity........................... 909 2.31 926 2.32 931 2.63
Deposit account....................... 63 0.16 84 0.21 197 0.56
-------- -------- ------- ------- ------- ------
Total consumer loans............... 972 2.47 1,010 2.53 1,128 3.19
-------- -------- ------- ------- ------- ------
Commercial business loans.............. 232 0.59 255 0.64 256 0.72
Total other loans.................. 1,204 3.06 1,265 3.17 1,384 3.91
-------- -------- ------- ------- ------- ------
Total loans........................ 39,305 100.00% 39,876 100.00% 35,420 100.00%
====== ====== ======
Less:
Loans in process....................... 2,301 2,278 1,936
Allowance for losses................... 853 854 301
-------- ------- -------
3,154 3,132 2,237
-------- ------- -------
Total loans receivable, net............ $36,151 $36,744 $33,183
======= ======= =======
</TABLE>
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<PAGE>
The following table shows the composition of our loan portfolio by
fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
December 31,
April 30, -------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ---------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
- -----------------
Real estate:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family............. $12,032 30.61% $11,997 30.09% $ 9,354 26.41%
Commercial...................... 612 1.56 1,430 3.59 1,553 4.38
Multi-family.................... 269 0.68 289 0.72 342 0.97
Construction or development..... 3,300 8.40 1,776 4.45 3,581 10.11
-------- --------- -------- ------- -------- -------
Total real estate loans...... 16,213 41.25 15,492 38.85 14,830 41.87
------- --------- ------- ------- ------- -------
Consumer......................... 972 2.47 1,010 2.53 1,128 3.19
Commercial business.............. 232 0.59 255 0.64 256 0.72
-------- --------- --------- ------- -------- -------
1,204 3.06 1,265 3.17 1,384 3.91
-------- --------- -------- ------- -------- -------
Total fixed-rate loans....... 17,417 44.31 16,757 42.02 16,214 45.78
Adjustable-Rate Loans:
- ----------------------
Real estate:
One- to four-family............. 13,022 33.13 13,637 34.20 12,956 36.58
Commercial...................... 4,068 10.35 3,173 7.96 3,193 9.01
Multi-family.................... 2,788 7.09 3,854 9.66 2,957 8.35
Construction or development..... 2,010 5.12 2,455 6.16 100 0.28
-------- ------- ------- ------- ------- -------
Total real estate loans...... 21,888 55.69 23,119 57.98 19,206 54.22
------- ------ ------- ------- ------- -------
Consumer......................... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total adjustable-rate loans.. 21,888 55.69 23,119 57.98 19,206 54.22
------- ------- ------- ------- ------- -------
Total loans.................. 39,305 100.00% 39,876 100.00% 35,420 100.00%
====== ====== ======
Less:
- -----
Loans in process................. 2,301 2,278 1,936
Deferred fees and discounts...... -- -- --
Allowance for loan losses........ 853 854 301
------- ------- -------
3,154 3,132 2,237
------- ------- -------
Total loans receivable, net... $36,151 $36,744 $33,183
======= ======= =======
</TABLE>
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<PAGE>
The following schedule illustrates the contractual maturity of our loan
portfolio at April 30, 1998 before net items. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-----------------------------------------------------
Multi-family and Construction Commercial
One-to Four-Family Commercial or Development Consumer Business Total
------------------ ---------------- --------------- ---------------- --------------- ----------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Periods Ending
April 30,
---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998(1).............. $ 139 8.68% $ 732 12.69 $ -- --% $ 65 7.37% $ -- --% $ 936 11.73%
1999(1).............. 163 8.82 103 8.50 86 8.50 9 7.77 -- -- 361 8.63
2000................. 343 8.56 20 9.50 874 -- 19 7.61 4 7.50 1,260 2.62
2001 and 2002........ 366 8.34 746 8.87 1,254 8.27 314 8.02 19 8.50 2,699 8.42
2003 to 2004......... 672 7.99 34 8.12 347 8.00 358 8.05 86 8.52 1,497 8.04
2005 to 2019......... 17,167 7.92 5,808 8.50 2,282 9.04 207 8.04 123 7.91 25,587 8.15
2020 and following... 6,204 7.88 294 9.00 467 7.47 -- -- -- -- 6,965 7.90
------- ------ ------ ----- ------ ------
Totals.......... $25,054 $7,737 $5,310 $972 $232 $39,305
======= ====== ====== ==== ==== =======
</TABLE>
- ----------
(1) Includes demand loans, non-accrual loans, loans having no stated maturity
and overdraft loans.
The total amount of loans due after April 30, 1999 which have
predetermined interest rates is $16.8 million, while the total amount of loans
due after such dates which have floating or adjustable interest rates is $21.2
million.
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One- to Four-Family Residential Real Estate Lending. Residential loan
originations are generated by our marketing efforts, present and walk-in
customers, and referrals from real estate brokers and builders. We have focused
our lending efforts primarily on the origination of loans secured by first
mortgages on owner-occupied, one- to four-family residences in our market area.
At April 30, 1998, one- to four-family residential mortgage loans totaled $25.0
million, or 63.7% of our gross loan portfolio.
Home Federal currently originates one- to four-family mortgage loans on
either a fixed or adjustable basis, as consumer demand dictates. The pricing
strategy for fixed-rate mortgage loans revolves around setting interest rates
that are competitive with other local financial institutions. Adjustable-rate
mortgage ("ARM") loans are offered with either one-year or three-year repricing
periods. Due to their wide availability and market rate sensitivity we currently
use the one-year and three-year U.S. Treasury Security Constants plus a margin
of 250 basis points for pricing of ARM loans. During the year ended December 31,
1997 and the four months ended April 30, 1998, we originated $2.9 million and
$612,000 of one- to four-family ARM loans, and $3.2 million and $1.3 million of
one- to four-family, fixed-rate mortgage loans, respectively. We have not sold
any mortgage loans. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -Asset/Liability Management."
Fixed-rate loans secured by one- to four-family residences have maximum
maturities of 30 years, and are fully amortizing, with payments due monthly.
These loans normally remain outstanding, however, for a substantially shorter
period of time because of refinancing and other prepayments. A significant
change in the current level of interest rates could alter the average life of a
residential loan in our portfolio considerably. All of our one- to four-family
loans are not assumable, do not contain prepayment penalties and do not permit
negative amortization of principal. Our real estate loans generally contain a
"due on sale" clause allowing us to declare the unpaid principal balance due and
payable upon the sale of the security property.
Our one- to four-family residential ARM loans are fully amortizing
loans with contractual maturities of up to 30 years, with payments due monthly.
Our ARM loans provide for specified minimum and maximum interest rates. As a
consequence of using caps, the interest rates on these loans may not be as rate
sensitive as are our cost of funds. Our ARM loans are generally not convertible
into fixed-rate loans.
ARM loans generally pose different credit risks than fixed-rate loans,
primarily because as interest rates rise, the borrower's payment rises,
increasing the potential for default. We have not experienced difficulty with
the payment history for these loans. See "- Asset Quality -- Non-Performing
Assets" and "-Asset Quality -- Classified Assets." At April 30, 1998, our one-
to four-family ARM loan portfolio totaled $13.0 million, or 33.1% of our gross
loan portfolio. At that date the fixed-rate residential mortgage loan portfolio
totaled $12.0 million, or 30.6% of our gross loan portfolio.
As mentioned above, we have primarily concentrated our lending
activities on the origination of owner-occupied, one- to four-family residences.
In recent years, however, loans secured by nonowner occupied, one-to four-family
residences have accounted for a growing share of total loan volume. These loans
are underwritten generally using the same criteria as owner-occupied, one- to
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four-family residential loans, but typically are originated at higher rates and
lower loan-to-value ratios than owner-occupied loans.
We generally underwrite our one- to four-family loans based on the
applicant's employment, credit history, and appraised value of the subject
property. Presently, we lend up to 90% of the lesser of the appraised value or
purchase price for one- to four-family loans. Properties securing our one- to
four-family loans are appraised by independent fee appraisers approved and
qualified by the Board of Directors. We generally require our borrowers to
obtain title insurance and fire, property and flood insurance (if necessary) in
an amount not less than the value of the security property.
Commercial and Multi-family Real Estate Lending. We are engaged in
commercial and multi-family real estate lending. These loans are secured
primarily by small retail establishments, small office buildings and other
non-residential and residential properties located in our market area. At April
30, 1998, commercial and multi-family real estate loans totaled $4.7 million and
$3.1 million, or 11.9% and 7.8% of our gross loan portfolio, respectively.
Our loans secured by commercial and multi-family real estate are
originated with either a fixed or adjustable interest rate. The interest rate on
adjustable-rate loans is based on a variety of indices, generally determined
upon negotiation with the borrower. Loan-to-value ratios on our commercial and
multi-family loans typically do not exceed 80% of the appraised value of the
property securing the loan. These loans typically require monthly payments and
have maximum maturities of 30 years. While maximum maturities may extend to 30
years, loans frequently have shorter maturities, generally ranging from 10 to 15
years.
Loans secured by commercial and multi-family real estate are granted
based on the income producing potential of the property and the financial
strength of the borrower. The net operating income (the income derived from the
operation of the property less all operating expenses) must be sufficient to
cover the payments related to the outstanding debt. We generally require
personal guaranties of the borrowers in addition to the security property as
collateral for such loans. Appraisals on properties securing commercial and
multi-family real estate loans are performed by independent fee appraisers
approved by the Board of Directors. See "- Loan Originations, Purchases and
Repayments."
Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Such loans typically involve large
balances to single borrowers or groups of related borrowers. Because payments on
loans secured by commercial and multi-family real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. If the cash flow from the project is reduced (e.g., if leases are
not obtained or renewed), the borrower's ability to repay the loan may be
impaired. See "- Asset Quality -- Nonperforming Loans."
Construction and Development Lending. We originate residential
construction loans to individuals as well as loans secured by building lots or
raw land held for development. Presently, all of these loans are secured by
property located within our market area. At April 30, 1998, we had participation
interests in construction loans secured by an apartment complex and a
warehouse/office
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<PAGE>
complex located in Columbus, Ohio totaling $1.9 million (of which approximately
$803,000 was unfunded). At that date, we had $5.3 million in construction and
development loans outstanding, representing 13.5% of our gross loan portfolio.
Construction loans to individuals for their residences generally are
structured to be converted to permanent loans at the end of the construction
phase, which typically runs six months. These construction loans have rates and
terms which match any one- to four-family loans then offered by the Association,
except that during the construction phase, the borrower pays interest only.
Residential construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent residential loans. At April 30, 1998,
$590,000 of our construction loans were to borrowers intending to live in the
properties upon completion of construction.
Loans secured by building lots or raw land held for development are
generally granted with terms of up to five years and are available at a fixed
interest rate. Payments on loans secured by building lots are due monthly and
amortized on a 20-year basis, resulting in a balloon payment at maturity.
Payments on raw land held for development are due monthly, and are interest
only. Loans secured by building lots or raw land for development are granted
based on both the financial strength of the borrower and the value of the
underlying property. At April 30, 1998, we had $1.7 million of loans secured by
building lots and raw land.
Construction loans are obtained principally through continued business
from builders who have previously borrowed from the Association, as well as
referrals from existing and walk-in customers. The application process includes
submission of accurate plans, specifications and costs of the project to be
constructed. These items are used as a basis to determine the appraised value of
the subject property. Loans are based on the lesser of current appraised value
and/or the cost of construction (land plus building). We also conduct periodic
inspections of the construction project being financed.
Because of the uncertainties inherent in estimating construction costs
and the market for the project upon completion, it is relatively difficult to
evaluate accurately the total loan funds required to complete a project, the
related loan-to-value ratios and the likelihood of ultimate success of the
project. Construction loans to borrowers other than owner-occupants also involve
many of the same risks discussed above regarding commercial real estate loans
and tend to be more sensitive to general economic conditions than many other
types of loans.
Other Lending. We also originate a nominal amount of consumer and
commercial business loans, generally as an accommodation to our customers. At
April 30, 1998, consumer and commercial business loans totaled $972,000 and
$232,000, respectively, or 2.5% and .6% of our gross loan portfolio. Our
consumer loan portfolio consists almost entirely of personal loans secured by
first or second mortgages on real estate. Such loans are offered at fixed rates
of interest with terms not exceeding ten years.
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Loan Originations, Purchases and Repayments
We originate loans through our marketing efforts, existing and walk-in
customers and referrals from real estate brokers and builders. While we
originate both adjustable-rate and fixed-rate loans, our ability to originate
loans is dependent upon the relative customer demand for loans in our market.
Demand is affected by local competition and the interest rate environment.
During the last several years, our dollar volume of fixed-rate, one- to
four-family loans has exceeded the dollar volume of the same type of
adjustable-rate loans. While our primary business is the origination of one- to
four-family mortgage loans, competition from other financial institutions
continues to limit the volume of loans we have been able to originate and place
in our portfolio. As a result we have purchased mortgage loans and investment
and mortgage-backed and related securities to supplement our portfolios. We do
not sell loans and our loans are not originated according to secondary market
guidelines. Furthermore, during the past few years, we, like many other
financial institutions, have experienced significant prepayments on loans and
mortgage-backed and related securities due to the sustained low interest rate
environment prevailing in the United States.
In periods of economic uncertainty, the ability of financial
institutions, including Home Federal, to originate large dollar volumes of real
estate loans may be substantially reduced or restricted, with a resultant
decrease in interest income.
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<PAGE>
The following table shows our loan origination, purchase and repayment
activities for the periods indicated.
Four Months Ended Years Ended
April 30, December 31,
-------------------- --------------------
1998 1997 1997 1996
---- ---- ---- ----
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to
four-family .................. $ 612 $ 1,456 $ 2,876 $ 2,325
- commercial ............. 70 -- 360 550
- multi-family ........... -- -- -- 224
-------- -------- -------- --------
Total adjustable-rate ........ 682 1,456 3,236 3,099
-------- -------- -------- --------
Fixed rate:
Real estate - one- to
four-family .................. 1,299 1,000 3,188 4,602
- commercial ............. -- -- -- 302
- multi-family ........... 675 -- -- 250
- land ................... 349 -- 95 525
Non-real estate - consumer .... 181 260 462 606
- commercial business .... 10 39 56 155
-------- -------- -------- --------
Total fixed-rate ............. 2,514 1,299 3,801 6,440
-------- -------- -------- --------
Total loans originated ....... 3,196 2,755 7,037 9,539
-------- -------- -------- --------
Purchases:
Real estate - one- to
four-family .................. -- -- 1,000 --
- commercial ............. -- -- 900 --
- multi-family ........... -- -- 1,000 1,000
-------- -------- -------- --------
Total loans purchased ......... -- -- 2,900 1,000
Mortgage-backed and
mortgage-related securities .. 3,561 -- 7,872 7,432
-------- -------- -------- --------
Total purchased ............ 3,561 -- 10,772 8,432
-------- -------- -------- --------
Repayments:
Principal repayments .......... 7,110 1,977 13,645 14,783
-------- -------- -------- --------
Total reductions ............ 7,110 1,977 13,645 14,783
Increase (decrease) in other
items, net .................... 8 (16) (668) 6
-------- -------- -------- --------
Net increase (decrease) ..... $ (345) $ 762 $ 3,496 $ 3,194
======== ======== ======== ========
Asset Quality
When a borrower fails to make a payment on a loan on or before the
default date, the loan is considered 30 days past due, at which time we
generally send out a delinquent notice to the borrower. All delinquent accounts
are reviewed by our collection officer, and at his or her discretion, we attempt
to cause the delinquency to be cured by contacting the borrower. If the loan
becomes 60 days delinquent, the collection officer will generally send a
personal letter to the borrower requesting payment of the delinquent amount in
full, or the establishment of an acceptable repayment plan to bring the loan
current within 90 days. If the account becomes 90 days delinquent, and an
acceptable repayment plan has not been agreed upon, the collection officer will
generally refer the account to legal counsel, with instructions to prepare a
notice of intent to foreclose. The notice of intent to foreclose allows the
borrower up to 30 days to bring the account current. During this 30 day period,
the collection officer may accept a written repayment plan from the borrower
which would bring the
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account current within 90 days. Once the loan becomes 120 days delinquent, and
an acceptable repayment plan has not been agreed upon, the collection officer,
after receiving consent from the Association's Board of Directors, will turn
over the account to our legal counsel with instructions to initiate foreclosure.
Delinquent Loans. The following table sets forth our loan delinquencies
by type, number, amount and percentage of type at April 30, 1998.
<TABLE>
<CAPTION>
Loans Delinquent For:
------------------------------------------------------------
30-89 Days 90 Days and Over Total Delinquent Loans
--------------------------- ----------------------------- -----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ........... 12 $ 530 2.12% 4 $ 159 0.64% 16 $ 689 2.76%
Commercial .................... 2 56 1.20 1 656 14.02 3 712 15.21
Multi-family .................. 1 76 2.49 -- -- -- 1 76 2.49
Construction or
development ................. 1 86 2.76 1 875 28.04 2 961 30.79
Consumer ......................... -- -- -- 1 6 0.64 1 6 0.64
--- ------ --- ------ --- -----
Total ....................... 16 $ 748 2.02% 7 $1,696 4.58% 23 $2,444 6.60%
=== ====== ==== ====== === ======
</TABLE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Loans are placed on
non-accrual status when the collection of principal and/or interest becomes
doubtful. For all years presented, we have had no foreclosed assets and no
troubled debt restructurings (which involve forgiving a portion of interest or
principal on any loans or making loans at a rate materially less than that of
market rates).
December 31,
April 30, -------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
One- to four-family ................... $ 132 $ -- $ --
Construction or development ........... 875 875 --
------ ------ ------
Total .............................. 1,007 875 --
------ ------ ------
Accruing loans delinquent
more than 90 days:
One- to four-family ................... 27 95 205
Multi-family .......................... -- -- 104
Commercial real estate ................ 656 653 662
Construction or development ........... -- 33 --
Consumer .............................. 6 6 3
Commercial business ................... -- -- --
------ ------ ------
Total .............................. 689 787 974
------ ------ ------
Total non-performing assets ............. $1,696 $1,662 $ 974
====== ====== ======
Total as a percentage of total
assets ................................. 2.33% 2.29% 1.37%
====== ====== ======
-50-
<PAGE>
Nonperforming loans. At April 30, 1998, we had $1.7 million in
nonperforming loans, which constituted 4.3% of our gross loan portfolio. Except
as discussed below, there were no nonperforming loans to any one borrower or
group of related borrowers that exceeded either individually or in the aggregate
$500,000.
Included in the table above are three loans to a group of related
borrowers aggregating approximately $1.0 million at April 30, 1998. The largest
of the three loans is a commercial real estate loan with an outstanding balance
of $875,000 at April 30, 1998 for the development of 34 single-family lots and
23 condominium sites for the eventual construction of 56 condominium units. This
loan was originated in June 1994 for $1.0 million with a loan-to-value ratio of
approximately 79%. The development consists of three phases, the first being for
development of 34 single-family residential lots, with phase two for the
development of the 23 condominium sites. Phase three, for which we have not
granted any financing commitment, is for the development of 37 additional
single-family lots. The borrower initially projected that phase one would be
completed in early 1995, with sales occurring during 1995 and 1996. As a result
of construction delays, phases one and two were completed during the first
quarter of 1997. Lot sales have been significantly slower than projected with
only six single-family lots and four condominium sites having been sold as of
April 30, 1998.
Lot sales remain slow.
The two other nonperforming loans to this group of borrowers aggregated
$132,000 at April 30, 1998 and are secured by a condominium unit. The first of
these loans was originated to a local developer in December 1989 for $240,000
with a loan-to-value ratio of 80%. The local developer abandoned the project in
December 1991 with the current borrower assuming the loan with additional
financing from us in the amount of $140,000. We also have an agreement with the
borrower that calls for the borrower to split equally any loss sustained by us
after sale of the remaining unit. The property is currently on the market. This
group of related borrowers also has three other loans with us totaling
approximately $400,000 at April 30, 1998, each of which was current at that
date.
The only other nonperforming loan or group of loans in excess of
$500,000 at April 30, 1998, consisted of two commercial real estate loans
aggregating $675,000 secured by a retail/office complex. The largest of these
two loans was originated in July 1986 for $650,000 with a loan-to-value ratio of
81% and an outstanding balance at April 30, 1998 of $656,000. The property is
also subject to a second mortgage by a third party in the amount of
approximately $200,000. This loan has a history of delinquent payments and loan
modifications to provide relief to the borrower. The most recent modification
occurred in January 1997 to reduce the interest rate charged on the loan to 8%
for a period of 12 months. Foreclosure proceedings were instituted during June
1998.
For the four months ended April 30, 1998, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $31,000. The amounts that were included in
interest income on such loans were $2,000.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of April 30, 1998, there was also an aggregate of
$1.6 million in net book value of loans with respect to which known information
about the possible credit problems of the borrowers have caused management to
have doubts as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing
-51-
<PAGE>
asset categories. These loans have been considered in management's determination
of the adequacy of our allowance for loan losses.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS and the FDIC, which may order the establishment of
additional general or specific loss allowances.
In connection with the filing of our periodic reports with the OTS and
in accordance with our classification of assets policy, we regularly review the
problem assets in our portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
management's review of our assets, at April 30, 1998, we had classified $1.7
million of our assets as substandard, none as doubtful and none as loss,
representing 13.9% of our retained earnings and 2.3% of our assets.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses which is based on management's evaluation of
past loss experience, current trends in the level of delinquent and specific
problem loans, loan concentration to single borrowers, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current and anticipated economic conditions in our
market area.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to our allowance will be the result of periodic
loan, property and collateral reviews and thus cannot be predicted in advance.
At April 30, 1998, we had a total allowance for loan losses of $853,000, or
50.3% of non-performing loans. See Notes A and D of the Notes to Consolidated
Financial Statements.
-52-
<PAGE>
The following table sets forth an analysis of our allowance for loan
losses.
At and For
the Four At and For the
Months Years Ended
Ended December 31,
April 30, -----------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Balance at beginning of period .............. $854 $301 $261
Charge-offs: One- to four-family ............ 21 147 --
---- ---- ----
Total Charge-offs ....................... 21 147 --
Recoveries: ................................. -- -- --
---- ---- ----
Net charge-offs .......................... 21 147 --
Additions charged to operations ............. 20 700 40
---- ---- ----
Balance at end of period .................... $853 $854 $301
==== ==== ====
Ratio of net charge-offs during
the period to average loans
outstanding during the period .............. 0.06% 0.41% --%
==== ==== ====
Ratio of net charge-offs during
the period to average
non-performing assets ...................... 1.25% 11.51 % --%
==== ==== ====
The distribution of our allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
April 30, 1998 1997 1996
------------------------------- --------------------------------- -----------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family...... $ 26 $24,987 67.53% $115 $25,814 68.66% $129 22,410 66.93%
Multi-family,
commercial, real
estate, construction
or development.......... 504 10,858 29.34 592 10,519 27.98 160 9,731 29.06
Consumer and
commercial business..... 1 1,159 3.13 1 1,265 3.36 1 1,343 4.01
Unallocated.............. 322 -- -- 146 -- -- 11 -- --
Total............... $853 $37,004 100.00% $854 $37,598 100.00% $301 $33,484 100.00%
==== ======= ====== ==== ======= ====== ==== ======= ======
</TABLE>
-53-
<PAGE>
Investment Activities
Home Federal must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, we have maintained liquid
assets at levels above the minimum requirements imposed by the OTS regulations
and above levels believed adequate to meet the requirements of normal
operations, including potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
At March 31, 1998 (the latest available date), our liquidity ratio (liquid
assets as a percentage of net withdrawable savings deposits and current
borrowings) was 9.4%.
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in investment grade
commercial paper and corporate debt securities and mutual funds whose assets
conform to the investments that a federally chartered savings institution is
otherwise authorized to make directly. We generally invest in the foregoing
types of investments. See "Regulation - Federal Regulation of Savings
Associations" for a discussion of additional restrictions on our investment
activities.
President Stephens and Vice President Swift have the basic
responsibility for the management of the Association's investment portfolio,
subject to the direction and guidance of the Board of Directors. Such officers
consider various factors when making decisions, including the marketability,
maturity and tax consequences of the proposed investment. The maturity structure
of investments will be affected by various market conditions, including the
current and anticipated slope of the yield curve, the level of interest rates,
the trend of new deposit inflows, and the anticipated demand for funds via
deposit withdrawals and loans.
The general objectives of our investment portfolio are to: (i) provide
and maintain liquidity within the guidelines prescribed by OTS regulations; (ii)
provide liquidity when loan demand is high and to assist in maintaining earnings
when loan demand is low; and (iii) maximize earnings while satisfactorily
managing risk, including credit risk, reinvestment risk, liquidity risk and
interest rate risk. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset/Liability Management."
Our investment securities consist primarily of mutual funds the assets
of which conform to the investments that a federally chartered savings
institution is otherwise authorized to make directly. These funds offer
professional management, easy access to funds, continuous reinvestment and
relatively low historical price volatility. Currently, we are invested in three
different mutual funds.
Our mortgage-backed and related securities portfolio consists of
securities issued under government-sponsored agency programs. We hold primarily
collateralized mortgage obligations (CMOs). CMOs are special types of
pass-through debt securities in which the stream of principal and interest
payments on the underlying mortgages or mortgage-backed securities is used to
create classes
-54-
<PAGE>
with different maturities and, in some cases, amortization schedules, as well as
a residual interest, with each such class possessing different risk
characteristics.
Our policy is to purchase only CMOs that are in the first or second
repayment tranche (investment class) and are AAA rated. The expected life of our
CMOs is typically under five years at the time of purchase. Premiums associated
with CMOs purchased are not significant; therefore, the risk of significant
yield adjustments because of accelerated prepayments is limited. Yield
adjustments are encountered as interest rates rise or decline, which in turn
slows or increases prepayment rates and affects the average lives of the CMOs.
The purpose of our CMO investment strategy is to: (i) assist in maintaining the
Association's Qualified Thrift Lender Status (see "Regulation - Qualified Thrift
Lender"); (ii) generate high cash flow so as to lessen liquidity and
reinvestment risk; (iii) preserve asset quality; and (iv) generate additional
interest income. At April 30, 1998, we held CMOs totaling $12.5 million, all of
which were secured by underlying collateral issued under government
agency-sponsored programs. All of our CMOs and mortgage-backed securities are
currently classified as held to maturity. At April 30, 1998, our CMOs did not
qualify as high risk mortgage securities as defined under OTS regulations.
While mortgage-backed and mortgage-related securities (such as CMOs)
carry a reduced credit risk as compared to whole loans, such securities remain
subject to the risk that a fluctuating interest rate environment, along with
other factors such as the geographic distribution of the underlying mortgage
loans, may alter the prepayment rate of such mortgage loans and so affect both
the prepayment speed, and value, of such securities.
-55-
<PAGE>
The following table sets forth the composition of our investment and
mortgage-backed and related securities portfolio at the dates indicated. Our
investment securities portfolio at April 30, 1998, contained neither tax-exempt
securities nor securities of any issuer with an aggregate book value in excess
of 10% of our retained earnings, excluding those issued by the United States
Government or its agencies and excluding our mutual fund investments.
<TABLE>
<CAPTION>
December 31,
--------------------------------------
April 30, 1998 1997 1996
---------------- ---------------- ----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ------ ------- ------ ------- ------
(Dollars in Thousands)
Investment securities:
<S> <C> <C> <C> <C> <C> <C>
Mutual funds(1) ..................... $15,315 87.60% $15,347 86.51% $19,437 87.96%
FHLMC stock.......................... 1,852 10.59 2,085 11.75 1,372 6.21
Federal agency obligations........... --- --- --- --- 1,000 4.52
FHLB stock........................... 301 1.72 294 1.66 274 1.24
Other................................ 15 0.09 15 0.08 15 0.07
------- ------ ------- ------ ------- ------
Total investment securities
and FHLB stock................... $17,483 100.00% $17,741 100.00% $22,098 100.00%
======= ====== ======= ====== ======= ======
Average remaining life of investment
securities........................... N/A N/A N/A
Other interest-earning assets:
Interest-bearing deposits with banks. $ 1,375 27.75% 727 17.92% $ 202 12.81%
Federal funds sold................... 3,580 72.25 3,330 82.08 1,375 87.19
------- ------ ------- ------ ------- ------
Total............................. $ 4,955 100.00% $ 4,057 100.00% $ 1,577 100.00%
======= ====== ======= ====== ======= ======
Mortgage-backed and related securities:
CMOs................................. $12,496 99.26% $12,238 99.02% $12,760 98.91%
FHLMC................................ 81 0.64 93 0.75 94 0.73
GNMA................................. 44 0.35 53 0.43 77 0.60
------- ------ ------- ------ ------- ------
12,621 100.25 12,384 100.20 12,931 100.24
Unamortized premium (discounts), net... (32) (0.25) (25) (0.20) (31) (0.24)
------- ------ ------- ------ ------- ------
Total mortgage-backed securities.. $12,589 100.00% $12,359 100.00% $12,900 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
(1) Mutual funds invest primarily in obligations of the U.S. Government and it
agencies.
The following table sets forth the contractual maturities of our
mortgage-backed securities at April 30, 1998.
<TABLE>
<CAPTION>
Due in April 30,
------------------------------------------------------------------------- 1998
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Balance
or Less to 1 Year 3 Years Years Years Years Years Outstanding
------- --------- ------- ----- ----- ----- ----- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CMOs............ $ 13 $209 $150 $ -- $852 $3,506 $7,737 $12,467
FHLMC........... 22 -- -- 59 -- -- -- 81
GNMA............ -- -- -- 41 -- -- -- 41
---- ---- ---- ---- ---- ------ ------ -------
Total...... $ 35 $209 $150 $100 $852 $3,506 $7,737 $12,589
==== ==== ==== ==== ==== ====== ====== =======
</TABLE>
-56-
<PAGE>
Sources of Funds
General. Our sources of funds are deposits, payment of principal and
interest on loans, interest earned on or maturation of other investment
securities and short-term investments, and funds provided from operations.
Deposits. We offer a variety of deposit accounts having a wide range of
interest rates and terms. Our deposits consist of passbook and statement savings
accounts, money market deposit accounts, NOW accounts, non-interest bearing
checking accounts and certificate of deposit accounts currently ranging in terms
from 91 days to three years. We only solicit deposits from our market area and
do not use brokers to obtain deposits. We primarily rely on competitive pricing
policies, advertising and customer service to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts we offer has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. We
endeavor to manage the pricing of our deposits in keeping with our
asset/liability management, liquidity and profitability objectives. Based on our
experience, we believe that our savings and checking accounts are relatively
stable sources of funds. However, our ability to attract and maintain
certificates of deposit and the rates paid on these deposits has been and will
continue to be significantly affected by market conditions.
The following table sets forth the deposit flows at the Association
during the periods indicated.
Four Months Ended
April 30, Years Ended December 31,
----------------- ------------------------
1998 1997 1997 1996
(Dollars in Thousands)
Opening balance............... $57,854 $57,673 $57,673 $57,774
Deposits...................... 13,721 12,958 35,880 34,255
Withdrawals................... (14,490) (13,599) (37,875) (36,521)
Interest credited............. 680 647 2,176 2,165
------- ------- ------- -------
Ending balance................ $57,765 $57,679 $57,854 $57,673
======= ======= ======= =======
Net increase (decrease)....... $ (89) $ 6 $ 181 $ (101)
======= ======= ======= ========
Percent increase (decrease)... (0.15)% 0.01% 0.31% (0.17)%
======= ======= ======= ========
-57-
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs we offered for the periods indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
April 30, 1998 1997 1996
------------------ ------------------ ------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------- ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Passbook and statement savings
accounts (3.00%)(1)................ $21,861 37.84% $22,289 38.53% $22,463 38.95%
NOW accounts (3.00%)(1)............. 2,969 5.14 2,830 4.89 2,722 4.72
Money market accounts (3.05%)(1).... 3,985 6.90 4,145 7.16 4,732 8.20
------- ------ ------- ------ ------- ------
Total non-certificates.............. 28,815 49.88 29,264 50.58 29,917 51.87
------- ------ ------- ------ ------- ------
Certificates:
2.00 - 3.99%...................... 53 0.09 53 0.10 57 0.10
4.00 - 5.99%...................... 28,527 49.39 27,426 47.40 26,884 46.62
6.00 - 7.99%...................... 370 0.64 1,111 1.92 815 1.41
------- ------ -------- ------ ------- ------
Total certificates.................. 28,950 50.12 28,590 49.42 27,756 48.13
------- ------ ------- ------ ------- ------
Total deposits...................... $57,765 100.00% $57,854 100.00% $57,673 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
- -------------
(1) Interest rates stated apply to all dates presented.
The following table shows rate and maturity information for our
certificates of deposit as of April 30, 1998.
2.00- 4.00- 6.00- Percent
3.99% 5.99% 7.99% Total of Total
---- ----- ----- ----- --------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
June 30, 1998.................. $ 53 $4,818 $236 $ 5,107 17.64%
September 30, 1998............. --- 7,890 71 7,961 27.50
December 31, 1998.............. --- 4,289 63 4,352 15.03
March 31, 1999................. --- 5,309 --- 5,309 18.34
June 30, 1999.................. --- 2,347 --- 2,347 8.11
September 30, 1999............. --- 1,336 --- 1,336 4.62
December 31, 1999.............. --- 843 --- 843 2.91
March 31, 2000................. --- 305 --- 305 1.05
June 30, 2000.................. --- 453 --- 453 1.56
September 30, 2000............. --- 284 --- 284 0.98
December 31, 2000.............. --- 347 --- 347 1.20
March 31, 2001................. --- 196 --- 196 0.68
Thereafter..................... --- 110 --- 110 0.38
---- ------- ---- ------- ------
Total....................... $ 53 $28,527 $370 $28,950 100.00%
==== ======= ==== ======= ======
Percent of total............ 0.18% 98.54% 1.28%
==== ======= ====
-58-
<PAGE>
The following table indicates the amount of our certificates of deposit
and other deposits by time remaining until maturity as of April 30, 1998.
Maturity
-----------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------ ------- -------- ------
(In Thousands)
Certificates of deposit
less than $100,000....... $5,680 $8,329 $7,424 $4,246 $25,679
Certificates of deposit
of $100,000 or more...... 855 536 1,766 114 3,271
------ ------ ------ ------ -------
Total certificates
of deposit............ $6,535 $8,865 $9,190 $4,360 $28,950
====== ====== ====== ====== =======
Borrowings. Although deposits are our primary source of funds, we may
utilize borrowings when they are a less costly source of funds, and can be
invested at a positive interest rate spread or when we desire additional
capacity to fund loan demand. At December 31, 1997 and April 30, 1998, we had
borrowings totaling $400,000 and $400,000, respectively. The average balance of
our borrowings during such periods were $488,000 and $400,000, respectively. Our
current borrowings relate to a five-year term note payable to a third party by
the Association in connection with the Association's capital contribution to a
limited partnership formed to construct multi-family housing units. See
"-Subsidiary and Other Activities" and Note E of Notes to Consolidated Financial
Statements.
Subsidiary and Other Activities
As a federally chartered savings association, we are permitted by OTS
regulations to invest up to 2% of our assets, or $1.5 million at April 30, 1998,
in the stock of, or unsecured loans to, service corporation subsidiaries. We may
invest an additional 1% of our assets in service corporations where such
additional funds are used for inner-city or community development purposes. We
have no subsidiaries.
In 1996, we acquired a fractional interest (17.5%) in an Ohio limited
partnership formed to construct multi-family housing units. Under the terms of
the limited partnership agreement, we will make a total capital contribution to
the partnership of $500,000 and are allocated tax losses and affordable housing
federal income tax credits. See Note E of Notes to Consolidated Financial
Statements.
Competition
We face strong competition in originating real estate and other loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from other savings institutions, commercial banks, credit unions and
mortgage bankers. Other savings institutions, commercial banks, credit unions
and finance companies provide vigorous competition in consumer lending.
-59-
<PAGE>
We attract all of our deposits through the Association's one office in
Niles, Ohio. Competition for those deposits is principally from other savings
institutions, commercial banks and credit unions located in the same community,
as well as mutual funds. We compete for these deposits by offering a variety of
deposit accounts at competitive rates and superior service.
Employees
At April 30, 1998, we had a total of 13 employees, including one
part-time employee. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
Properties
We conduct our business through the Association's only office located
in Niles, Ohio, which is owned by the Association. We believe that our current
facilities are adequate to meet the present and foreseeable needs of the
Association and the Company. The total net book value of the Association's
premises and equipment (including land, building and leasehold improvements and
furniture, fixtures and equipment) at April 30, 1998 was $287,000. See Note F of
Notes to Consolidated Financial Statements.
We maintain an on-line data base with a service bureau servicing
financial institutions. The net book value of the data processing and computer
equipment utilized by the Association at April 30, 1998 was $49,000.
Legal Proceedings
From time to time Home Federal is involved as plaintiff or defendant in
various legal actions arising in the normal course of business. Presently, we
are not involved as a defendant in any legal proceedings.
REGULATION
General
Home Federal is a federally chartered savings association, the deposits
of which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, we are subject to broad federal
regulation and oversight extending to all our operations. We are a member of the
FHLB of Cincinnati and are subject to certain limited regulation by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). As the
savings and loan holding company of Home Federal, the Company also is subject to
federal regulation and oversight. The purpose of the regulation of the Company
and other holding companies is to protect subsidiary savings associations. We
are a member of the SAIF, which together with the BIF are the two deposit
insurance funds administered by the FDIC, and our deposits are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over us.
-60-
<PAGE>
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, we are required to file periodic
reports with the OTS and are subject to periodic examinations by the OTS and the
FDIC. The last regular OTS examination of Home Federal was as of March 1997.
Under agency scheduling guidelines, it is likely that another examination will
be initiated in the near future. When these examinations are conducted by the
OTS and the FDIC, the examiners may require us to provide for higher general or
specific loan loss reserves. All savings associations are subject to a
semi-annual assessment, based upon the savings association's total assets, to
fund the operations of the OTS. Our OTS assessment for the fiscal year ended
December 31, 1997 was $24,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Home Federal and the
Company. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Association is prescribed by federal laws and it is prohibited from engaging in
any activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. We are in compliance with the noted restrictions.
Our general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
April 30, 1998, our lending limit under this restriction was $1.9 million.
Assuming the sale of the minimum number of shares in the Conversion at April 30,
1998, that limit would be increased to $3.1 million. We are in compliance with
the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan.
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Insurance of Accounts and Regulation by the FDIC
We are a member of the SAIF, which is administered by the FDIC. Our
deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the SAIF or the BIF.
The FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC semi-annually. At April 30, 1998, we were
classified as a well-capitalized institution.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
In order to equalize the deposit insurance premium schedules for BIF
and SAIF insured institutions, the FDIC imposed a one-time special assessment on
all SAIF-assessable deposits pursuant to federal legislation passed on September
30, 1996. Our special assessment, which was $378,000, was paid in November 1996,
and included in federal deposit insurance expense in the year ended December 31,
1996. Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to 6.48 basis points for each $100 in domestic deposits, while
BIF-insured institutions pay an assessment equal to 1.52 basis points for each
$100 in domestic deposits. The assessment is expected to be reduced to 2.43
basis points no later than January 1, 2000, when BIF insured institutions fully
participate in the assessment. These assessments, which may be revised based
upon the level of BIF and SAIF deposits, will continue until the bonds mature in
the year 2017.
We will continue to be insured by the SAIF following completion of the
Conversion.
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Regulatory Capital Requirements
Federally insured savings associations, such as Home Federal, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At April 30, 1998, we did not have any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. We do not have any non-includable subsidiaries.
At April 30, 1998, we had tangible capital of $12.2 million, or 17.1%
of total assets, which is approximately $11.1 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date. We
traditionally, and as of April 30, 1998, have a higher capital ratio than our
peers and are considered "well-capitalized" for regulatory purposes. On a pro
forma basis, after giving effect to the sale of the minimum, midpoint and
maximum number of shares of Common Stock offered in the Conversion and
investment of 50% of the net proceeds in assets not excluded for tangible
capital purposes, we would have had tangible capital equal to 23.5%, 24.6% and
25.7%, respectively, of adjusted total assets at April 30, 1998, which is $17.0
million, $18.1 million and $19.2 million, respectively, above the requirement.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At April 30, 1998, we had
no intangibles which were subject to these tests.
At April 30, 1998, we had core capital equal to $12.2 million, or 17.1%
of adjusted total assets, which is $10.0 million above the minimum leverage
ratio requirement of 3% as in effect on that date. On a pro forma basis, after
giving effect to the sale of the minimum, midpoint and maximum number of shares
of Common Stock offered in the Conversion and investment of 50% of the net
proceeds in assets not excluded from core capital, we would have had core
capital equal to
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23.5%, 24.6% and 25.7%, respectively, of adjusted total assets at April 30,
1998, which is $15.9 million, $17.0 million and $18.1 million, respectively,
above the requirement.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At April 30, 1998, we had $853,000
of general loss reserves, which was $364,000 more than 1.25% of risk-weighted
assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. We had no such exclusions
from capital and assets at April 30, 1998.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that savings associations with above
normal interest rate risk exposure deduct from their total capital, for purposes
of determining compliance with such requirement, an amount equal to 50% of its
interest-rate risk exposure multiplied by the present value of its assets. This
exposure is a measure of the potential decline in the net portfolio value of a
savings association, greater than 2% of the present value of its assets, based
upon a hypothetical 200 basis point increase or decrease in interest rates
(whichever results in a greater decline). Net portfolio value is the present
value of expected cash flows from assets, liabilities and off-balance sheet
contracts. The rule will not become effective until the OTS evaluates the
process by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may be completed. Any
savings association with less than $300 million in assets and a total risk-based
capital ratio in excess of 12% is exempt from this requirement unless the OTS
determines otherwise. At the present time, the proposal is not expected to have
a material impact on the Association.
On April 30, 1998, we had total risk-based capital of approximately
$12.7 million (including $12.2 million in core capital and $489,000 in
qualifying supplementary capital) and risk-weighted assets of $39.1 million, or
total capital of 32.4% of risk-weighted assets. This amount was $9.5 million
above the 8% requirement in effect on that date. On a pro forma basis, after
giving effect to the sale of the minimum, midpoint and maximum number of shares
of Common Stock offered in the Conversion, the infusion to the Association of
50% of the net Conversion proceeds and the
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investment of those proceeds in 55% risk-weighted assets (the average risk
weight of the Association's assets at April 30, 1998), we would have had total
risk-based capital of 44.1%, 46.0% and 48.0%, respectively, of risk-weighted
assets, which is above the current 8% requirement by $15.3 million, $16.4
million and $17.4 million, respectively.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and, until such plan is
approved by the OTS, may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Association may have a substantial adverse effect on its operations and
profitability.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to
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stock conversion. See "The Conversion - Effects of Conversion to Stock Form on
Depositors and Borrowers of the Association" and "- Restrictions on Repurchase
of Stock".
Generally, savings associations, such as Home Federal, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four-quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS. We
may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
All savings associations, including Home Federal, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
short-term borrowings (borrowings payable in one year or less). For a discussion
of what we include in liquid assets, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 4%.
Penalties may be imposed upon associations for violations of the liquid asset
ratio requirement. At March 31, 1998 (the latest available date), we were in
compliance with this requirement with an overall regulatory liquidity ratio of
9.4%.
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Qualified Thrift Lender Test
All savings associations, including Home Federal, are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At April 30, 1998, we met the test and have always met the test
since it became effective.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of Home
Federal, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by Home
Federal. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Association may be required to devote additional
funds for investment and lending in its local community. We were examined for
CRA compliance in March 1997 and received a rating of "satisfactory."
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Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of Home Federal include the Company and
any company which is under common control with the Association. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must generally be made on terms substantially the same as for loans to
unaffiliated individuals or as offered to all employees in a company-wide
benefit program.
Holding Company Regulation
The Company will be a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than Home Federal or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If we fail the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company.
See "- Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
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Federal Securities Law
The stock of the Company will be registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
will be subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain noninterest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At April 30, 1998, we were in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
We are a member of the FHLB of Cincinnati, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, we are required to purchase and maintain stock in the FHLB
of Cincinnati. At April 30, 1998, we had $301,000 in FHLB stock, which was in
compliance with this requirement. We receive dividends on our FHLB stock. Such
dividends averaged 7.07% for 1997.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate- income housing
projects. These contributions have affected adversely the level of FHLB
dividends
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paid and could continue to do so in the future. These contributions could also
have an adverse effect on the value of FHLB stock in the future. A reduction in
value of our FHLB stock may result in a corresponding reduction in our capital.
Federal and State Taxation
Federal Taxation. Savings associations such as Home Federal that meet
certain conditions prescribed by the Internal Revenue Code of 1986, as amended
(the "Code"), are permitted to establish reserves for bad debts and to make
annual additions thereto which may, within specified formula limits, be taken as
a deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction is computed under the experience
method. Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
In August 1996, legislation was enacted that repealed the percentage of
taxable income method used by many thrifts to calculate their bad debt reserve
for federal income tax purposes. As a result, small thrifts must recapture that
portion of the reserve that exceeds the amount that could have been taken under
the experience method for tax years beginning after December 31, 1987. Due to
certain limitations as to allowable additions to the bad debt reserve, Home
Federal has not made additions to its allowance since 1987 and will not be
subject to federal income tax recapture.
In addition to the regular income tax, corporations, including savings
associations such as Home Federal, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.
A portion of our reserves for losses on loans may not, without adverse
tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of April 30, 1998, the portion of our reserves subject to this
treatment for tax purposes totaled approximately $2.54 million.
We file federal income tax returns on a fiscal year basis using the
accrual method of accounting. The Company does not anticipate filing
consolidated federal income tax returns with Home Federal. Savings associations
that file federal income tax returns as part of a consolidated group are
required by applicable Treasury regulations to reduce their taxable income for
purposes of computing the percentage bad debt deduction for losses attributable
to activities of the non-savings association members of the consolidated group
that are functionally related to the activities of the savings association
member.
The federal income tax returns of the Association for the last three
years are open to possible audit by the Internal Revenue Service ("IRS"). No
returns are being audited by the IRS at the current time. In the opinion of
management, any examination of still open returns (including returns of
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predecessors or entities merged into the Association) would not result in a
deficiency which could have a material adverse effect on the financial condition
of the Association.
Ohio Taxation. We are subject to the Ohio corporate franchise tax. As a
financial institution, we compute our franchise tax based on our net worth.
Under this method, the Association will compute its Ohio corporate franchise tax
by multiplying its net worth (as determined under generally accepted accounting
principles) as specifically adjusted pursuant to Ohio law, by the applicable tax
rate, which is currently 1.5%. The Company will be subject to the Ohio franchise
tax on holding companies of financial institutions. The tax imposed is the
greater of the tax on net worth, as adjusted to include the portion attributable
to the Association, or the tax on net income. Home Federal may claim a credit
equal to the annual assessment paid to the State pursuant to the Ohio Revised
Code.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
MANAGEMENT OF THE HOLDING COMPANY
Directors and Executive Officers
The Board of Directors of the Company currently consists of five
members, each of whom is also a director of the Association. As discussed below,
upon consummation of the Conversion, the current directors of the Association
will become directors of the stock-chartered Association. See "Management of the
Association - Directors." Each director of the Company has served as such since
the Company's incorporation in July 1998. Directors of the Company will serve
three-year staggered terms so that approximately one-third of the directors will
be elected at each annual meeting of stockholders. One class of directors,
consisting of Horace L. McLean, has a term of office expiring at the Company's
first Annual Meeting of Stockholders, a second class, consisting of William L.
Stephens and George J. Swift, has a term of office expiring at the Company's
second Annual Meeting of Stockholders, and a third class, consisting of P. James
Kramer and Ralph A. Zuzolo, Sr., has a term expiring at the Company's third
Annual Meeting of Stockholders. For biographical information regarding each
director of the Company, see "Management of the Association - Directors."
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Company are as follows: William L. Stephens, President and Chief
Executive Officer; George J. Swift, Vice President and Secretary; and Lawrence
Safarek, Vice President and Treasurer. It is not currently anticipated that the
executive officers of the Company will receive any remuneration in their
capacity as Company executive officers. For information regarding compensation
of directors and executive officers of the Association, see "Management of the
Association--Meetings and Committees of the Board of Directors of the
Association" and "--Executive Compensation."
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Indemnification
The certificate of incorporation of the Company provides that a
director or officer of the Company shall be indemnified by the Company to the
fullest extent authorized by the General Corporation Law of the State of
Delaware against all expenses, liability and loss reasonably incurred or
suffered by such person in connection with his activities as a director or
officer or as a director or officer of another company, if the director or
officer held such position at the request of the Company. Delaware law requires
that such director, officer, employee or agent, in order to be indemnified, must
have acted in good faith and in a manner reasonably believed to be not opposed
to the best interests of the Company and, with respect to any criminal action or
proceeding, did not have reasonable cause to believe his conduct was unlawful.
The certificate of incorporation of the Company and Delaware law also
provide that the indemnification provisions of such certificate and the statute
are not exclusive of any other right which a person seeking indemnification may
have or later acquire under any statute, or provision of the certificate of
incorporation, bylaws of the Company, agreement, vote of shareholders or
disinterested directors or otherwise.
These provisions may have the effect of deterring shareholder
derivative actions, since the Company may ultimately be responsible for expenses
for both parties to the action.
In addition, the certificate of incorporation of the Company and
Delaware law also provide that the Company may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Company or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the Company
has the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law. The Company intends to obtain such
insurance.
MANAGEMENT OF THE ASSOCIATION
Directors
The direction and control of the Association, as a mutual savings
association, has been vested in its Board of Directors. Upon consummation of the
Conversion, each of the current directors of the Association will become
directors of the Association in stock form. The Board of Directors of the
converted Association will consist of five directors divided into three classes,
with approximately one-third of the directors elected at each annual meeting of
stockholders. Because the Company will own all of the issued and outstanding
shares of capital stock of the Association after the Conversion, the Company, as
sole stockholder, will elect the directors of the Association.
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The following table sets forth certain information regarding the
directors of the Association.
Term of
Director Office
Name Age Position(s) Held Since Expires
- ---- --- ---------------- -------- -------
William L. Stephens 66 Chairman of the Board, President 1969 2000
and Chief Executive Officer
George J. Swift 75 Director, Vice President and 1969 2000
Secretary
P. James Kramer 42 Director 1994 2001
Horace L. McLean 67 Director 1987 1999
Ralph A. Zuzolo, Sr. 56 Director 1979 2001
The business experience of each director for at least the past five
years is set forth below.
William L. Stephens. Mr. Stephens serves as Chairman of the Board,
President and Chief Executive Officer of the Association, positions he has held
since 1969.
George J. Swift. Mr. Swift is Vice President and Secretary of the
Association, positions he has held since 1969.
P. James Kramer. Since 1980, Mr. Kramer has served as President of
William Kramer & Son, a heating and air conditioning company, located in Niles,
Ohio.
Horace L. McLean. Since 1987, Mr. McLean has served as President of
McLean Engineering, Inc.
Ralph A. Zuzolo, Sr. Mr. Zuzolo is an attorney and a principal in the
law firm of Zuzolo, Zuzolo & Zuzolo, located in Niles, Ohio. Mr. Zuzolo has been
with his law firm since 1968.
Executive Officers Who are not Directors
Each of the executive officers of the Association will retain his
office following the Conversion. Officers are elected annually by the Board of
Directors of the Association. The business experience of the executive officers
who are not also directors is set forth below.
Lawrence Safarek. Mr. Safarek, age 49, currently serves as Vice
President and Treasurer of the Association. Mr. Safarek has been employed by the
Association since 1971.
Meetings and Committees of the Board of Directors
Our Board of Directors meets twice a month, or more frequently as
necessary. During the year ended December 31, 1997, the Board of Directors held
30 meetings. No director attended fewer than 75% of the total meetings of the
Board of Directors and committees on which such Board member served during this
period.
The following is a description of our Executive Committee. We do not
have a standing Compensation, Audit or Nominating Committee; rather, the entire
Board of Directors performs these functions. We have several other committees
which meet as needed to review various other functions
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of the Association. Following the Conversion, the Board of Directors of the
Association may revise the membership and structure of the current committees of
the Board of Directors.
The Executive Committee is comprised of President Stephens (Chairman),
Vice President Swift and Director Zuzolo. The Executive Committee meets on an as
needed basis and exercises the power of the Board of Directors between Board
meetings, to the extent permitted by applicable law.
The Executive Committee did not meet during 1997.
The entire Board of Directors of the Association is responsible for
determining salaries to be paid to officers and employees of the Association,
based on recommendations of President Stephens and Vice President Swift.
President Stephens and Vice President Swift excuse themselves from Board
discussions concerning their salaries as President and Vice President,
respectively. The Board of Directors met once during 1997 to discuss
compensation matters.
The entire Board of Directors acts as the Nominating Committee. The
Nominating Committee reviews the terms of the directors and makes nominations
for directors to be voted on by members. The committee generally meets once a
year to make nominations.
Director Compensation
During 1997, each director (employee and non-employee) of the
Association was paid a fee of $450 for each meeting of the Board of Directors
attended, with up to five excused absences paid per year.
In addition, Ralph A. Zuzolo, Sr., a director of the Association, is a
partner in the law firm of Zuzolo, Zuzolo & Zuzolo. From time to time, such firm
acts as counsel to the Association. The legal fees received by the law firm from
professional services rendered to the Association during the year ended December
31, 1997 did not exceed 5% of the firm's gross revenues.
Executive Compensation
The following table sets forth information concerning the compensation
paid or granted to the Association's Chief Executive Officer and each other
executive officer who made in excess of $100,000 during 1997.
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Summary Compensation Table
- --------------------------------------------------------------------------------
Annual Compensation(1)
---------------------- All Other
Name and Principal Position Year Salary($)(2) Bonus($) Compensation($)(3)
- --------------------------- ---- ----------- ------- ------------------
William L. Stephens 1997 $117,200 $39,400 $72,000
President and CEO
George J. Swift 1997 $117,200 $39,400 $72,000
Vice President and
Secretary
- ---------
(1) As a mutual institution, the Association does not have any stock options or
restricted stock plans. The Company does, however, intend to adopt such
plans following the Conversion. See "- Benefit Plans -- Other Stock Benefit
Plans." Messrs. Stephens and Swift did not receive any additional benefits
or perquisites from the Association which exceeded, in the aggregate, the
lesser of 10% of such individual's salary and bonus, or $50,000.
(2) Includes director fees of $13,400 for service on the Board of Directors and
inspection fees of $600 received for services rendered to the Association.
(3) Represents the amounts accrued by the Association for the benefit of
Messrs. Stephens and Swift under their supplemental retirement agreements.
Employment Agreements
Upon completion of the Conversion, Home Federal intends to enter into
employment agreements with __________, ________ and _________. The employment
agreements are designed to assist us in maintaining a stable and competent
management team after the Conversion. The continued success of Home Federal
depends to a significant degree on the skills and competence of its officers.
The form of agreement has been filed with, and been approved by, the OTS as part
of the application of the Company for approval to become a thrift holding
company. The employment agreements become effective upon completion of the
Conversion and provide for annual base salary in an amount not less than such
individual's current salary and an initial term of three years. The agreements
provide for extensions of one year, in addition to the then-remaining term under
the agreements, on each anniversary of the effective date of the agreements,
subject to a formal performance evaluation performed by disinterested members of
the Board of Directors of Home Federal. The agreements provide for termination
upon the employee's death, for cause or in certain events specified by OTS
regulations. The employment agreements are also terminable by the employees upon
90 days notice to Home Federal.
The agreements grant participation in an equitable manner in employee
benefits applicable to executive personnel. The agreements do not contain a
change in control provision.
Benefit Plans
General. We currently provide health care benefits to our employees,
including hospitalization, major medical, dental, life and disability insurance,
subject to certain deductibles and copayments by employees. We also maintain a
defined benefit pension plan for our employees.
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Supplemental Executive Retirement Plan. Effective September 1, 1987,
the Board of Directors of the Association approved a non-qualified deferred
compensation plan for Messrs. Stephens and Swift. The agreements are subject to
renewal annually. During the term of the agreements and as long as employment of
the executives by the Association continues, we will provide for monthly
accruals of specified amounts for each executive. Accrued deferred compensation
amounts are payable in a lump sum upon the executive's death, disability,
voluntary resignation, or termination by the Association without cause. Until
disbursed, the amounts payable under such agreements are subject to the claims
of general creditors. As of December 31, 1997, Home Federal had accrued benefits
to Messrs. Stephens and Swift under their agreements totaling $204,000 and
$444,000, respectively.
Employee Stock Ownership Plan. The Board of Directors has approved the
adoption of an ESOP for the benefit of our employees. The ESOP is designed to
meet the requirements of an employee stock ownership plan as described at
Section 4975(e)(7) of the Code and Section 407(d)(6) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). The ESOP may borrow in order
to finance purchases of the Common Stock.
It is anticipated that the ESOP will be funded with a loan from the
Company (not to exceed an amount equal to 8% of the gross conversion proceeds).
The Company intends to apply to the OTS to permit it to lend funds to the ESOP.
In the event the Company is not permitted to lend funds to the ESOP and the ESOP
is unable to obtain financing from an unrelated lender for its stock purchase,
the Company may contribute funds to the ESOP to enable it purchase up to 3% of
the shares of Common Stock in the Conversion; provided, however that in such
event the total contributions of the Company to the ESOP and restricted stock
plans for stock purchases in the Conversion may not exceed 4% of the Common
Stock sold in the Conversion.
GAAP generally requires that any borrowing by the ESOP from an
unaffiliated lender be reflected as a liability in the Company's consolidated
financial statements, whether or not such borrowing is guaranteed by, or
constitutes a legally binding contribution commitment of, the Company or the
Association. The funds used to acquire the ESOP shares are expected to be
borrowed from the Company. If the Company finances the ESOP debt, the ESOP debt
will be eliminated through consolidation and no liability will be reflected on
the Company's consolidated financial statements. In addition, shares purchased
with borrowed funds will, to the extent of the borrowings, be excluded from
stockholders' equity, representing unearned compensation to employees for future
services not yet performed. Consequently, if the ESOP purchases already-issued
shares in the open market, the Company's consolidated liabilities will increase
to the extent of the ESOP's borrowings, and total and per share stockholders'
equity will be reduced to reflect such borrowings. If the ESOP purchases newly
issued shares from the Company, total stockholders' equity would neither
increase nor decrease, but per share stockholders' equity and per share net
income would decrease because of the increase in the number of outstanding
shares. In either case, as the borrowings used to fund ESOP purchases are
repaid, total stockholders' equity will correspondingly increase.
All employees are eligible to participate in the ESOP after they attain
age 21 and complete one year of service. Employees will be credited for years of
service to the Association prior to the adoption of the ESOP for participation
and vesting purposes. Contributions to the ESOP are
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allocated among participants on the basis of compensation. Each participant's
account will be credited with cash and shares of Company Common Stock based upon
compensation earned during the year with respect to which the contribution is
made. Contributions credited to a participant's account are vested on a
graduated basis and become fully vested when such participant completes seven
years of service. ESOP participants are entitled to receive distributions from
their ESOP accounts only upon termination of service. Distributions will be made
in the form of a lump sum in cash and in whole shares of the Common Stock.
Fractional shares will be paid in cash. Participants will not incur a tax
liability until a distribution is made.
Each participating employee is entitled to instruct the trustee of the
ESOP as to how to vote the shares allocated to his or her account. With respect
to shares of common stock allocated to accounts for which the participant does
not give voting instructions to the trustee, and with respect to shares of
common stock which have not yet been allocated to participants' accounts, the
trustee will vote all such shares in the same proportion as those shares for
which the trustee receives such voting instructions. The trustee will not be
affiliated with the Company or Home Federal.
The ESOP may be amended by the Board of Directors, except that no
amendment may be made which would reduce the interest of any participant in the
ESOP trust fund or divert any of the assets of the ESOP trust fund to purposes
other than the exclusive benefit of participants or their beneficiaries.
Other Stock Benefit Plans. In addition to the employment agreements, in
the future we may consider the implementation of a stock option and incentive
plan (the "Stock Option Plan") and a restricted stock plan for the benefit of
selected directors, officers and employees. We anticipate that the Stock Option
Plan and restricted stock plan will be comprised of 10% and 4%, respectively, of
the Company stock sold in the Conversion. Grants of common stock pursuant to the
restricted stock plan will be issued without cost to the recipient. If a
determination is made to implement a Stock Option Plan or restricted stock plan,
it is anticipated that any such plans will be submitted to stockholders for
their consideration at which time stockholders would be provided with detailed
information regarding such plan. If such plans are approved, and effected, they
will have a dilutive effect on the Company's stockholders as well as affect the
Company's net income and stockholders' equity, although the actual results
cannot be determined until such plans are implemented. Any such Stock Option
Plan or restricted stock plan will not be implemented within one year of the
date of the consummation of the Conversion, subject to continuing OTS
jurisdiction.
Certain Transactions
The Association has followed a policy of granting loans to officers and
directors. Loans to directors and executive officers are made in the ordinary
course of business and on the same terms and conditions as those of comparable
transactions with the general public prevailing at the time, in accordance with
our underwriting guidelines, and do not involve more than the normal risk of
collectibility or present other unfavorable features.
All loans we make to our directors and executive officers are subject
to OTS regulations restricting loan and other transactions with affiliated
persons of the Association. Loans to all directors and executive officers and
their associates totaled approximately $922,000 at April 30,
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1998, which was 6.9% of our equity capital at that date. All loans to directors
and executive officers were performing in accordance with their terms at April
30, 1998.
THE CONVERSION
The Board of Directors of the Association and the OTS have approved the
Plan of Conversion. OTS approval is subject to approval of the Plan of
Conversion by the our members, and subject to the satisfaction of certain other
conditions imposed by the OTS. OTS approval does not constitute a recommendation
or endorsement of the Plan of Conversion.
General
On July 6, 1998, we adopted a Plan of Conversion, pursuant to which we
will convert from a federally chartered mutual savings institution to a
federally chartered stock savings institution and immediately thereafter become
a wholly owned subsidiary of the Company. The Conversion will include adoption
of the proposed federal stock charter and bylaws, which will authorize us to
issue capital stock. Under the Plan, our common stock is being sold to the
Company and the Company Common Stock is being offered to our eligible depositors
and borrowers and other members and then to the public. The Conversion will be
accounted for at historical cost in a manner similar to a pooling of interests.
The OTS has approved the Company's application to become a savings and loan
holding company and to acquire all of the Association's common stock to be
issued in the Conversion.
The shares of Company Common Stock are first being offered in a
subscription offering to holders of subscription rights. To the extent shares of
Company Common Stock remain available after the subscription offering shares of
Company Common Stock may be offered in a direct community offering on a best
efforts basis through Charles Webb in such a manner as to promote a wide
distribution of the shares. The direct community offering, if any, may commence
anytime subsequent to the commencement of the subscription offering. Shares not
subscribed for in the subscription offering and direct community offering may be
offered for sale by the Company on a best efforts basis in a public offering
conducted by Charles Webb. We have the right, in our sole discretion, to accept
or reject, in whole or in part, any orders to purchase shares of the Common
Stock received in the direct community offering and the public offering. See "-
Offering of Holding Company Common Stock."
Subscriptions for shares will be subject to the maximum and minimum
purchase limitations set forth in the Plan of Conversion.
The completion of the offering is subject to market conditions and
other factors beyond our control. No assurance can be given as to the length of
time following approval of the Plan at the meeting of our members that will be
required to complete the sale of shares being offered in the Conversion. If
delays are experienced, significant changes may occur in the Estimated Valuation
Range with corresponding changes in the offering price and the net proceeds to
be realized by us from the sale of the shares. In the event the Conversion is
terminated, we will charge all Conversion expenses against current income and
any funds collected by us in the offering will be promptly returned, with
interest, to each subscriber.
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Effects of Conversion to Stock Form on Depositors and Borrowers of the
Association
Voting Rights. Currently in our mutual form, our depositor and borrower
members have voting rights and may vote for election of directors. Subsequent to
Conversion, voting rights will be vested exclusively in the Company as the sole
stockholder of the Association. Voting rights as to the Company will be held
exclusively by its stockholders. Each purchaser of Company Common Stock shall be
entitled to vote on any matters to be considered by the Company stockholders. A
stockholder will be entitled to one vote for each share of Company Common Stock
owned, subject to certain limitations applicable to holders of 10% or more of
the shares of the Company Common Stock. See "Description of Capital Stock."
Deposit Accounts and Loans. The balance terms and FDIC insurance
coverage of deposit accounts will not be affected by the Conversion.
Furthermore, the amounts and terms of loans, and the obligations of the
borrowers under their individual contractual arrangements with us will not be
affected by the Conversion.
Tax Effects. We have received an opinion from Silver, Freedman & Taff,
L.L.P. with regard to federal income taxation, and an opinion from Anness,
Gerlach & Williams with regard to Ohio taxation, to the effect that the adoption
and implementation of the Plan of Conversion set forth herein will not be
taxable for federal or Ohio tax purposes to the Association or the Company. See
"- Income Tax Consequences."
Liquidation Rights. We have no plans to liquidate, either before or
subsequent to the completion of the Conversion. However, if there should ever be
a complete liquidation, either before or after Conversion, deposit account
holders would receive the protection of insurance by the FDIC up to applicable
limits. Subject thereto, liquidation rights before and after Conversion would be
as follows:
Liquidation Rights in Present Mutual Institution. In addition to the
protection of FDIC insurance up to applicable limits, in the event of
our complete liquidation, each holder of a deposit account would
receive his or her pro rata share of any assets of the Association
remaining after payment of claims of all creditors (including the
claims of all depositors in the amount of the withdrawal value of their
accounts). Such holder's pro rata share of such remaining assets, if
any, would be in the same proportion of such assets as the balance in
his or her deposit account was to the aggregate balance in all our
deposit accounts at the time of liquidation.
Liquidation Rights in Proposed Converted Institution. After Conversion,
each deposit account holder, in the event of our complete liquidation,
would have a claim of the same general priority as the claims of all
our other general creditors in addition to the protection of FDIC
insurance up to applicable limits. Therefore, except as described
below, the deposit account holder's claim would be solely in the amount
of the balance in his or her deposit account plus accrued interest. A
deposit account holder would have no interest in the assets of the
Association above that amount, if any.
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The Plan of Conversion provides for the establishment, upon the
completion of the Conversion, of a special "liquidation account" for
the benefit of Eligible Account Holders (i.e., eligible depositors at
March 31, 1997) and Supplemental Account Holders (eligible depositors
at ________ __, 1998). Each Eligible Account Holder and Supplemental
Eligible Account Holder, if he or she continues to maintain his or her
deposit account with us, would be entitled upon our complete
liquidation after Conversion, to an interest in the liquidation account
prior to any payment to stockholders. Each Eligible Account Holder
would have an initial interest in such liquidation account for each
deposit account held with us on the qualifying date, March 31, 1997.
Each Supplemental Eligible Account Holder would have a similar interest
as of the qualifying date, __________, 1998. The interest as to each
deposit account would be in the same proportion of the total
liquidation account as the balance of the deposit account on the
qualifying dates was to the aggregate balance in all the deposit
accounts of Eligible Account Holders and Supplemental Eligible Account
Holders on such qualifying dates. However, if the amount in the deposit
account on any annual closing date (December 31) is less than the
amount in such account on the respective qualifying dates, then the
interest in this special liquidation account would be reduced at that
time by an amount proportionate to any such reduction, and the interest
would cease to exist if such deposit account was closed. The interest
in the special liquidation account will never be increased despite any
increase in the related deposit account after the respective qualifying
dates.
Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders were
satisfied would be distributed to the Company as the sole stockholder
of the Association.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether
the Association, as converted, or another SAIF-insured institution is
the surviving institution, is deemed to be a complete liquidation for
purposes of distribution of the liquidation account and, in any such
transaction, the liquidation account would be assumed to the full
extent authorized by regulations of the OTS as then in effect. The OTS
has stated that the consummation of a transaction of the type described
in the preceding sentence in which the surviving entity is not a
SAIF-insured institution would be reviewed on a case-by-case basis to
determine whether the transaction should constitute a "complete
liquidation" requiring distribution of any then remaining balance in
the liquidation account. While we believe that such a transaction
should not constitute a complete liquidation, there can be no assurance
that the OTS will not adopt a contrary position.
Common Stock. For information as to the characteristics of the Common
Stock to be issued under the Plan of Conversion, see "Dividends" and
"Description of Capital Stock." Common Stock issued under the Plan of Conversion
cannot, and will not, be insured by the FDIC or any other
governmental agency.
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We will continue, immediately after completion of the Conversion, to
provide our services to depositors and borrowers pursuant to our existing
policies and will maintain our existing management and employees. Other than for
payment of certain expenses incident to the Conversion, none of our assets will
be distributed in the Conversion. We will continue to be a member of the FHLB
System, and our deposit accounts will continue to be insured by the FDIC. Our
affairs will continue to be directed by our existing Board of Directors and
management.
Stock Contribution to the Charitable Foundation
General. In furtherance of our commitment to the local community, the
Plan of Conversion provides for the establishment of a charitable foundation in
connection with the Conversion. The Plan provides that we will incorporate the
Foundation under Delaware law as a non-stock corporation and will fund the
Foundation with Common Stock (the "Stock Contribution"), as further described
below. We believe that the funding of the Foundation with Common Stock is a
means to establish a common bond between us and the community, enabling our
community to share in the potential growth and success of the Company over the
long term. By further enhancing the Association's visibility and reputation in
the local community, we believe that the Foundation will enhance the long-term
value of our community banking franchise. The Foundation will be dedicated to
charitable purposes within our local community, including community development
activities.
The Stock Contribution will be considered as a separate matter from the
proposal to approve the Plan of Conversion. If our members approve the Plan of
Conversion, but not the Stock Contribution, we intend to complete the Conversion
without the Stock Contribution. Failure to approve the Stock Contribution may
materially affect the pro forma market value of the Common Stock. If the
resulting pro forma market value of the Common Stock to be sold in the offering
is less than $16.7 million or more than $26.15 million, or if the OTS otherwise
requires a resolicitation, we will establish a new Estimated Valuation Range and
commence a resolicitation of subscribers. In the event of a resolicitation,
unless an affirmative response is received within a specified period of time,
all funds will be promptly returned to investors, as described elsewhere herein.
See "- Stock Pricing and Number of Shares to be Issued."
Purpose of the Stock Contribution. The purpose of the Foundation is to
provide funding to support charitable causes and community development
activities. We are involved in community lending and community development
activities within our local community. We received a "satisfactory" CRA rating
in our last CRA examination. The Foundation is being formed to complement our
existing community activities, not as a replacement for such activities. We
intend to continue to emphasize community lending and community development
activities following the Conversion. However, such activities are not our sole
corporate purpose. The Foundation will be completely dedicated to community
activities and the promotion of charitable causes, and may be able to support
such activities in ways that are not presently available to us. In this regard,
we believe the establishment of a charitable foundation is consistent with our
commitment to community service. We also further believe that the funding of the
Foundation with Common Stock is a means of enabling our community to share in
the potential growth and success of the Company long after completion of the
Conversion. The Foundation will accomplish that goal by providing for continued
ties between the Foundation and the Association, thereby forming a partnership
with our community.
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Although we have carefully considered each of the above factors, the
establishment of a charitable foundation in connection with a conversion is a
relatively new concept that has been implemented by only a few other converting
banks. Accordingly, certain persons may raise challenges as to the validity of
the establishment of the Foundation that, if not resolved promptly, could delay
the consummation of the Conversion or result in the elimination of the
Foundation.
Structure of the Foundation. The Foundation is a private foundation
under the Code. As a private foundation, the Foundation is required to
distribute annually in grants or donations at least 5% of its net investment
assets. The Foundation is dedicated to the promotion of charitable purposes
within the communities in which we operate, including, but not limited to,
providing grants or donations to support cultural activities, not-for-profit
medical facilities, elder and youth care, community groups and other types of
organizations or projects. While the Foundation is authorized to engage directly
in charitable activities, in order to limit overhead costs, the Foundation's
primary activity currently consists of making grants to other charitable
organizations.
The authority for the affairs of the Foundation is vested in its
members and its Board of Trustees. The Foundation's certificate of incorporation
provides that the Foundation's members will be its Board of Trustees, which is
comprised of __________________. Although all of the Foundation's initial
trustees were selected by us, future Foundation trustees may be nominated and
elected only by the Foundation's members. As a result, the Board of Trustees is
self-perpetuating. The Board of Trustees may be expanded following the
Conversion to include additional Association directors and other community
members as trustees; but it is currently anticipated that at least a majority of
the Foundation's Board of Trustees will consist of persons who are then current
or former directors of the Association.
The Foundation's certificate of incorporation provides that the
earnings of the Foundation shall not result in any private benefit for its
members, trustees or officers. In addition, it is anticipated that the
Foundation will adopt a conflicts of interest policy to protect against
inappropriate insider benefits.
The trustees are responsible for establishing and carrying out the
policies of the Foundation with respect to grants or donations by the
Foundation, consistent with the purposes for which the Foundation was
established. The trustees of the Foundation are also responsible for directing
the activities of the Foundation, and managing its assets.
While the Foundation does not currently intend to purchase any shares
of the Common Stock on the open market, it is authorized to do so. The OTS has
informed us that any such purchases by the Foundation would be deemed to be
repurchases by the Company for the purposes of the OTS restrictions on
post-conversion stock repurchases. See "Use of Proceeds."
Under the order of the OTS approving our conversion application, all
shares of Common Stock held by the Foundation, including those acquired pursuant
to the Stock Contribution, must be voted in the same ratio as all other shares
of the Common Stock on all proposals considered by stockholders of the Company;
provided, however, that the OTS will waive this voting restriction under certain
circumstances if compliance with the restriction would: (i) cause a violation of
the law of the State of Ohio and the OTS determines that federal law would not
preempt the application of
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the laws of the State of Ohio to the Foundation; (ii) cause the Foundation to
lose its tax-exempt status or otherwise have a material and adverse tax
consequence on the Foundation; or (iii) cause the Foundation to be subject to an
excise tax under Section 4941 of the Code. In order for the OTS to waive such
voting restriction, the Company's or the Foundation's legal counsel must render
an opinion satisfactory to the OTS that compliance with the voting restriction
would have the effect described in clauses (i), (ii) or (iii) above. Under those
circumstances, the OTS will grant a waiver of the voting restrictions upon
submission of such legal opinion(s) by the Company or the Foundation. In the
event that the OTS waives the voting restriction, the trustees would direct the
voting of the Common Stock held by the Foundation. However, a condition to the
OTS approval of the Conversion provides that in the event such voting
restriction is waived or becomes unenforceable, the Director of the OTS, or his
designees, at that time may impose conditions on the composition of the board of
trustees of the Foundation or such other conditions or restrictions relating to
the control of the Common Stock held by the Foundation, any of which could limit
the ability of the board of trustees of the Foundation to control the voting of
the Common Stock held by the Foundation. The Company has no current intention to
seek such a waiver.
There are no agreements or understandings with trustees of the
Foundation regarding the exercise of control, directly or indirectly, over the
management or policies of the Company or the Association, including agreements
related to voting, acquisition or disposition of the Common Stock. As trustees
of a nonprofit corporation, trustees of the Foundation are at all times bound by
their fiduciary duty to advance the Foundation's charitable goals, to protect
the assets of the Foundation and to act in a manner consistent with the
charitable purposes for which the Foundation is established.
It is currently anticipated that the Foundation will adopt a policy
addressing affiliated transactions between the Foundation and the Company or the
Association. Transactions between the Foundation and the Association will comply
with applicable provisions of Sections 23A and 23B of the Federal Reserve Act,
as amended, and the OTS conflicts of interests rules. Additionally, the Company
(but not the Association) may provide office space and administrative support to
the Foundation without charge provided that such actions comply with applicable
conflicts of interests restrictions.
The Stock Contribution. Under the terms of the Plan of Conversion, the
Company will contribute, either in the form of a donation or in a sale for their
aggregate par value ($.01 per share), 30,000 shares to the Foundation, subject
to stockholder approval. Such Stock Contribution, once made, will not be
recoverable. We determined to make the Stock Contribution with Common Stock
rather than cash because we desired to form a bond with the community in a
manner that would allow the community to share in the potential growth and
success of the Company over the long term. The funding of the Stock Contribution
with stock also provides the Foundation with a potentially larger endowment than
if the Company contributed cash to the Foundation since, as a shareholder, the
Foundation will share in the potential growth and success of the Company. As
such, the Stock Contribution to the Foundation has the potential to provide a
self-sustaining funding mechanism which reduces the amount of cash that the
Company, if it were not making the stock contribution, would have to contribute
to the Foundation in future years in order to maintain a level amount of
charitable grants and donations.
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One of the conditions imposed on the gift of Common Stock by the
Company is that the amount of Company Common Stock that may be sold by the
Foundation in any one year shall not exceed 5% of the average market value of
the assets held by the Foundation, except where the board of directors of the
Foundation, by three-fourths vote, determines that the failure to sell an amount
of common stock greater than such amount would result in a long-term reduction
of the value of the Foundation's assets and as such would jeopardize the
Foundation's capacity to carry out its charitable purposes. While there may be
greater risk associated with a one-stock portfolio in comparison to a
diversified portfolio, the Company believes any such risk is mitigated by the
ability of the Foundation's trustees to sell more than 5% of its stock in such
circumstances. Upon completion of the Conversion and the Stock Contribution, the
Company will have 1,700,000, 2,000,000 and 2,300,000 shares issued and
outstanding at the minimum, midpoint and maximum of the Estimated Valuation
Range. Because the Company will have an increased number of shares outstanding,
the voting and ownership interest of shareholders in Company Common Stock would
be diluted by 1.76%, 1.50% and 1.30% at the minimum, midpoint and maximum of the
Estimated Valuation Range, respectively, as compared to their interests in the
Company if the Stock Contribution were not made. For additional discussion of
the dilutive effect, see "Comparison of Valuation and Pro Forma Information With
No Stock Contribution" and "Pro Forma Data."
If the Stock Contribution is approved by our members, the Company will
recognize a $300,000 expense (offset, in part, by a corresponding tax deduction
of $102,000), during the quarter in which the Conversion is completed, which is
expected to be the fourth quarter of fiscal 1998. Such expense will likely
eliminate earnings in the quarter recognized and have a material adverse impact
on the Company's earnings for fiscal year 1998. If the Stock Contribution had
been made at April 30, 1998, we would have reported a net income of $89,000
rather than $287,000 for the four months ended April 30, 1998. For further
discussion of the Foundation and its impact on purchasers in the Conversion, see
"Risk Factors - Risks Associated with the Stock Contribution to the Charitable
Foundation" and "Pro Forma Data."
Although the Stock Contribution will be accrued in the fourth quarter
of 1998 as described above, such contribution may be paid at any time during the
twelve-month period following the completion of the Conversion. The reason for
permitting the Company to pay the Stock Contribution in more than one tax year
is that the five-year tax carry forward period commences on the date of payment
rather than the date of accrual. Thus, by paying the initial contribution over
more than one tax year the Company can lengthen the period over which the Stock
Contribution may be carried forward for tax purposes. See "-- Tax
Considerations" below.
Tax Considerations. We have received an opinion of Silver, Freedman &
Taff, L.L.P. that an organization created for the above purposes would qualify
as an organization exempt from taxation under Section 501(c)(3) of the Code, and
would likely be classified as a private foundation. A private foundation
typically receives its support from one person or one corporation whereas a
public charity receives its support from the public. The Foundation will submit
an application to the IRS to be recognized as an exempt organization. If the
Foundation files such an application within 15 months from the date of its
organization, and if the IRS approves the application, the effective date of the
Foundation's status as a Section 501(c)(3) organization will be retroactive to
the date of its organization. Silver, Freedman & Taff, L.L.P., however, has not
rendered any advice on the condition to the contribution to be agreed to by the
Foundation which requires that all shares of
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Company Common Stock held by the Foundation must be voted in the same ratio as
all other outstanding shares of Company Common Stock on all proposals considered
by shareholders of the Company. Consistent with this condition, in the event
that the Company or the Foundation receives an opinion of its legal counsel that
compliance with this voting restriction would have the effect of causing the
Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Foundation, or subject the Foundation to an
excise tax for "self-dealing" under Section 4941 of the Code, the OTS will waive
such voting restriction upon submission by the Company or the Foundation of a
legal opinion(s) to that effect satisfactory to the OTS. See "-- Regulatory
Conditions Imposed on the Foundation."
A legal opinion of the OTS which addresses the establishment of
charitable foundations by savings associations opines that as a general rule
funds contributed to a charitable foundation should not exceed the deductible
limitation set forth in the Code, and if an association's contributions exceed
the deductible limit, such action must be justified by the board of directors.
In addition, under Delaware law, the Company is authorized by statute to make
charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must merely be within reasonable limits as to
amount and purpose to be valid. Under the Code, the Company may deduct up to 10%
of its taxable income in any one year and any contributions made by the Company
in excess of the deductible amount will be deductible for federal tax purposes
over each of the five succeeding taxable years. We believe that the conversion
presents a unique opportunity to make the Stock Contribution given the
substantial amount of additional capital being raised in the Conversion. In
making such a determination, we considered the dilutive impact of the Stock
Contribution on the conversion appraisal. See "Comparison of Valuation and Pro
Forma Information with No Stock Contribution." Based on such considerations, we
believe that the Stock Contribution to the Foundation in excess of the 10%
annual limitation is justified given our capital position and earnings, the
substantial additional capital being raised in the Conversion and the potential
benefits of the Foundation to our community. In this regard, assuming the sale
of the Common Stock at the midpoint of the Estimated Valuation Range, the
Company would have pro forma consolidated capital of $20.4 million and our pro
forma tangible, core and risk-based capital ratios would be 24.6%, 24.6% and
46.0%, respectively. See "Regulatory Capital Compliance," "Capitalization," and
"Comparison of Valuation and Pro Forma Information with No Stock Contribution."
Thus, the amount of the Stock Contribution will not adversely impact our
financial condition, and we therefore believe that the amount of the charitable
contribution is reasonable given the Company's and our pro forma capital
positions. As such, we believe that the Stock Contribution does not raise safety
and soundness concerns.
We have received an opinion of Silver, Freedman & Taff, L.L.P. that the
Company's contribution of its own stock to the Foundation will not constitute an
act of self-dealing, and that the Company will be entitled to a deduction in the
amount of the $300,000, subject to a limitation based on 10% of the Company's
annual taxable income. The Company, however, would be able to carry forward any
unused portion of the deduction for five years following the year in which the
contribution is made for federal and Delaware tax purposes.
The Company currently estimates that substantially all of the Stock
Contribution should be deductible. However, no assurances can be made that the
Company will have sufficient pre-tax
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income over the periods following the year in which the contributions are made
to utilize fully the carryover related to the excess contribution.
In cases of willful, flagrant or repeated acts or failures to act which
result in violations of the IRS rules governing private foundations, a private
foundation's status as a private foundation may be involuntarily terminated by
the IRS. In such event, the managers of a private foundation could be liable for
excise taxes based on such violations and the private foundation could be liable
for a termination tax under the Code. The Foundation's certificate of
incorporation provides that it shall have a perpetual existence. In the event,
however, the Foundation were subsequently dissolved as a result of a loss of its
tax exempt status, the Foundation would be required under the Code and its
articles of incorporation to distribute any assets remaining in the Foundation
at that time for one or more exempt purposes within the meaning of Section
501(c)(3) of the Code, or to distribute such assets to the federal government,
or to a state or local government, for a public purpose.
In general, the income of a private foundation is exempt from federal
and state taxation. However, investment income, such as interest, dividends and
capital gains, will be subject to a federal excise tax of 2.0%. The Foundation
will be required to make an annual filing with the IRS within four and one-half
months after the close of the Foundation's taxable year to maintain its
tax-exempt status. The Foundation will also be required to publish a notice that
the annual information return will be available for public inspection for a
period of 180 days after the date of such public notice. The information return
for a private foundation must include, among other things, an itemized list of
all grants made or approved, showing the amount of each grant, the recipient,
any relationship between a grant recipient and the Foundation's managers, and a
concise statement of the purpose of each grant.
Regulatory Conditions Imposed on the Foundation. The Stock Contribution
is subject to the following conditions imposed by the OTS: (i) the Foundation
will be subject to examination by the OTS, at the Foundation's own expense; (ii)
the Foundation must comply with supervisory directives imposed by the OTS; (iii)
the Foundation will provide annual reports to the OTS describing grants made and
grant recipients; (iv) the Foundation will operate in accordance with written
policies adopted by the board of trustees, including a conflict of interest
policy; (v) the Foundation will not engage in self-dealing and will comply with
all laws necessary to maintain its tax-exempt status; and (vi) any shares of
Common Stock of the Company held by the Foundation must be voted in the same
ratio as all other shares of the Common Stock on all proposals considered by
stockholders of the Company; provided, however, that the OTS will waive this
voting restriction under certain circumstances if compliance with the voting
restriction would: (a) cause a violation of the law of the State of Ohio and the
OTS determines the federal law does not preempt the application of the laws of
the State of Delaware to the Foundation; (b) cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (c) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the OTS to waive such voting restriction,
the Company's or the Foundation's legal counsel must render an opinion
satisfactory to OTS that compliance with the voting restriction would have the
effect described in clauses (a), (b) or (c) above. There can be no assurances
that either a legal or tax opinion addressing these issues will be rendered, or
if rendered, that the OTS will grant an unconditional waiver of the voting
restriction. In this regard, a condition to the OTS approval of the Conversion
provides that in the event such voting restriction is waived or becomes
unenforceable, the Director of the OTS, or
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his designees, at that time may impose conditions on the composition of the
board of trustees of the Foundation to control the voting of Common Stock held
by the Foundation. In no event will the voting restriction survive the sale of
shares of the Common Stock held by the Foundation.
The Stock Contribution is subject to the approval of a majority of the
total outstanding votes of our members eligible to be cast at the Special
Meeting. The Stock Contribution will be considered as a separate matter from
approval of the Plan of Conversion. If our members approve the Plan of
Conversion, but not the Stock Contribution, we intend to complete the Conversion
without the Stock Contribution. Failure to approve the Foundation may materially
increase the pro forma market value of the Common Stock being offered since the
Estimated Valuation Range, as set forth herein, takes into account the after-tax
impact of the Stock Contribution. See "Pro Forma Data."
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities of a thrift institution sold in connection with its conversion must
be based on an appraised aggregate market value of the institution as converted
(i.e., taking into account the expected receipt of proceeds from the sale of the
securities in the conversion), as determined by an independent valuation. Keller
& Company, which is experienced in the valuation and appraisal of business
entities, including thrift institutions involved in the conversion process, was
retained by us to prepare an appraisal of the estimated pro forma market value
of the Association and the Company upon Conversion.
Keller & Company will receive a fee of approximately $19,000 for its
appraisal in addition to its reasonable out-of-pocket expenses incurred in
connection with the appraisal. Keller & Company has also agreed to assist us in
the preparation of our business plan and to perform certain records management
services for us for such fee. We have agreed to indemnify Keller & Company under
certain circumstances against liabilities and expenses (including legal fees)
arising out of, related to, or based upon the Conversion.
Keller & Company has prepared an appraisal of our estimated pro forma
market as converted. The Keller & Company appraisal concluded that, at April 30,
1998, the Estimated Valuation Range of the Common Stock was from a minimum of
$17,000,000 to a maximum of $23,000,000 with a midpoint of $20,000,000. Assuming
that the shares are sold at $10.00 per share in the Conversion, the estimated
number of shares to be issued in the Conversion (not including the Stock
Contribution) is expected to be between 1,670,000 and 2,270,000. The purchase
price of $10.00 per share was determined by discussion between us and Keller &
Company, taking into account, among other factors, (i) the requirement under OTS
regulations that the Common Stock be offered in a manner that would achieve the
widest distribution of shares and (ii) liquidity in the Common Stock subsequent
to the Conversion.
The appraisal involved a comparative evaluation of our operating and
financial statistics with those of other thrift institutions. The appraisal also
took into account such other factors as the market for thrift institution stocks
generally, prevailing economic conditions, both nationally and in Ohio, which
affect the operations of thrift institutions, the competitive environment within
which we operate and the effect of us becoming a subsidiary of the Company. No
detailed individual analysis of the separate components of our assets and
liabilities was performed in connection with the
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evaluation. The Plan of Conversion requires that all of the shares subscribed
for in the offering be sold at the same price per share. The Board of Directors
reviewed the appraisal, including the methodology and the appropriateness of the
assumptions utilized by Keller & Company and determined that in its opinion the
appraisal was not unreasonable. The Estimated Valuation Range may be amended
with the approval of the OTS in connection with changes in our financial
condition or operating results, or market conditions generally. As described
below, an amendment to the Estimated Valuation Range above $26,450,000 would not
be made without a resolicitation of subscriptions and/or proxies except in
limited circumstances.
If, upon completion of the offering, at least the minimum number of
shares are subscribed for, Keller & Company, after taking into account factors
similar to those involved in its prior appraisal, will determine its estimate of
our pro forma market value upon Conversion, as of the close of the offering.
If, based on the estimate of Keller & Company, our aggregate pro forma
market value is not within the Estimated Valuation Range, Keller & Company, upon
the consent of the OTS, will determine a new Estimated Valuation Range ("Amended
Valuation Range"). If the aggregate pro forma market value of the stock to be
sold in the offering has increased in the Amended Valuation Range to an amount
that does not exceed $26,150,000 (i.e., 15% above the maximum of the EVR not
including the Stock Contribution), then the number of shares to be issued may be
increased to accommodate such increase in value without a resolicitation of
subscriptions and/or proxies. In such event we do not intend to resolicit
subscriptions and/or proxies unless we then determine, after consultation with
the OTS, that circumstances otherwise require such a resolicitation. If,
however, the aggregate pro forma market value of the Common Stock to be sold of
the Company, at that time is less than $16.7 million or more than $26.15
million, a resolicitation of subscribers and/or proxies may be made, the Plan of
Conversion may be terminated or such other actions as the OTS may permit may be
taken. In the event that upon completion of the offering, the pro forma market
value of the Common Stock to be sold is below $16.7 million or above $26.15
million (15% above the maximum of the EVR), the Company intends to file the
revised appraisal with the SEC by post-effective amendment to its Registration
Statement on Form S-1. See "Additional Information." If the Plan of Conversion
is terminated, all funds would be returned promptly with interest at our current
passbook rate, and holds on funds authorized for withdrawal from deposit
accounts would be released. If there is a resolicitation of subscriptions,
subscribers will be given the opportunity to cancel or change their
subscriptions and to the extent subscriptions are so canceled or reduced, funds
will be returned with interest at our current passbook rate and holds on funds
authorized for withdrawal from deposit accounts will be released or reduced.
Stock subscriptions received by us may not be withdrawn by the subscriber and,
if accepted by us, are final. If the Conversion is not completed prior to
_________, 2000 (two years after the date of the Special Meeting), the Plan of
Conversion will automatically terminate.
Any increase in the total number of shares of Common Stock to be
offered in the Conversion will dilute a subscriber's percentage ownership
interest and will reduce the pro forma net income and net worth on a per share
basis. A decrease in the number of shares to be issued in the Conversion will
increase a subscriber's proportionate ownership interest and will increase both
pro forma net income and net worth on a per share basis while decreasing that
amount on an aggregate basis.
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No sale of the shares will take place unless, prior thereto, Keller &
Company confirms to the OTS that, to the best of Keller &Company's knowledge and
judgment, nothing of a material nature has occurred which would cause Keller &
Company to conclude that the actual purchase price on an aggregate basis is
incompatible with its estimate of the aggregate pro forma market value of the
Company and the Association as converted at the time of the sale. If, however,
the facts do not justify such a statement, the offering or other sale may be
canceled, a new Estimated Valuation Range set and new offering held.
In preparing its valuation of our pro forma market value upon
Conversion, Keller & Company relied upon and assumed the accuracy and
completeness of all financial and statistical information provided by us. Keller
& Company also considered information based upon other publicly available
sources which it believes are reliable. However, Keller & Company does not
guarantee the accuracy and completeness of such information and did not
independently verify the financial statements and other data provided by us or
independently value our assets or liabilities. The appraisal is not intended to
be, and must not be interpreted as, a recommendation of any kind as to the
advisability of voting to approve the Conversion or of purchasing shares of
Common Stock. The appraisal considers us only as going concerns and should not
be considered as any indication of the liquidation value of Home Federal or the
Company. Moreover, the appraisal is necessarily based on many factors which
change from time to time. There can be no assurance that persons who purchase
shares in the Conversion will be able to sell such shares at prices at or above
the purchase price.
Offering of Holding Company Common Stock
Under the Plan of Conversion, up to 2,270,000 shares of Common Stock
will be offered for sale, subject to certain restrictions described below,
initially through the subscription offering. Federal conversion regulations
require, with certain exceptions, that all shares offered in a conversion be
sold in order for the conversion to become effective. An additional 30,000
shares of Common stock will be issued to the Foundation, if approved by members.
The subscription offering will expire at noon, Niles, Ohio time, on
________, 1998 (the "Subscription Expiration Date") unless extended by us.
Depending on the availability of shares and market conditions at or near the
completion of the subscription offering, we may effect a direct community
offering and/or a public offering of shares to selected persons through Webb. To
order Common Stock in connection with the direct community offering and/or
public offering, if any, an executed stock order and account withdrawal
authorization and certification must be received by Webb prior to the
termination of the direct community offering and public offering. The date by
which orders must be received in the direct community offering and the public
offering, if any, will be set by us at the time of such offering. OTS
regulations require that all shares to be offered in the Conversion be sold
within a period ending not more than 45 days after the Subscription Expiration
Date (or such longer period as may be approved by the OTS) or, despite approval
of the Plan of Conversion by members, the Conversion will not be effected and we
will remain in mutual form. This period expires on _____, 1998, unless extended
with the approval of the OTS. In addition, if the subscription offering is
extended beyond _____, 1998, all subscribers will have the right to modify or
rescind their subscriptions and to have their subscription funds returned
promptly with interest. In the event that the Conversion is not effected, all
funds submitted and not previously refunded
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pursuant to the offering will be promptly refunded to subscribers with interest
at our current passbook rate, and all withdrawal authorizations will be
terminated.
Subscription Offering. In accordance with OTS regulations,
non-transferable subscription rights have been granted under the Plan of
Conversion to the following persons in the following order of priority: (1)
Eligible Account Holders (our deposit account holders maintaining an aggregate
balance of $50.00 or more as of March 31, 1997), (2) our Tax-Qualified Employee
Plans; provided, however, that the Tax-Qualified Employee Plans shall have first
priority subscription rights to the extent that the total number of shares of
Common Stock sold in the Conversion exceeds the maximum of the Estimated
Valuation Range; (3) Supplemental Eligible Accounts Holders (our deposit account
holders maintaining a balance of $50.00 or more as of _______, 1998), (4) Other
Members (our depositors and borrowers at the close of business on _________,
1998, the voting record date for the Special Meeting) and (5) our officers,
directors and employees. All subscriptions received will be subject to the
availability of Company Common Stock after satisfaction of all subscriptions of
all persons having prior rights in the subscription offering, and to the maximum
and minimum purchase limitations set forth in the Plan of Conversion.
Category No. 1 is reserved for the Eligible Account Holders.
Subscription rights to purchase shares under this category will be allocated
among Eligible Account Holders to permit each such depositor to purchase shares
in this Category in an amount equal to the greater of $150,000 of Common Stock,
one-tenth of one percent (.10%) of the total shares offered in the Conversion,
or 15 times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the qualifying deposits of the
Eligible Account Holder and the denominator is the total amount of the
qualifying deposit of all Eligible Account Holders, in each case on the
Eligibility Record Date. To the extent shares are oversubscribed in this
category, shares shall be allocated first to permit each subscribing Eligible
Account Holder to purchase, to the extent possible, 100 shares and thereafter
among each subscribing Eligible Account Holder pro rata in the same proportion
that his qualifying deposit bears to the total qualifying deposits of all
subscribing Eligible Account Holders whose subscriptions remain unsatisfied.
Category No. 2 provides for the issuance of subscription rights to
Tax-Qualified Employee Plans to purchase up to 10% of the total amount of shares
of Common Stock issued in the subscription offering on a second priority basis.
However, such plans shall not, in the aggregate, purchase more than 10% of the
Common Stock issued. The ESOP intends to purchase a total of ___% of the Common
Stock sold in the Conversion under this category. Subscription rights received
pursuant to this category shall be subordinated to all rights received by
Eligible Account Holders to purchase shares pursuant to Category No. 1;
provided, however, that notwithstanding any provision of the Plan of Conversion
to the contrary, the Tax-Qualified Employee Plans shall have first priority
subscription rights to the extent that the total number of shares of Common
Stock sold in the Conversion exceeds the maximum of the Estimated Valuation
Range.
Category No. 3 is reserved for the Supplemental Eligible Account
Holders. Subscription rights to purchase shares under this category will be
allocated among Supplemental Eligible Account Holders to permit each such
depositor to purchase shares in this category in an amount equal to the greater
of $150,000 of Common Stock, one-tenth of one percent (.10%) of the total shares
of
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Common Stock offered in the Conversion, or 15 times the product (rounded down to
the next whole number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction of which the numerator is the amount of
the qualifying deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of the qualifying deposits of all Supplemental
Eligible Account Holders in each case on ________, 1998 (the "Supplemental
Eligibility Record Date"), subject to the overall purchase limitation after
satisfying the subscriptions of Eligible Account Holders and Tax Qualified
Employee Plans. Any non-transferable subscription rights received by an Eligible
Account Holder shall reduce, to the extent thereof, the subscription rights to
be distributed to such person as a Supplemental Eligible Account Holder. In the
event of an oversubscription for shares, the shares available shall be allocated
first to permit each subscribing Supplemental Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make his total
allocation (including the number of shares, if any, allocated in accordance with
Category No. 1) equal to 100 shares, and thereafter among each subscribing
Supplemental Eligible Account Holder pro rata in the same proportion that his
qualifying deposit bears to the total qualifying deposits of all subscribing
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied.
Category No. 4 provides, to the extent that shares are then available
after satisfying the subscriptions of Eligible Account Holders, Tax-Qualified
Employee Plans and Supplemental Eligible Account Holders, for the issuance of
subscription rights to Other Members to purchase in this category up to the
greater of $150,000 of Common Stock, or one-tenth of one percent (.10%) of the
Common Stock offered in the Conversion. In the event of an oversubscription, the
shares available shall be allocated among the subscribing Other Members pro rata
in the same proportion that his number of votes on the Voting Record Date bears
to the total number of votes on the Voting Record Date of all subscribing Other
Members on such date. Such number of votes shall be determined based on our
mutual charter and bylaws in effect on the date of approval by members of this
Plan of Conversion.
Category No. 5 provides for the issuance of subscription rights to our
officers, directors and employees, to purchase in this Category up to $150,000
of the Common Stock to the extent that shares are available after satisfying the
subscriptions of eligible subscribers in preference Categories 1, 2, 3 and 4.
The total number of shares which may be purchased under this category may not
exceed 24% of the number of shares of Common Stock. In the event of an
oversubscription, the available shares will be allocated pro rata among all
subscribers in this category based on the number of shares ordered by each
subscriber.
Direct Community Offering and Public Offering. To the extent that
shares remain available and subject to market conditions at or near the
completion of the subscription offering, we may offer shares of Common Stock
pursuant to the Plan to selected persons in a direct community offering and/or
public offering on a best-efforts basis through Webb in such a manner as to
promote a wide distribution of the Common Stock. Any orders received in
connection with the direct community offering and public offering, if any, will
receive a lower priority than orders properly made in the subscription offering
by persons properly exercising subscription rights. In addition depending on
market conditions, Webb may utilize selected broker-dealers ("Selected Dealers")
in connection with the sale of shares in the public offering, if any. Common
Stock sold in the direct community offering and public offering will be sold at
$10.00 per share and hence will be sold at the same price as all
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other shares in the Conversion. We have the right to reject orders, in whole or
in part, in our sole discretion in the direct community offering and public
offering.
No person, together with any associate or group of persons acting in
concert, will be permitted to purchase more than $150,000 of Common Stock in the
direct community offering and public offering. To order Common Stock in
connection with the direct community offering or public offering, if any, an
executed stock order and account withdrawal authorization and certification must
be received by Webb prior to the termination of such offering. The date by which
orders must be received in the direct community offering and public offering
will be set by us at the time of commencement of such offering; provided
however, if the offering is extended beyond _______, 1998, each subscriber will
have the opportunity to maintain, modify or rescind his or her subscription. In
such event, all subscription funds will be promptly returned with interest to
each subscriber unless he or she affirmatively indicates otherwise.
It is estimated that the Selected Dealers will receive a negotiated
commission of up to ____% of the Common Stock sold by the Selected Dealers,
payable by us, and Webb will also receive a fee of ____% of Common Stock sold by
such firms. Such fees in the aggregate will not exceed 5.5%.
See "- Marketing Arrangements."
In the event we determine to conduct a direct community offering and/or
public offering, persons to whom a prospectus is delivered may subscribe for
shares of Common Stock by submitting a completed stock order and account
withdrawal authorization (provided by Webb) and an executed certification along
with immediately available funds to Webb by not later than the public offering
expiration date (as established by us). Promptly upon receipt of available
funds, together with a properly executed stock order and account withdrawal
authorization and certification, Webb will forward such funds to us to be
deposited in a subscription escrow account.
If a subscription in the direct community offering and/or public
offering is accepted, promptly after the completion of the Conversion, a
certificate for the appropriate amount of shares will be forwarded to Webb as
nominee for the beneficial owner. In the event that a subscription is not
accepted or the Conversion is not consummated, we will promptly refund with
interest the subscription funds to Webb which will then return the funds to
subscribers' accounts. If the aggregate pro forma market value of the Common
Stock to be sold in the offering is less than $16.7 million or more than $26.15
million, each subscriber will have the right to modify or rescind his or her
subscription.
The opportunity to subscribe for shares of Common Stock in the direct
community offering and/or public offering is subject to our right, in our sole
discretion, to accept or reject any such orders in whole or in part.
Additional Purchase Restrictions
The Plan also provides for certain additional limitations to be placed
upon the purchase of shares in the Conversion. Specifically, no person (other
than a Tax-Qualified Employee Plan) by himself or herself or with an associate,
and no group of persons acting in concert, may subscribe for or purchase more
than $300,000 of Common Stock. For purposes of this limitation, an associate of
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a person does not include a Tax-Qualified Employee Plan or Non-Tax Qualified
Employee Plan in which the person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity. Moreover, for purposes
of this paragraph, shares held by one or more Tax Qualified or Non-Tax Qualified
Employee Plans attributed to a person shall not be aggregated with shares
purchased directly by or otherwise attributable to that person. See "- Stock
Pricing and Number of Shares to be Issued" regarding potential changes in
subscription rights in the event of a decrease in the number of shares to be
issued in the Conversion. Officers and directors and their associates may not
purchase, in the aggregate, more than 34% of the shares to be sold in the
Conversion. For purposes of the Plan, the members of the Board of Directors are
not deemed to be acting in concert solely by reason of their Board membership.
For purposes of this paragraph, an associate of a person does not include a
Tax-Qualified Employee Plan. Moreover, any shares attributable to the officers
and directors and their associates, but held by one or more Tax-Qualified
Employee Plans shall not be included in calculating the number of shares which
may be purchased under the limitations in this paragraph. The term "associate"
is used above to indicate any of the following relationships with a person: (i)
any corporation or organization (other than the Company or the Association or a
majority-owned subsidiary of the Company or the Association) of which a person
is an officer or partner or is, directly or indirectly, the beneficial owner of
10% or more of any class of equity security; (ii) any trust or other estate in
which such person has a substantial beneficial interest or as to which such
person serves as trustee or in a similar fiduciary capacity; and (iii) any
relative or spouse of such person or any relative of such spouse who has the
same home as such person or who is a director or officer of the Company or the
Association or any subsidiary of the Company or the Association.
We, in our sole discretion, may increase the maximum purchase
limitations referred to above up to 9.99% of the total shares to be offered in
the offering, provided that orders for shares exceeding 5.0% of the shares being
offered in the offering shall not exceed, in the aggregate, 10% of the shares
being offered in the offering. Requests to purchase additional shares of Common
Stock under this provision will be allocated by us on a pro rata basis giving
priority in accordance with the priority rights set forth above. Depending on
market and financial conditions, we, with the approval of the OTS and without
further approval of our members, may increase or decrease any of the above
purchase limitations.
To the extent that shares are available, each subscriber must subscribe
for a minimum of 25 shares. In computing the number of shares to be allocated,
all numbers will be rounded down to the next whole number.
Common Stock purchased in the Conversion will be freely transferable
except for shares purchased by our executive officers and directors. See "-
Restrictions on Transfer of Subscription Rights and Shares."
Marketing Arrangements
We have retained Webb to consult with and advise us and to assist us in
the distribution of shares in the offering on a best-efforts basis. Among the
services Webb will perform are (i) training and educating our employees, who
will be performing certain ministerial functions in the offering, regarding the
mechanics and regulatory requirements of the stock sale process, (ii) keeping
records
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of orders for shares of Common Stock, (iii) targeting our sales efforts
including preparation of marketing materials, (iv) assisting in the collection
of proxies from our members for use at the Special Meeting, and (v) providing
its registered stock representatives to staff the Stock Center and meeting with
and assisting potential subscribers. For its services, Webb will receive a
success fee of 1.5% of the aggregate purchase price of Common Stock sold in the
offering, excluding Common Stock purchased by our directors, officers and
employees, or members of their immediate families and purchases by tax-qualified
plans. A management fee of $25,000, is being applied against this fee. If the
offering is terminated before completion, Webb will be entitled to retain such
payments already accrued or received.
To the extent registered broker-dealers are utilized, we will pay a fee
(to be negotiated, but not to exceed ___% of the aggregate purchase price of
shares of Common Stock sold in the direct community offering and/or public
offering) to such Selected Dealers, including any sponsoring dealer fees. We
will also pay Webb a fee of ____% of the aggregate purchase price of shares of
Common Stock sold in the offering by Selected Dealers, which together with the
fee to be paid to Selected Dealers will result in an aggregate fee not to exceed
5.5% of the Common Stock sold in the offering. Fees paid to Webb and to any
other broker-dealer may be deemed to be underwriting fees, and Webb and such
other broker-dealers may be deemed to be underwriters. We have agreed to
reimburse Webb for its reasonable out-of-pocket expenses (not to exceed
$10,000), and its legal fees and expenses (not to exceed $35,000) and to
indemnify Webb against certain claims or liabilities, including certain
liabilities under the Securities Act.
In the event there is a direct community offering or public offering,
procedures may be implemented to permit a purchaser to pay for his or her shares
with funds held by or deposited with Webb or a Selected Dealer. See "- Direct
Community Offering and Public Offering."
Our directors and executive officers may, to a limited extent,
participate in the solicitation of offers to purchase Common Stock. Sales will
be made from a Stock Center located away from the publicly accessible areas
(including teller windows) of the Association's offices. Our other employees may
participate in the offering in administrative capacities, providing clerical
work in effecting a sales transaction or answering questions of a potential
purchaser provided that the content of the employee's responses is limited to
information contained in this Prospectus or other offering document. Other
questions of prospective purchasers will be directed to executive officers or
registered representatives of Webb. Such other employees have been instructed
not to solicit offers to purchase Common Stock or provide advice regarding the
purchase of Common Stock. We will rely on Rule 3a4-1 under the Exchange Act and
sales of Common Stock will be conducted within the requirements of Rule 3a4-1,
so as to permit officers, directors and employees to participate in the sale of
Common Stock. Our officers, directors and employees will not be compensated in
connection with their participation by the payment of commissions or other
remuneration based either directly or indirectly on the transactions in the
Common Stock.
We will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons entitled to subscribe for
shares, pursuant to the Plan of Conversion, reside. However, no shares will be
offered or sold under the Plan of Conversion to any such person who (1) resides
in a foreign country or (2) resides in a state of the United States in which a
small number of persons otherwise eligible to subscribe for shares under the
Plan of Conversion reside or as to which
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we determine that compliance with the securities law of such state would be
impracticable for reasons of cost or otherwise, including, but not limited to, a
requirement that we or any of our officers, directors or employees register,
under the securities laws of such state, as a broker, dealer, salesmen or agent.
No payments will be made in lieu of the granting of subscription rights to any
such person.
Method of Payment for Subscriptions
To purchase shares in the subscription offering, an executed order form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from your deposit account with us (which may be
given by completing the appropriate blanks in the order form), must be received
by us by 12:00 noon, Niles, Ohio time, on ________, 1998. Order forms which are
not received by such time or are executed defectively or are received without
full payment (or appropriate withdrawal instructions) are not required to be
accepted.
To order Common Stock in connection with the direct community offering
and/or the public offering, if any, an executed stock order and account
withdrawal authorization must be received by Webb prior to the termination of
such offering. The date by which orders must be received in the direct community
offering and the public offering will be set by us at the time of commencement
of such offerings, if any; provided however, if the offering is extended beyond
___________, 1998, each subscriber will have the opportunity to maintain, modify
or rescind his or her subscription. In such event, all subscription funds will
be promptly returned with interest to each subscriber unless he or she
affirmatively indicates otherwise. In addition, we are not obligated to accept
orders submitted on photocopies or facsimile order forms.
We have the right to waive or permit the correction of incomplete or
improperly executed forms, but do not represent that we will do so. Once
received, an executed order form or stock order and account withdrawal
authorization may not be modified, amended or rescinded without our consent
unless the Conversion has not been completed by _________, 1998.
Payment for subscriptions in the subscription offering, may be made (i)
in cash if delivered to us in person at our office, (ii) by check or money order
or (iii) by authorization of withdrawal from deposit accounts maintained with
us. Interest will be paid on payments made by cash, check, bank draft or money
order, whether or not the Conversion is complete or terminated, at our current
passbook rate from the date payment is received until the completion or
termination of the Conversion. If payment is made by authorization of withdrawal
from deposit or certificate accounts, the funds authorized to be withdrawn from
such account will continue to accrue interest at the contractual rates until
completion or termination of the Conversion. Such funds will be unavailable to
the depositor until completion or termination of the Conversion.
If a subscriber authorizes us to withdraw the amount of the purchase
price from his certificate account, we will do so as of the effective date of
Conversion. We will waive any applicable penalties for early withdrawal from
certificate accounts at Home Federal for the purpose of purchasing Common Stock.
If the remaining balance in a certificate account is reduced below the
applicable minimum balance requirement at the time that the funds actually are
transferred under the
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authorization, the rate paid on the remaining balance of the certificate will
earn interest at the then-current passbook rate.
A depositor interested in using his or her IRA funds to purchase Common
Stock must do so through a self-directed IRA. Since we do not offer such
accounts, we will allow a depositor to make a trustee-to-trustee transfer of the
IRA funds to a trustee offering a self-directed IRA program with the agreement
that such funds will be used to purchase the Common Stock in the offering. There
will be no early withdrawal or IRS interest penalties for such transfers. The
new trustee would hold the Common Stock in a self-directed account in the same
manner as we now hold the depositor's IRA funds. An annual administrative fee
may be payable to the new trustee. Depositors interested in using funds in a
Home Federal IRA to purchase Common Stock should contact the Stock Center as
soon as possible so that the necessary forms may be forwarded for execution and
returned prior to the Subscription Expiration Date.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather, may pay for such shares of Common Stock
subscribed for the purchase price upon consummation of the Conversion, provided
that there is in force from the time of its subscription until such time, a loan
commitment to lend to the ESOP, at such time, the aggregate purchase price of
the shares for which it subscribed.
For information regarding the submission of orders in connection with
the direct community offering and the public offering, see "- Direct Community
Offering and Public Offering."
All refunds and any interest due will be paid after completion of the
Conversion. Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the last address of such persons appearing on the
records of the Association, or to such other address as may be specified in
properly completed order forms, as soon as practicable following consummation of
the sale of all shares of Common Stock. Any certificates returned as
undeliverable will be disposed of in accordance with applicable law.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Subscription Expiration Date in accordance with Rule 15c2-8 under
the Exchange Act, no prospectus will be mailed any later than five days prior to
such date or hand delivered any later than two days prior to such date.
Execution of the order form will confirm receipt or delivery in accordance with
Rule 15c2-8. Order forms will only be distributed with a prospectus. We will
accept for processing only orders submitted on original order forms. Photocopies
or facsimile copies of order forms will not be accepted. Payment by cash, check,
money order, bank draft or debit authorization to an existing account at the
Association must accompany the order form. No wire transfers will be accepted.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (March 31,
1997), Supplemental Eligibility Record Date (_______ __, 1998) and/or the Voting
Record Date (_____ __, 1998) must list all accounts on the order form giving all
names on each account and the account number as of the
applicable record date.
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In addition to the foregoing, if shares are offered through Selected
Dealers, a purchaser may pay for his shares with funds held by or deposited with
a Selected Dealer. If an order form is executed and forwarded to the Selected
Dealer or if the Selected Dealer is authorized to execute the order form on
behalf of a purchaser, the Selected Dealer is required to forward the order form
and funds to us for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the Selected Dealer. Alternatively, Selected Dealers may solicit indications
of interest from their customers who indicated an interest and seek their
confirmation as to their intent to purchase. Those indicating an intent to
purchase shall forward executed order forms to their Selected Dealer or
authorize the Selected Dealer to execute such forms. The Selected Dealer will
acknowledge receipt of the order to its customer in writing on the following
business day and will debit such customer's account on the third business day
after the customer has confirmed his intent to purchase (the "debit date") and
on or before noon of the next business day following the debit date will send
order forms and funds to us for deposit in a segregated account. If such
alternative procedure is employed, purchasers' funds are not required to be in
their accounts with Selected Dealers until the debit date.
Restrictions on Transfer of Subscription Rights and Shares
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights, including Eligible
Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account
Holders, Other Members and employees, officers and directors, from transferring
or entering into any agreement or understanding to transfer the legal or
beneficial ownership of the subscription rights issued under the Plan or the
shares of Common Stock to be issued upon their exercise. Such rights may be
executed only by the person to whom they are granted and only for his account.
Each person exercising such subscription rights will be required to certify that
he is purchasing shares solely for his own account and that he has no agreement
or understanding regarding the sale or transfer of such shares. The OTS
regulations also prohibit any person from offering or making an announcement of
an offer or intent to make an offer to purchase such subscription rights or
shares of Common Stock prior to the completion of the Conversion.
We may pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
known by us to involve the transfer of such rights.
Except as to our directors and executive officers, the shares of Common
Stock sold in the Conversion will be freely transferable. Shares purchased by
our directors, executive officers or their associates in the Conversion shall be
subject to the restrictions that said shares shall not be sold during the period
of one year following the date of purchase, except in the event of the death of
the stockholder. Accordingly, stock certificates issued by the Company to
directors, executive officers and their associates shall bear a legend giving
appropriate notice of such restriction and, in addition, the Company will give
appropriate instructions to the transfer agent for the Common Stock with respect
to the applicable restriction upon transfer of any restricted shares. Any shares
issued at a later date as a stock dividend, stock split or otherwise, to holders
of restricted stock, shall be subject to the same restrictions that may apply to
such restricted stock. Company stock (like the stock of most companies) is
subject to the requirements of the Securities Act. Accordingly, Company stock
may
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be offered and sold only in compliance with registration requirements or
pursuant to an applicable exemption from registration.
Common Stock received in the Conversion by persons who are not
"affiliates" of the Company may be resold without registration. Shares received
by affiliates of the Company (primarily the directors, officers and principal
stockholders of the Company) will be subject to the resale restrictions of Rule
144 under the Securities Act, which are discussed below.
Rule 144 generally requires that there be publicly available certain
information concerning the Company, and that sales thereunder be made in routine
brokerage transactions or through a market maker. If the conditions of Rule 144
are satisfied, each affiliate (or group of persons acting in concert with one or
more affiliates) is entitled to sell in the public market, without registration,
in any three-month period, a number of shares which does not exceed the greater
of (i) 1% of the number of outstanding shares of Common Stock, or (ii) if the
stock is admitted to trading on a national securities exchange or reported
through the automated quotation system of a registered securities bank, the
average weekly reported volume of trading during the four weeks preceding the
sale.
Participation by the Board and Executive Officers
Our directors and executive officers have indicated their intention to
purchase in the Conversion an aggregate of $1.5 million of Common Stock, equal
to 8.82%, 7.50%, 6.52% or 5.67% of the number of shares to be issued in the
offering, at the minimum, midpoint, maximum and adjusted maximum of the
Estimated Valuation Range, respectively. The following table sets forth
information regarding subscription rights to Common Stock intended to be
exercised by each of our directors, including members of their immediate family
and their IRAs, and by all directors and executive officers as a group. The
following table assumes that 1,970,000 shares, the midpoint of the Estimated
Valuation Range, of Common Stock are issued at the purchase price of $10.00 per
share and that 30,000 shares are issued to the Foundation. The table does not
include shares to be purchased through the proposed ESOP or awarded under the
proposed restricted stock plan or proposed Stock Option Plan.
Number of
Aggregate Shares at Percent of
Purchase $10.00 per Shares at
Name Title Price Share(1) Midpoint
- ---- ----- --------- --------- ----------
William L. Stephens Director, President and $300,000 30,000 1.50%
Chief Executive Officer
George J. Swift Director, Vice President 300,000 30,000 1.50
and Secretary
Ralph A. Zuzolo, Sr. Director 300,000 30,000 1.50
Horace L. McLean Director 150,000 15,000 .75
P. James Kramer Director 300,000 30,000 1.50
Lawrence Safarek Treasurer 150,000 15,000 .75
-------- -------
$1,500,000 150,000 7.50
========== =======
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Risk of Delay in Completion of the Offering
The completion of the sale of all unsubscribed shares in the offering
will be dependent, in part, upon our operating results and market conditions at
the time of the offering. Under the Plan of Conversion, all shares offered in
the Conversion must be sold within a period ending 24 months from the date of
the Special Meeting. While we anticipate completing the sale of shares offered
in the Conversion within this period, if our Board of Directors are of the
opinion that economic conditions generally or the market for publicly traded
thrift institution stocks make undesirable a sale of the Common Stock, then the
offering may be delayed until such conditions improve. If the offering is
extended beyond ________ 1998, all subscribers will have the right to modify or
rescind their subscriptions and to have their subscription funds returned with
interest. There can be no assurance that the offering will not be extended as
set forth above.
A material delay in the completion of the sale of all unsubscribed
shares in the offering or otherwise may result in a significant increase in the
costs of completing the Conversion. Significant changes in our operations and
financial condition, the aggregate market value of the shares to be issued in
the Conversion and general market conditions may occur during such material
delay. In the event the Conversion is not consummated within 24 months after the
date of the Special Meeting of Members, we would charge accrued Conversion costs
to then current period operations.
Approval, Interpretation, Amendment and Termination
All interpretations of the Plan of Conversion, as well as the
completeness and validity of order forms and stock order and account withdrawal
authorizations, will be made by us and will be final, subject to the authority
of the OTS and the requirements of applicable law. The Plan of Conversion
provides that, if deemed necessary or desirable by the Boards of Directors of
the Association and the Company, the Plan of Conversion may be substantively
amended by the Boards of Directors of the Association and the Company, as a
result of comments from regulatory authorities or otherwise, at any time with
the concurrence of the OTS. In the event the Plan of Conversion is substantially
amended, other than a change in the maximum purchase limits set forth herein, we
intend to notify subscribers of the change and to refund subscription funds with
interest unless subscribers affirmatively elect to increase, decrease or
maintain their subscriptions. The Plan of Conversion will terminate if the sale
of all shares is not completed within 24 months after the date of the Special
Meeting of Members. The Plan of Conversion may be terminated by a two-thirds
vote of the our Board of Directors at any time prior to the Special Meeting of
Members, and at any time following such Special Meeting with the concurrence of
the OTS. A specific resolution approved by a majority vote of our Board of
Directors would be required to terminate the Plan of Conversion prior to the end
of such 24-month period.
Restrictions on Repurchase of Stock
Generally, during the first year following the conversion, the Company
may not repurchase its shares and during each of the second and third years
following the conversion, the Company may repurchase up to five percent of the
outstanding shares provided they are purchased in open-market transactions.
Repurchases must not cause us to become undercapitalized and at least 10 days
prior notice of the repurchase must be provided to the OTS. The OTS may
disapprove a repurchase
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program upon a determination that (1) the repurchase program would adversely
affect our financial condition, (2) the information submitted is insufficient
upon which to base a conclusion as to whether the financial condition would be
adversely affected, or (3) a valid business purpose was not demonstrated.
However, the OTS may grant special permission to repurchase shares after six
months following the conversion and to repurchase more than five percent during
each of the second and third years. In addition, SEC rules also govern the
method, time, price, and number of shares of common stock that may be
repurchased by the Company and affiliated purchasers. If, in the future, the
rules and regulations regarding the repurchase of stock are liberalized, the
Company may utilize the rules and regulations then in effect.
Income Tax Consequences
Consummation of the Conversion is expressly conditioned upon our prior
receipt of either a ruling from the IRS or an opinion of Silver, Freedman &
Taff, L.L.P. with respect to federal taxation, and an opinion of Anness, Gerlach
& Williams with respect to Ohio taxation, to the effect that consummation of the
Conversion will not be taxable to the converted Association or the Company. The
full text of the Silver, Freedman & Taff, L.L.P. opinion, the Keller Letter
(hereinafter defined) and the Anness, Gerlach & Williams opinion, which opinions
are summarized herein, were filed with the SEC as exhibits to the Company's
Registration Statement on Form S-1. See "Additional Information."
An opinion which is summarized below has been received from Silver,
Freedman & Taff, L.L.P. with respect to our proposed Conversion to the stock
form. The Silver, Freedman Taff, L.L.P. opinion states that (i) the Conversion
will qualify as a reorganization under Section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended, and no gain or loss will be recognized to the
Association in either its mutual form or its stock form by reason of the
proposed Conversion, (ii) no gain or loss will be recognized to the Association
in its stock form upon the receipt of money and other property, if any, from the
Company for the stock of the Association; and no gain or loss will be recognized
to the Company upon the receipt of money for Common Stock of the Company; (iii)
the assets of the Association in either its mutual or its stock form will have
the same basis before and after the Conversion; (iv) the holding period of the
assets of the Association in its stock form will include the period during which
the assets were held by the Association in its mutual form prior to Conversion;
(v) gain, if any, will be realized by the depositors of the Association upon the
constructive issuance to them of withdrawable deposit accounts of the
Association in its stock form, nontransferable subscription rights to purchase
Common Stock and/or interests in the Liquidation Account (any such gain will be
recognized by such depositors, but only in an amount not in excess of the fair
market value of the subscription rights and Liquidation Account interests
received); (vi) the basis of the account holder's savings accounts in the
Association after the Conversion will be the same as the basis of his or her
savings accounts in the Association prior to the Conversion; (vii) the basis of
each account holder's interest in the Liquidation Account is assumed to be zero;
(viii) based on the Keller Letter, as hereinafter defined, the basis of the
subscription rights will be zero; (ix) the basis of the Common Stock to its
stockholders will be the purchase price thereof; (x) a stockholder's holding
period for Common Stock acquired through the exercise of subscription rights
shall begin on the date on which the subscription rights are exercised and the
holding period for the Common Stock purchased in the offering will commence on
the date following the date on which such stock is purchased; (xi) the
Association in its stock form will succeed to and take into account the earnings
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and profits or deficit in earnings and profits, of the Association, in its
mutual form, as of the date of Conversion; (xii) the Association, immediately
after Conversion, will succeed to and take into account the bad debt reserve
accounts of the Association, in mutual form, and the bad debt reserves will have
the same character in the hands of the Association after Conversion as if no
Conversion had occurred; and (xiii) the creation of the Liquidation Account will
have no effect on the Association's taxable income, deductions or addition to
reserve for bad debts either in its mutual or stock form.
The opinion from Silver, Freedman & Taff, L.L.P. is based on, among
other things, certain assumptions, including the assumptions that the exercise
price of the subscription rights to purchase Common Stock will be approximately
equal to the fair market value of that stock at the time of the completion of
the proposed Conversion. With respect to the subscription rights, we have
received a letter from Keller & Company (the "Keller Letter") which concludes,
based on certain assumptions, that the subscription rights to be received by
Eligible Account Holders, Supplemental Eligible Account Holders and other
eligible subscribers do not have any economic value at the time of distribution
or at the time the subscription rights are exercised, whether or not an offering
takes place.
We have also received an opinion of Silver, Freedman & Taff, L.L.P. to
the effect that, based in part on the Keller Letter: (i) no taxable income will
be realized by depositors as a result of the exercise of non-transferable
subscription rights to purchase shares of Common Stock at fair market value;
(ii) no taxable income will be recognized by borrowers, directors, officers and
employees of the Association on the receipt or exercise of subscription rights
to purchase shares of Common Stock at fair market value; and (iii) no taxable
income will be realized by the Association or Company on the issuance of
subscription rights to eligible subscribers to purchase shares of Common Stock
at fair market value.
Notwithstanding the Keller Letter, if the subscription rights are
subsequently found to have a fair market value and are deemed a distribution of
property, it is Silver, Freedman & Taff, L.L.P.'s opinion that gain or income
will be recognized by various recipients of the subscription rights (in certain
cases, whether or not the rights are exercised) and that we may be taxable on
the distribution of the subscription rights.
With respect to Ohio taxation, we have received an opinion from Anness,
Gerlach & Williams to the effect that the Ohio tax consequences to the
Association, in its mutual or stock form, the Company, eligible account holders,
parties receiving subscription rights, parties purchasing conversion stock, and
other parties participating in the Conversion will be the same as the federal
income tax consequences described above.
Unlike a private letter ruling, the opinions of Silver, Freedman &
Taff, L.L.P. and Anness, Gerlach & Williams, as well as the Keller Letter, have
no binding effect or official status, and no assurance can be given that the
conclusions reached in any of those opinions would be sustained by a court if
contested by the IRS or the Delaware or Ohio tax authorities.
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<PAGE>
RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although we are not aware of any effort that might be made to obtain
control of the Company after Conversion, we, as discussed below, believe that it
is appropriate to include certain provisions as part of the Company's
certificate of incorporation to protect the interests of the Company and its
stockholders from takeovers which the Board of Directors of the Company might
conclude are not in the best interests of Home Federal, the Company or the
Company's stockholders.
The following discussion is a general summary of material provisions of
the Company's certificate of incorporation and bylaws and certain other
regulatory provisions which may be deemed to have an "anti-takeover" effect. The
following description of certain of these provisions is necessarily general and,
with respect to provisions contained in the Company's certificate of
incorporation and bylaws and the Association's proposed stock charter and
bylaws, reference should be made in each case to the document in question, each
of which is part of our Conversion Application filed with the OTS and the
Company's Registration Statement filed with the SEC. See "Additional
Information."
Provisions of the Company's Certificate of Incorporation and Bylaws
Directors. Certain provisions of the Company's certificate of
incorporation and bylaws will impede changes in majority control of the Board of
Directors. The Company's certificate of incorporation provides that the Board of
Directors of the Company will be divided into three classes, with directors in
each class elected for three-year staggered terms except for the initial
directors. Thus, assuming a Board of three directors or more, it would take two
annual elections to replace a majority of the Company's Board. The Company's
certificate of incorporation also provides that the size of the Board of
Directors may be increased or decreased only by a majority vote of the whole
Board or by a vote of 80% of the shares eligible to be voted at a duly
constituted meeting of stockholders called for such purpose. The bylaws also
provide that any vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the number of directors, shall be filled for
the remainder of the unexpired term by a majority vote of the directors then in
office. Final ly, the bylaws impose certain notice and information requirements
in connection with the nomination by stockholders of candidates for election to
the Board of Directors or the proposal by stockholders of business to be acted
upon at an annual meeting of stockholders.
The certificate of incorporation provides that a director may only be
removed for cause by the affirmative vote of 80% of the shares eligible to vote.
Restrictions on Call of Special Meetings. The certificate of
incorporation of the Company provides that a special meeting of stockholders may
be called only pursuant to a resolution of the Board of Directors and for only
such business as directed by the Board. Stockholders are not authorized to call
a special meeting.
Absence of Cumulative Voting. The Company's certificate of
incorporation does not provide for cumulative voting rights in the election of
directors.
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<PAGE>
Authorization of Preferred Stock. The certificate of incorporation of
the Company authorizes 500,000 shares of serial preferred stock, $.01 par value.
The Company is authorized to issue preferred stock from time to time in one or
more series subject to applicable provisions of law, and the Board of Directors
is authorized to fix the designations, powers, preferences and relative
participating, optional and other special rights of such shares, including
voting rights (which could be multiple or as a separate class) and conversion
rights. In the event of a proposed merger, tender offer or other attempt to gain
control of the Company that the Board of Directors does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede the completion of
such a transaction. If the Company issued any preferred stock which disparately
reduced the voting rights of the Common Stock within the meaning of Rule 19c-4
under the Exchange Act, the Common Stock could be required to be delisted from
the Nasdaq System. An effect of the possible issuance of preferred stock,
therefore, may be to deter a future takeover attempt. The Board of Directors has
no present plans or understandings for the issuance of any preferred stock and
does not intend to issue any preferred stock except on terms which the Board
deems to be in the best interests of the Company and its stockholders.
Limitation on Voting Rights. The certificate of incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit"), be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. This limitation would not inhibit any person
from soliciting (or voting) proxies from other beneficial owners for more than
10% of the Common Stock or from voting such proxies. Beneficial ownership is to
be determined pursuant to Rule 13d-3 of the General Rules and Regulations of the
Exchange Act, and in any event includes shares beneficially owned by any
affiliate of such person, shares which such person or his affiliates (as defined
in the certificate of incorporation) have the right to acquire upon the exercise
of conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by directors, officers and employees of the
Association or the Company. This provision will be enforced by the Board of
Directors to limit the voting rights of persons beneficially owning more than
10% of the stock and thus could be utilized in a proxy contest or other
solicitation to defeat a proposal that is desired by a majority of the
stockholders.
Procedures for Certain Business Combinations. The Company's certificate
of incorporation requires that certain business combinations (including
transactions initiated by management) between the Company (or any majority-owned
subsidiary thereof) and a 10% or more stockholder either (i) be approved by at
least 80% of the total number of outstanding voting shares, voting as a single
class, of the Company, (ii) be approved by two-thirds of the continuing Board of
Directors (i.e., persons serving prior to the 10% stockholder becoming such) or
(iii) involve consideration per share generally equal to that paid by such 10%
stockholder when it acquired its block of stock.
It should be noted that, since the Board and management (6 persons)
intend to purchase approximately $1.5 million of the shares offered in the
Conversion and may control the voting of additional shares through the ESOP and
proposed restricted stock plan and Stock Option Plan, the Board and management
may be able to block the approval of combinations requiring an 80% vote even
where a majority of the stockholders vote to approve such combinations.
-103-
<PAGE>
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Company's certificate of incorporation must be approved by the Company's Board
of Directors and also by a majority of the outstanding shares of the Company's
voting stock, provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to number, classification, election and removal of
directors; amendment of bylaws; call of special stockholder meetings; offers to
acquire and acquisitions of control; director liability; certain business
combinations; power of indemnification; and amendments to provisions relating to
the foregoing in the certificate of incorporation).
The bylaws may be amended by a majority vote of the Board of Directors
or the affirmative vote of at least 80% of the total votes eligible to be voted
at a duly constituted meeting of stockholders.
Purpose and Takeover Defensive Effects of the Company's Certificate of
Incorporation and Bylaws. We believe that the provisions described above are
prudent and will reduce the Company's vulnerability to takeover attempts and
certain other transactions which have not been negotiated with and approved by
its Board of Directors. These provisions will also assist us in the orderly
deployment of the conversion proceeds into productive assets during the initial
period after the Conversion. We believe these provisions are in the best
interest of the Association and of the Company and its stockholders. In our
judgment, the Company's Board will be in the best position to determine the true
value of the Company and to negotiate more effectively for what may be in the
best interests of its stockholders. Accordingly, we believe that it is in the
best interests of the Company and its stockholders to encourage potential
acquirors to negotiate directly with the Board of Directors of the Company and
that these provisions will encourage such negotiations and discourage hostile
takeover attempts. It is also our view that these provisions should not
discourage persons from proposing a merger or other transaction at prices
reflective of the true value of the Company and which is in the best interests
of all stockholders.
Attempts to take over financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the Company
and its stockholders, with due consideration given to matters such as the
management and business of the acquiring corporation and maximum strategic
development of the Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Company's remaining stockholders of the benefits of certain protective
provisions of the Exchange
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<PAGE>
Act, if the number of beneficial owners becomes less than the 300 required for
Exchange Act registration.
Despite our belief as to the benefits to stockholders of these
provisions of the Company's certificate of incorporation and bylaws, these
provisions may also have the effect of discouraging a future takeover attempt
which would not be approved by the Company's Board, but pursuant to which
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have any opportunity to do so. Such provisions
will also render the removal of the Company's Board of Directors and of
management more difficult. The Company will enforce the voting limitation
provisions of the certificate of incorporation in proxy solicitations and
accordingly could utilize these provisions to defeat proposals that are favored
by a majority of the stockholders. We, however, have concluded that the
potential benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Company may adopt additional charter
provisions regarding the acquisition of its equity securities that would be
permitted to a Delaware corporation. The Company does not presently intend to
propose the adoption of further restrictions on the acquisition of the Company's
equity securities.
Other Restrictions on Acquisitions of Stock
Delaware Anti-Takeover Statute. The Delaware General Corporation Law
(the "DGCL") provides that buyers who acquire more than 15% of the outstanding
stock of a Delaware corporation, such as the Company, are prohibited from
completing a hostile takeover of such corporation for three years. However, the
takeover can be completed if (i) the buyer, while acquiring the 15% interest,
acquires at least 85% of the corporation's outstanding stock (the 85%
requirement excludes shares held by directors who are also officers and certain
shares held under employee stock plans), or (ii) the takeover is approved by the
target corporation's board of directors and two-thirds of the shares of
outstanding stock of the corporation (excluding shares held by the bidder).
However, these provisions of the DGCL do not apply to Delaware
corporations with less than 2,000 stockholders or which do not have voting stock
listed on a national exchange or listed for quotation with a registered national
securities association. No prediction can be made as to whether the Company will
be listed on the Nasdaq Stock Market or have 2,000 stockholders. The Company may
exempt itself from the requirements of the statute by adopting an amendment to
its Certificate of Incorporation or Bylaws electing not to be governed by this
provision. At the present time, the Board of Directors does not intend to
propose any such amendment.
Federal Regulation. A federal regulation prohibits any person prior to
the completion of a conversion from transferring, or entering into any agreement
or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, this regulation prohibits any person, without
the prior approval of the OTS, from acquiring or making an offer to
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<PAGE>
acquire (if the offer is opposed by the savings association) more than 10% of
the stock of any converted savings institution if such person is, or after
consummation of such acquisition would be, the beneficial owner of more than 10%
of such stock. In the event that any person, directly or indirectly, violates
this regulation, the securities beneficially owned by such person in excess of
10% may not be counted as shares entitled to vote and may not be voted by any
person or counted as voting shares in connection with any matter submitted to a
vote of stockholders. Like the charter provisions outlined above, these federal
regulations can make a change in control more difficult, even if desired by the
holders of the majority of the shares of the stock. We reserve the right to ask
the OTS or other federal regulators to enforce these restrictions against
persons seeking to obtain control of the Company, whether in a proxy
solicitation or otherwise. Our policy is that these legal restrictions must be
observed in every case, including instances in which an acquisition of control
of the Company is favored by a majority of the stockholders.
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition,
federal regulations require that, prior to obtaining control of a savings
association, a person, other than a company, must give 60 days' prior notice to
the OTS and have received no OTS objection to such acquisition of control. Any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Under federal law (as well as the regulations referred to
below) the term "savings association" includes state and federally chartered
SAIF-insured institutions and federally chartered savings banks whose accounts
are insured by the FDIC's BIF and holding companies thereof.
Control, as defined under federal law, in general means ownership,
control of or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a majority of a
savings association's directors, or a determination by the OTS that the acquiror
has the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of any class of a savings association's voting stock, if the
acquiror also is subject to any one of eight "control factors," constitutes a
rebuttable determination of control under the OTS regulations. Such control
factors include the acquiror being one of the two largest stockholders. The
determination of control may be rebutted by submission to the OTS, prior to the
acquisition of stock or the occurrence of any other circumstances giving rise to
such determination, of a statement setting forth facts and circumstances which
would support a finding that no control relationship will exist and containing
certain undertakings. The OTS regulations provide that persons or companies
which acquire beneficial ownership exceeding 10% or more of any class of a
savings association's stock must file with the OTS a certification that the
holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
-106-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The 6,500,000 shares of capital stock authorized by the Company's
certificate of incorporation are divided into two classes, consisting of
6,000,000 shares of Common Stock (par value $.01 per share) and 500,000 shares
of serial preferred stock (par value $.01 per share). The Company currently
expects to issue (not including the Stock Contribution) between 1,670,000 and
2,270,000 shares (subject to increase to 2,615,000) of Common Stock in the
Conversion and no shares of serial preferred stock. The aggregate par value of
the issued shares will constitute the capital account of the Company on a
consolidated basis. Upon payment of the purchase price, all shares issued in the
Conversion will be duly authorized, fully paid and nonassessable. The balance of
the purchase price of Common Stock, less expenses of Conversion, will be
reflected as paid-in capital on a consolidated basis. See "Capitalization."
Common Stock
Each share of the Common Stock will have the same relative rights and
will be identical in all respects with each other share of the Common Stock. The
Common Stock will represent non-withdrawable capital, will not be of an
insurable type and will not be insured by the FDIC.
Voting Rights. Under Delaware law, the holders of the Common Stock will
possess exclusive voting power in the Company. Each stockholder will be entitled
to one vote for each share held on all matters voted upon by stockholders,
subject to the limitation discussed under "Restrictions on Acquisitions of Stock
and Related Takeover Defensive Provisions - Provisions of the Company's
Certificate of Incorporation and Bylaws - Limitation on Voting Rights." If the
Company issues preferred stock subsequent to the Conversion, holders of the
preferred stock may also possess voting powers.
Liquidation or Dissolution. In the event of any liquidation,
dissolution or winding up of the Association, the Company, as the sole holder of
the Association's capital stock would be entitled to receive, after payment or
provision for payment of all debts and liabilities of the Association (including
all deposit accounts and accrued interest thereon) and after distribution of the
balance in the special liquidation account to Eligible and Supplemental Account
Holders, all assets of the Association available for distribution. In the event
of liquidation, dissolution or winding up of the Company, the holders of its
Common Stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of the Company
available for distribution. See "The Conversion - Effects of Conversion to Stock
Form on Depositors and Borrowers of the Association." If preferred stock is
issued subsequent to the Conversion, the holders thereof may have a priority
over the holders of Common Stock in the event of liquidation or dissolution.
No Preemptive Rights. Holders of the Common Stock will not be entitled
to preemptive rights with respect to any shares which may be issued. The Common
Stock will not be subject to call for redemption, and, upon receipt by the
Company of the full purchase price therefor, each share of the Common Stock will
be fully paid and nonassessable.
Preferred Stock. After Conversion, the Board of Directors of the
Company will be authorized to issue preferred stock in series and to fix and
state the voting powers, designations,
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<PAGE>
preferences and relative, participating, optional or other special rights of the
shares of each such series and the qualifications, limitations and restrictions
thereof. Preferred stock may rank prior to the Common Stock as to dividend
rights, liquidation preferences, or both, and may have full or limited voting
rights. The holders of preferred stock will be entitled to vote as a separate
class or series under certain circumstances, regardless of any other voting
rights which such holders may have.
Except as discussed above, the Company has no present plans for the
issuance of the additional authorized shares of Common Stock or for the issuance
of any shares of preferred stock. In the future, the authorized but unissued and
unreserved shares of Common Stock will be available for general corporate
purposes, including but not limited to possible issuance as stock dividends or
stock splits, in future mergers or acquisitions, under a cash dividend
reinvestment and stock purchase plan, in a future underwritten or other public
offering, or under a stock based employee plan. The authorized but unissued
shares of preferred stock will similarly be available for issuance in future
mergers or acquisitions, in a future underwritten public offering or private
placement or for other general corporate purposes. Except as described herein or
as otherwise required to approve the transaction in which the additional
authorized shares of common stock or authorized shares of preferred stock would
be issued, no stockholder approval will be required for the issuance of these
shares. Accordingly, the Board of Directors of the Company, without stockholder
approval, can issue preferred stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock.
LEGAL AND TAX MATTERS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for us by the firm of Silver,
Freedman & Taff, L.L.P. (a limited liability partnership including professional
corporations), 7th Floor, East Tower, 1100 New York Avenue, NW, Washington, DC
20005. Silver, Freedman & Taff, L.L.P. has consented to the references herein to
its opinions. The Ohio income tax consequences of the Conversion will be passed
upon by Anness, Gerlach & Williams. Anness, Gerlach & Williams has consented to
the references herein to its opinion. Certain legal matters are being passed
upon for Webb by its legal counsel, Vorys, Sater, Seymour and Pease LLP,
Cincinnati, Ohio.
EXPERTS
The consolidated financial statements of Home Federal as of December
31, 1997 and 1996 and for the three-year period ended December 31, 1997 included
in this Prospectus have been audited by Anness, Gerlach & Williams, independent
auditors, as indicated in their report which is included herein and has been so
included in reliance upon such report, given the authority of that firm as
experts in accounting and auditing.
Keller & Company has consented to the inclusion herein of the summary
of the Keller Letter setting forth its opinion as to the estimated pro forma
market value of the Company and the Association as converted and to the
reference to its opinion that subscription rights received by Eligible Account
Holders, Supplemental Eligible Account Holders and other eligible subscribers do
not have any economic value.
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<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the Registration Statement. However, the Prospectus
does contain a description of the material provisions of the documents contained
therein. Such information can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, NW, Washington, DC 20549, and
copies of such material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a Web site. The address of the SEC's Web site is
"http://www.sec.gov." The statements contained herein as to the contents of any
contract or other document filed as an exhibit to the Registration Statement
are, of necessity, brief descriptions thereof which describe only the material
provisions of such documents; each such statement is qualified by reference to
such contract or document.
We have filed an Application for Conversion with the OTS with respect
to the Conversion. Pursuant to the rules and regulations of the OTS, this
Prospectus omits certain information contained in those Applications. The
Applications may be examined at the principal offices of the OTS, 1700 G Street,
NW, Washington, DC 20552 and at the Central Regional Office of the OTS, Suite
1300, 200 West Madison Street, Chicago, Illinois 60606, without charge.
In connection with the Conversion, the Company will register the Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its Common Stock will become
subject to the proxy solicitation rules, reporting requirements and restrictions
on stock purchases and sales by directors, officers and greater than 10%
stockholders, the annual and periodic reporting and certain other requirements
of the Exchange Act. Under the Plan, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion.
A copy of the Certificate of Incorporation and Bylaws of the Company
are available without charge from the Association.
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NILES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets at April 30, 1998 (unaudited) and
December 31, 1997 and 1996............................................................................... F-3
Consolidated Income Statements for the Four Months Ended April 30, 1998 and 1997
(unaudited) and the Years Ended
December 31, 1997, 1996 and 1995.......................................................................... F-4
Consolidated Statements of Changes in Equity for the Four Months Ended April 30,
1998 (unaudited) and the Years Ended December 31, 1997,
1996 and 1995............................................................................................ F-5
Consolidated Statements of Cash Flows for the Four Months Ended April 30, 1998
and 1997 (unaudited) and the Years Ended
December 31, 1997, 1996 and 1995......................................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-9
</TABLE>
All schedules are omitted because the required information is not
applicable or is included in the Consolidated Financial Statements and related
Notes.
The financial statements of the Company have been omitted because the
Company has not yet issued any stock, has no assets, no liabilities and has not
conducted any business other than that of an organizational nature.
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Home Federal Savings and Loan
Association of Niles
Niles, Ohio
We have audited the consolidated statements of financial position of Home
Federal Savings and Loan Association of Niles and Subsidiary as of December 31,
1997 and 1996, and the related consolidated statements of income, equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Association's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Home Federal
Savings and Loan Association of Niles and Subsidiary as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/Anness Gerlach & Williams
February 2, 1998, except for
Note M as to which the date is July 6, 1998
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
(In Thousands)
<TABLE>
<CAPTION>
December 31
April 30, -----------------
1998 1997 1996
----------- ------- -------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Noninterest bearing ............................... $ 545 $ 819 $ 656
Interest bearing .................................. 4,955 4,057 1,577
------- ------- -------
TOTAL CASH AND CASH EQUIVALENTS ............... 5,500 4,876 2,233
Securities available for sale - at market ........... 17,184 17,447 20,824
Securities to be held to maturity - at cost ......... 12,589 12,359 13,900
Loans receivable .................................... 36,151 36,744 33,183
Accrued interest receivable ......................... 3 1 30
Federal Home Loan Bank stock, at cost ............... 301 294 274
Real estate investment-limited partnership, at equity 412 426 464
Prepaid expenses and other assets ................... 112 36 25
Prepaid federal income taxes ........................ -- 20 24
Premises and equipment, at cost less
accumulated depreciation .......................... 287 294 256
------- ------- -------
TOTAL ASSETS .................................. $72,539 $72,497 $71,213
======= ======= =======
LIABILITIES
Deposits ............................................ $57,765 $57,854 $57,673
Accrued interest payable ............................ 185 127 114
Accounts payable and other liabilities .............. 823 798 656
Note payable ........................................ 400 400 500
Federal income tax payable .......................... 30 -- --
Deferred federal income tax liability ............... 54 155 107
------- ------- -------
TOTAL LIABILITIES 59,257 59,334 59,050
EQUITY
Retained earnings substantially restricted .......... 12,186 11,899 11,513
Net unrealized gain on securities available
for sale, net of related tax effects of $564
in 1998, $651 in 1997 and $335 in 1996 ............ 1,096 1,264 650
------- ------- -------
13,282 13,163 12,163
------- ------- -------
TOTAL LIABILITIES AND EQUITY .................. $72,539 $72,497 $71,213
======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
(In Thousands)
<TABLE>
<CAPTION>
Four Months Ended
April 30 Year Ended December 31
----------------- ------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable:
First mortgage loans ............... $ 983 $ 900 $2,851 $2,415 $2,205
Consumer and other loans ........... 33 36 108 95 77
Mortgage-backed and related securities 250 237 665 845 760
Investments .......................... 328 441 1,170 1,284 1,382
Interest-bearing deposits ............ 77 38 208 141 225
------ ------ ------ ------ ------
TOTAL INTEREST INCOME ............ 1,671 1,652 5,002 4,780 4,649
Interest expense:
Deposits ............................. 812 778 2,433 2,397 2,290
Borrowings ........................... 12 15 43 5 --
------ ------ ------ ------ ------
TOTAL INTEREST EXPENSE ........... 824 793 2,476 2,402 2,290
------ ------ ------ ------ ------
NET INTEREST INCOME .............. 847 859 2,526 2,378 2,359
Provision for loan losses .............. 20 -- 700 40 60
------ ------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ........ 827 859 1,826 2,338 2,299
Noninterest income:
Gain on sale of investments .......... 461 -- -- -- --
Service fees and other ............... 8 8 27 23 26
------ ------ ------ ------ ------
TOTAL NONINTEREST INCOME ......... 469 8 27 23 26
Noninterest expense:
Equity in loss of limited partnership 14 13 38 36 --
General and administrative:
Compensation and benefits .......... 745 297 869 822 747
Occupancy and equipment ............ 38 35 81 81 62
Federal deposit insurance premiums . 12 5 30 510 134
Other operating expense ............ 81 107 362 302 270
------ ------ ------ ------ ------
TOTAL NONINTEREST EXPENSE ........ 890 457 1,380 1,751 1,213
------ ------ ------ ------ ------
INCOME BEFORE INCOME TAXES ....... 406 410 473 610 1,112
Federal income taxes ................... 119 112 87 184 378
------ ------ ------ ------ ------
NET INCOME ....................... $ 287 $ 298 $ 386 $ 426 $ 734
====== ====== ====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF EQUITY
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Years ended December 31, 1997, 1996 and 1995
(In Thousands)
Accumulated Other
Retained Comprehensive Total
Earnings Income (Loss) Equity
-------- ----------------- -------
Balance at January 1, 1995 ............. $10,353 ($ 328) $10,025
Comprehensive income:
Net income for the year .............. 734 -- 734
Other comprehensive income:
Unrealized gains on securities
available for sale, net of
related tax effects of $463 ........ -- 899 899
------- ------- -------
COMPREHENSIVE INCOME ............. 734 899 1,633
------- ------- -------
BALANCE AT
DECEMBER 31, 1995 ................ 11,087 571 11,658
Comprehensive income:
Net income for the year .............. 426 -- 426
Other comprehensive income:
Unrealized gains on securities
available for sale, net of
related tax effects of $41 ......... -- 79 79
------- ------- -------
COMPREHENSIVE INCOME ............. 426 79 505
------- ------- -------
BALANCE AT
DECEMBER 31, 1996 ................ 11,513 650 12,163
Comprehensive income:
Net income for the year .............. 386 -- 386
Other comprehensive income:
Unrealized gains on securities
available for sale, net of
related tax effects of $316 ........ -- 614 614
------- ------- -------
COMPREHENSIVE INCOME ............. 386 614 1,000
------- ------- -------
BALANCE AT
DECEMBER 31, 1997 ................ 11,899 1,264 13,163
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Years ended December 31, 1997, 1996 and 1995
(In Thousands)
Accumulated Other
Retained Comprehensive Total
Earnings Income (Loss) Equity
-------- ----------------- -------
Comprehensive income:
Net income for the four months ended
April 30, 1998 (unaudited) ......... 287 -- 287
Other comprehensive income:
Unrealized gains on securities
available for sale, net of
related tax effects of $70
(unaudited) ........................ -- 136 136
Less reclassification adjustment,
net of related tax effects of
$157 (unaudited) ................... -- (304) (304)
------- ------- -------
COMPREHENSIVE INCOME ............. 287 (168) 119
------- ------- -------
BALANCE AT APRIL 30,
1998 (UNAUDITED) ................. $12,186 $ 1,096 $13,282
======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
(In Thousands)
<TABLE>
<CAPTION>
Four Months Ended
April 30 Year Ended December 31
------------------ -----------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................... $ 287 $ 298 $ 386 $ 426 $ 734
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes credit ..................... (14) (2) (268) (52) (34)
Depreciation ..................................... 17 12 50 46 23
Amortization of discounts on investments and
mortgage-backed and related securities ......... (7) (15) (32) (86) (155)
Gain on sale of securities available for sale .... (461) -- (4) -- --
Equity in loss of limited partnership ............ 14 13 38 36 --
Provision for loan losses ........................ 20 -- 700 40 60
Income reinvested from liquid asset mutual funds . -- (408) (510) (1,160) (1,147)
Federal Home Loan Bank stock dividends ........... (7) (4) (20) (18) (17)
Net (increase) decrease in accrued interest
receivable and prepaid expenses and other assets (80) (33) 22 47 (6)
Net increase in accrued interest, accounts payable
and other liabilities .......................... 133 182 154 99 88
------- ------- ------- ------- -------
NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES ................. (98) 43 516 (622) (454)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale .. 471 -- 4,821 -- --
Proceeds from securities held to maturity ............ -- -- 1,000 4,000 4,000
Purchase of securities to be held to maturity ........ -- -- -- (1,000) (3,893)
Proceeds from principal payments on mortgage-backed
and related securities ............................. 3,338 2,686 8,445 8,491 8,526
Purchase of mortgage-backed and related securities ... (3,561) -- (7,872) (7,432) (4,976)
Net (increase) decrease in interest-bearing deposits
with banks ......................................... (898) (823) (2,480) 270 1,675
Net increase in loans ................................ 573 (1,964) (4,260) (3,710) (3,288)
Additions to premises and equipment .................. (10) (10) (88) (76) (71)
------- ------- ------- ------- -------
NET CASH PROVIDED BY
(USED IN) INVESTING ACTIVITIES ................. (87) (111) (434) 543 1,973
</TABLE>
F-7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
(In Thousands)
<TABLE>
<CAPTION>
Four Months Ended
April 30 Year Ended December 31
------------------ -----------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in savings accounts ...................... (449) (684) (653) (932) (4,058)
Net increase in certificates of deposit ............... 360 690 834 831 2,640
Scheduled payment on note payable ..................... -- -- (100) -- --
----- ----- ------- ------- -------
NET CASH PROVIDED BY
(USED IN) FINANCING ACTIVITIES .................. (89) 6 81 (101) (1,418)
----- ----- ------- ------- -------
NET INCREASE (DECREASE) IN CASH ................. (274) (62) 163 (180) 101
CASH AT BEGINNING OF YEAR ............................... 819 656 656 836 735
----- ----- ------- ------- -------
CASH AT END OF YEAR ............................. $ 545 $ 594 $ 819 $ 656 $ 836
===== ===== ======= ======= =======
Cash paid during the year for:
Interest on deposits .................................. $ 764 $ 729 $ 2,419 $ 2,403 $ 2,264
Income taxes .......................................... $ 88 $ 33 $ 351 $ 231 $ 426
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITY
During 1996, the Association acquired an interest in a real estate limited
partnership through the issuance of a note payable of $500,000.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Home Federal Savings and Loan Association of Niles (the "Association") is a
federally chartered association conducting a general banking business in Niles,
Ohio (Trumbull County) which consists of attracting deposits from the general
public and applying those funds to the origination of loans for commercial,
consumer, and residential purposes. The Association's profitability is
significantly dependent on its net interest income, which is the difference
between interest income generated from interest-earning assets (i.e., loans and
investments) and the interest expense paid on interest-bearing liabilities
(i.e., customer deposits). Net interest income is affected by the relative
amount of interest-earnings assets and interest-bearing liabilities and the
interest received or paid on these balances. The level of interest rates paid or
received by the Association can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are outside of
management's control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general accounting
practices within the financial services industry. In preparing financial
statements in accordance with GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from such estimates.
The following is a summary of significant accounting policies which have
been consistently applied in the preparation of the accompanying financial
statements.
Investment Securities and Mortgage-Backed and Related Securities:
The Association accounts for investment securities and mortgage-backed and
related securities in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." SFAS No. 115 requires that investments be categorized
as held-to-maturity, trading, or available for sale. Securities classified
as held-to-maturity are carried at cost only if the Association has the
positive intent and ability to hold these securities to maturity. Trading
securities and securities designated as available for sale are carried at
fair value with resulting unrealized gains or losses recorded to operations
or equity, respectively. At April 30, 1998 and December 31, 1997 and 1996,
the Association's equity accounts reflected net unrealized gains of
$1,096,000, $1,264,000 and $650,000, respectively, on securities designated
as available for sale. Realized gains or losses on sales of securities are
recognized using the specific identification method.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans Receivable:
Loans held in portfolio are stated at the principal amount
outstanding, adjusted for the allowance for loan losses and unearned
income. Interest is accrued as earned unless the collectibility of the loan
is in doubt. Uncollectible interest on loans that are contractually past
due is charged off, or an allowance is established based on management's
periodic evaluation. The allowance is established by a charge to interest
income equal to all interest previously accrued, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments has returned to normal, in which case the loan is
returned to accrual status. If the ultimate collectibility of the loan is
in doubt, in whole or in part, all payments received on nonaccrual loans
are applied to reduce principal until such doubt is eliminated.
Loans held for sale are identified at origination and are carried at
the lower of cost or market, determined in the aggregate. In computing
cost, deferred loan origination fees are deducted from the principal
balance of the related loan. At April 30, 1998, December 31, 1997 and 1996,
there were no loans identified as held for sale.
Loan Origination Fees and Costs:
The Association accounts for loan origination fees and costs in
accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." Pursuant to the provisions of SFAS No. 91, all loan origination
fees received, net of direct origination costs, are deferred and amortized
to interest income using the level-yield method, giving effect to actual
loan prepayments. Additionally, SFAS No. 91 generally limits the definition
of loan origination costs to the direct costs attributable to originating a
loan.
Allowance for Loan Losses:
It is the Association's policy to provide valuation allowances for
estimated losses on loans based upon past loss experience, current trends
in the level of delinquent and specific problem loans, loan concentrations
to single borrowers, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral and
current and anticipated economic conditions in the primary market area.
When the collection of a loan becomes doubtful, or otherwise troubled, the
Association records a loan loss provision equal to the difference between
the fair value of the property securing the loan and the loan's carrying
value. Major loans and major lending areas are reviewed periodically to
determine potential problems at an early date. The allowance for loan
losses is increased by charges to earnings and decreased by charge-offs
(net of recoveries).
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Loan Losses (Continued):
The Association accounts for impaired loans in accordance with SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114
requires that impaired loans be measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate
or, as an alternative, at the loans observable market price or fair value
of the collateral.
A loan is defined under SFAS No. 114 as impaired when, based on
current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. In applying the provisions of SFAS No. 114, the Association
considers its investment in one-to-four family residential loans, consumer
installment loans, and credit card loans to be homogeneous and, therefore,
excluded from separate identification for evaluation of impairment. With
respect to the Association's investment in commercial real estate loans,
and its evaluation of impairment thereof, such loans are collateral
dependent and as a result are carried as a practical expedient at the lower
of cost or fair value.
Loans which are more than ninety days delinquent are considered to
constitute more than a minimum delay in repayment and are evaluated for
impairment under SFAS No. 114 at that time.
At April 30, 1998 and December 31, 1997, the Association identified
two loans with a net carrying value of $875,000, which were considered
impaired due to delinquent payments. Accrual of interest on these loans has
been discontinued.
At December 31, 1996, the Association had no loans that would be
defined as impaired under SFAS No. 114.
Premises and Equipment:
Premises and equipment are recorded at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation is provided on the straight-line and accelerated methods over
the estimated useful lives of the assets, estimated to be forty to fifty
years for buildings and three to ten years for furniture and equipment.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Federal Income Taxes:
The Association accounts for federal income taxes pursuant to SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 established financial
accounting and reporting standards for the effects of income taxes that
result from the Association's activities within the current and previous
years. In accordance with SFAS No. 109, a deferred tax liability or
deferred tax asset is computed by applying the current statutory tax rates
to net taxable or deductible temporary differences between the tax basis of
an asset or liability and its reported amount in the financial statements
that will result in net taxable or deductible amounts in future periods.
Deferred tax assets are recorded only to the extent that the amount of net
deductible temporary differences or carryforward attributes may be utilized
against current period earnings, carried back against prior years'
earnings, offset against taxable temporary differences reversing in future
periods, or utilized to the extent of management's estimate of future
taxable income. A valuation allowance is provided for deferred tax assets
to the extent that the value of net deductible temporary differences and
carryforward attributes exceeds management's estimates of taxes payable on
future taxable income. Deferred tax liabilities are provided on the total
amount of net temporary differences taxable in the future.
Deferral of income taxes results primarily from deferred compensation
accruals, Federal Home Loan Bank stock dividends and book/tax differences
in the allowance for loan losses.
Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents
include cash, amounts due from banks and interest-bearing balances with
banks with original terms of maturity of less than ninety days.
Basis of Presentation:
The financial statements as of April 30, 1998 and for the four month
periods ended April 30, 1998 and 1997 are unaudited. However, in the
opinion of management, all adjustments, (consisting only of normal
recurring accruals) necessary for a fair presentation of financial position
and results of operations have been made.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE B - COMPREHENSIVE INCOME
The Association adopted SFAS No. 130 "Reporting Comprehensive Income" for
reporting periods beginning in 1998. The Statement establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of general-purpose financial statements. It 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 presented with
the same prominence as other financial statements. SFAS No. 130 requires that
companies (i) classify terms of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial position. Financial
statements for earlier periods have been reclassified as required for
comparative purposes.
NOTE C - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair values of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
December 31
April 30, 1998 -----------------------------------------------
(Unaudited) 1997 1996
---------------------- ---------------------- ----------------------
Amortized Estimated Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value Cost Fair Value
--------- ---------- --------- ---------- --------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity:
Federal Home Loan Bank Bond ...... $ -- $ -- $ -- $ -- $ 1,000 $ 1,005
------- ------- ------- ------- ------- -------
TOTAL INVESTMENT
SECURITIES HELD TO MATURITY .. -- -- -- -- 1,000 1,005
Available for Sale:
FHLMC common stock ............... 39 1,853 48 2,085 48 1,372
Asset management funds:
Income Trust ................... 5,668 5,592 5,668 5,602 5,517 5,343
ARMS ........................... 4,006 3,912 4,006 3,928 3,908 3,826
Short-Term Government Trust .... -- -- -- -- 4,712 4,715
GNMA Trust ..................... 5,795 5,812 5,795 5,817 5,639 5,553
Other .......................... 15 15 15 15 15 15
------- ------- ------- ------- ------- -------
TOTAL AVAILABLE FOR SALE ..... 15,523 17,184 15,532 17,447 19,839 20,824
------- ------- ------- ------- ------- -------
TOTAL INVESTMENT SECURITIES .. $15,523 $17,184 $15,532 $17,447 $20,839 $21,829
======= ======= ======= ======= ======= =======
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE C - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (CONTINUED)
The amortized cost, gross unrelated gains, gross unrealized losses and
estimated fair values for mortgage-backed securities are summarized as follows:
April 30, 1998 (Unaudited)
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Held to Maturity: (In Thousands)
Government National Mortgage
Association participation
certificates .................. $ 41 $ -- $ -- $ 41
Federal National Mortgage
Association collateralized
mortgage obligations .......... 6,203 10 16 6,197
Federal Home Loan Mortgage
Corporation participation
certificates .................. 81 -- 1 80
Collateralized mortgage
obligations ................... 6,264 12 18 6,258
------- ---- ---- -------
TOTALS ...................... $12,589 $ 22 $ 35 $12,576
======= ==== ==== =======
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------------------------------
1997 1996
--------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
--------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Held to Maturity: (In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government National Mortgage
Association participation
certificates .................. $ 48 $ -- $ -- $ 48 $ 71 $ 7 $ -- $ 78
Federal National Mortgage
Association collateralized
mortgage obligations .......... 8,482 6 12 8,476 6,054 3 37 6,020
Federal Home Loan Mortgage
Corporation participation
certificates .................. 92 -- 2 90 545 -- 1 544
Collateralized mortgage
obligations ................... 3,737 9 25 3,721 6,230 5 79 6,156
------- ---- ---- ------- ------- ---- ---- -------
TOTALS ...................... $12,359 $ 15 $ 39 $12,335 $12,900 $ 15 $117 $12,798
======= ==== ==== ======= ======= ==== ==== =======
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE D - LOANS RECEIVABLE
The composition of the loan portfolio is as follows:
December 31
April 30, 1998 ---------------------
(Unaudited) 1997 1996
-------------- -------- --------
(In Thousands)
Real estate mortgage (primarily
one-to-four family residential) ....... $ 28,111 $ 29,777 $ 25,609
Construction and development ............ 5,310 4,231 3,681
Commercial real estate .................. 4,680 4,603 4,746
Consumer and other ...................... 1,141 1,181 1,187
Loans on deposits ....................... 63 84 197
Loans in process ........................ (2,301) (2,278) (1,936)
-------- -------- --------
37,004 37,598 33,484
Less allowance for loan losses .......... 853 854 301
-------- -------- --------
TOTALS ............................ $ 36,151 $ 36,744 $ 33,183
======== ======== ========
In the ordinary course of business, the Association has granted loans to
some of the officers, directors and their related interests. Related party loans
are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility.
The aggregate dollar amount of these loans was approximately $1.1 million, $1.1
million and $1.3 million at April 30, 1998, December 31, 1997 and 1996,
respectively. During the year ended December 31, 1997, no loans were made to
officers, directors and their related interests while principal repayments of
approximately $200,000 were received from related parties.
The Association's lending efforts have historically focused on one-to-four
family residential real estate loans and construction loans which comprise
approximately $29.9 million, or 81%, of the total loan portfolio at December 31,
1997, and $26.0 million, or 78%, of the total loan portfolio at December 31,
1996. Historically, such loans have been conservatively underwritten with cash
down payments sufficient to provide the Association with adequate collateral
coverage in the event of default. Nevertheless, the Association, as with any
lending institution, is subject to the risk that real estate values or economic
conditions could deteriorate in its primary lending areas within Ohio, thereby
impairing collateral values. However, management is of the belief that real
estate values and economic conditions in the Association's primary lending areas
are presently stable.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE D - LOANS RECEIVABLE (CONTINUED)
The activity in the allowance for loan losses is summarized as follows:
Four Months Ended
April 30
(Unaudited) Year Ended December 31
----------------- ----------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Balance at beginning of period ....... $ 854 $301 $ 301 $261 $201
Provision charged to operations ...... 20 -- 700 40 60
Less loans charged off,
net of recoveries .................. (21) -- (147) -- --
----- ---- ----- ---- ----
BALANCE AT END OF PERIOD ......... $ 853 $301 $ 854 $301 $261
===== ==== ===== ==== ====
NOTE E - REAL ESTATE INVESTMENT - LIMITED PARTNERSHIP
In 1996, the Association acquired a fractional interest in a limited
partnership formed to construct multi-family housing units. The Association
accounts for the investment in the limited partnership using the equity method.
Under the terms of the limited partnership agreement, the Association has a
total contribution of capital of $500,000 and is allocated tax losses and
affordable housing federal income tax credits.
In connection with the Association funding its contributed capital to the
partnership, it has issued a $500,000 term note payable to a bank in annual
installments of $100,000 beginning November 15, 1997 and maturing November 15,
2001. The interest is payable semiannually beginning May 15, 1997 and ending
November 15, 2001 at a fixed rate of 8.875%. The note payable is collateralized
by ten membership shares of the limited partnership.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
April 30, December 31
1998 ---------------
(Unaudited) 1997 1996
----------- ---- ----
(In Thousands)
Land .......................................... $ 32 $ 32 $ 32
Buildings ..................................... 359 359 359
Furniture, equipment and vehicles ............. 380 370 307
---- ---- ----
771 761 698
Less accumulated depreciation ................. 484 467 442
---- ---- ----
TOTALS .................................. $287 $294 $256
==== ==== ====
NOTE G - DEPOSITS
A comparative summary of deposits is as follows:
<TABLE>
<CAPTION>
December 31
April 30, 1998 ------------------------------------
Weighted Average (Unaudited) 1997 1996
Rate at ----------------- ----------------- -----------------
December 31, 1997 Amount Percent Amount Percent Amount Percent
----------------- ------- ------- ------- ------- ------- -------
(In Thousands)
Savings:
<S> <C> <C> <C> <C> <C> <C> <C>
Statement savings accounts ...... 3.00% $ 230 --% $ 303 1% $ 295 1%
Passbook savings accounts ....... 3.00 21,613 38 21,980 38 22,163 38
Christmas clubs ................. -- 18 -- 6 -- 5 --
Negotiable order of
withdrawal accounts ........... 3.00 2,969 5 2,830 5 2,722 5
Money market demand
accounts ...................... 3.05 3,985 7 4,145 7 4,732 8
------- --- ------- --- ------- ---
TOTAL SAVINGS ............... 28,815 50 29,264 51 29,917 52
</TABLE>
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE G - DEPOSITS (CONTINUED)
<TABLE>
<CAPTION>
December 31
April 30, 1998 ------------------------------------
Weighted Average (Unaudited) 1997 1996
Rate at ----------------- ----------------- -----------------
December 31, 1997 Amount Percent Amount Percent Amount Percent
----------------- ------- ------- ------- ------- ------- -------
(In Thousands)
Certificates of deposit:
<S> <C> <C> <C> <C> <C> <C> <C>
Less than 1 year,
3.05% to 5.00% ................ 4.90 8,632 15 8,784 15 9,392 16
One to two years,
5.15% to 5.91% ................ 5.55 12,477 22 12,877 22 12,160 21
Over two years,
5.40% to 6.75% ................ 5.83 2,676 5 2,767 5 2,790 5
Jumbo - over $100,000 ........... 5.92 2,040 3 1,049 2 428 1
IRA accounts, six months
to three years, 4.75%
to 6.15% ...................... 5.62 3,125 5 3,113 5 2,986 5
------- --- ------- --- ------- ---
TOTAL CERTIFICATES OF DEPOSIT 28,950 50 28,590 49 27,756 48
------- --- ------- --- ------- ---
TOTALS ...................... $57,765 100% $57,854 100% $57,673 100%
======= === ======= === ======= ===
</TABLE>
Scheduled maturities of certificates of deposit are as follows:
December 31
April 30, 1998 -----------------------
(Unaudited) 1997 1996
-------------- ------- -------
Within one year ................ $22,729 $ -- $22,896
One to two years ............... 4,831 24,276 4,077
Two to three years ............. 1,280 2,941 783
Over three years ............... 110 1,373 --
------- ------- -------
TOTALS ................... $28,950 $28,590 $27,756
======= ======= =======
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE G - DEPOSITS (CONTINUED)
Interest expense on deposits is summarized as follows:
Four Months Ended
April 30
(Unaudited) December 31
----------------- ------------------------
1998 1997 1997 1996 1995
---- ---- ------ ------ ------
(In Thousands)
Passbook savings accounts .......... $216 $223 $ 663 $ 679 $ 709
Statement savings .................. 3 3 10 11 14
Negotiable order of
withdrawal accounts .............. 30 28 88 86 80
Money market demand accounts ....... 40 41 133 146 160
Certificates of deposit ............ 523 483 1,539 1,475 1,327
---- ---- ------ ------ ------
TOTALS ....................... $812 $778 $2,433 $2,397 $2,290
==== ==== ====== ====== ======
NOTE H - FEDERAL INCOME TAXES
Income tax expense is summarized as follows:
Four Months Ended
April 30
(Unaudited) December 31
----------------- ------------------------
1998 1997 1997 1996 1995
---- ---- ------ ------ ------
(In Thousands)
Federal:
Current ......................... $ 133 $ 114 $ 355 $ 236 $ 412
Deferred ........................ (14) (2) (268) (52) (34)
----- ----- ----- ----- -----
TOTALS ...................... $ 119 $ 112 $ 87 $ 184 $ 378
===== ===== ===== ===== =====
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE H - FEDERAL INCOME TAXES (CONTINUED)
The provision for federal income taxes on earnings differ from that
computed at the statutory rate of 34% for the years ended December 31 is as
follows:
Four Months Ended
April 30
(Unaudited) December 31
----------------- ------------------------
1998 1997 1997 1996 1995
---- ---- ------ ------ ------
(In Thousands)
Federal taxes computed at
statutory rate ................... $ 138 $ 139 $ 161 $ 208 $ 383
Decrease resulting from:
Limited partnership tax
credits ........................ (18) (26) (70) (20) --
Dividends received
deduction ...................... (1) (1) (4) (4) (5)
----- ----- ----- ----- -----
FEDERAL INCOME TAX PROVISION . $ 119 $ 112 $ 87 $ 184 $ 378
===== ===== ===== ===== =====
Effective federal income tax rate .. 29.2% 27.3% 23.1% 30.2% 34.0%
===== ===== ===== ===== =====
The composition of the Association's net deferred tax liability is as
follows:
April 30 December 31
1998 -----------------
(Unaudited) 1997 1996
----------- ------ ------
(In Thousands)
Taxes (payable) refundable on temporary
differences at the expected statutory
rate:
Deferred tax liabilities:
Federal Home Loan Bank stock
dividends ............................. $ (66) $ (64) $ (58)
Unrealized gains on securities
available for sale .................... (564) (651) (335)
----- ----- -----
TOTAL DEFERRED TAX LIABILITIES ........ (630) (715) (393)
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE H - FEDERAL INCOME TAXES (CONTINUED)
April 30 December 31
1998 -----------------
(Unaudited) 1997 1996
----------- ------ ------
(In Thousands)
Deferred tax assets:
Deferred compensation ....................... 236 220 171
Allowance for loan losses ................... 340 340 102
Losses on limited partnership ............... -- -- 6
Other ....................................... -- -- 7
----- ----- -----
TOTAL DEFERRED TAX ASSETS ............. 576 560 286
----- ----- -----
NET DEFERRED FEDERAL
INCOME TAX LIABILITY .................. $ (54) $(155) $(107)
===== ===== =====
Prior to 1996, the Association was allowed a special bad debt deduction
based on a percentage of earnings, generally limited to 8% of otherwise taxable
income, or the amount of qualifying and nonqualifying loans outstanding and
subject to certain limitations based on aggregate loans and savings account
balances at the end of the calendar year. The Association was subject to such
limitations during the year ended December 31, 1995, and, therefore, was
precluded from utilizing the percentage of earnings bad debt deduction. If the
amounts that qualified as deductions for federal income tax purposes are later
used for purposes other than for bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at the
then current corporate income tax rate. Retained earnings at December 31, 1997,
includes approximately $2.54 million for which federal income taxes have not
been provided. The amount of the unrecognized deferred tax liability relating to
the cumulative percentage of earnings bad debt deduction totaled approximately
$863,000 at December 31, 1997. See Note L for additional information regarding
the Association's future bad debt deductions.
NOTE I - PENSION AND DEFERRED COMPENSATION PLANS
The Association has a noncontributory defined benefit pension plan covering
all eligible employees. Benefits are based on years of service and the highest
consecutive five-year average earnings preceding normal retirement date. Plan
assets consist of fully-insured retirement income life insurance policies and at
plan years ended August 31, 1997 and 1996, the cash value of the policies were
$273,906 and $750,818, respectively, which approximates the actuarially computed
value of vested and nonvested benefits. The Association's policy is to fund
pension costs accrued. Pension costs totaled approximately $11,000 for the four
months ended April 30, 1998 and 1997 and $33,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE I - PENSION AND DEFERRED COMPENSATION PLANS (CONTINUED)
Effective September 1, 1987, the directors of the Association approved a
non-qualified deferred compensation plan for certain officers. The agreements
are subject to renewal annually. During the term of the agreements and as long
as employment of the executives by the Association continues, the Association
will provide for monthly accruals of specified amounts for each executive.
Accrued deferred compensation amounts are payable in a lump sum upon the
executive's death, disability, voluntary resignation, or termination by the
Association without cause. Deferred compensation expense amounted to $48,000 for
the four months ended April 30, 1998 and 1997, and $144,000, $96,000 and $56,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE J - COMMITMENTS AND CONTINGENCIES
The Association is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the statement of financial position. The contract or
notional amounts of the commitments reflect the extent of the Association's
involvement in such financial instruments.
The Association's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Association uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At April 30, 1998 (unaudited) and December 31, 1997, the Association had
outstanding commitments of approximately $843,000 and $218,000 to originate
fixed rate consumer and residential real estate loans. In the opinion of
management, outstanding loan commitments equaled or exceeded prevalent market
interest rates as of December 31, 1997, such loans were underwritten in
accordance with normal underwriting policies, and all commitments will be funded
via cash flow from operations and existing excess liquidity.
From time to time, and in the ordinary course of business, the Association
becomes a party of matters of litigation. In the opinion of the Association's
counsel, there are no claims, asserted or unasserted, the resolution of which
would have a material affect on the Association's consolidated financial
statements.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE K - REGULATORY CAPITAL
The Association is subject to the regulatory capital requirements
promulgated by the Office of Thrift Supervision (OTS). Failure to meet minimum
capital requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
The OTS has adopted risk-based capital ratio guidelines to which the
Association is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk-weighting categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier ("Tier
1") includes common equity, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan losses, subject to certain
limitations, less required deductions. Savings associations are required to
maintain a total risk-based capital ratio of 8%, of which 4% must be Tier 1
capital. The OTS may, however, set higher capital requirements when particular
circumstances warrant. Savings associations experiencing or anticipating
significant growth are expected to maintain capital ratios, including tangible
OTS capital positions, well above the minimum levels.
In addition, the OTS established guidelines prescribing a minimum Tier 1
leverage ratio (Tier 1 capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of 3%
for savings associations that meet certain specified criteria, including that
they have the highest regulatory rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier 1 leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points.
As of December 31, 1997 and 1996, management believes that the Association
met all capital adequacy requirements to which the Association was subject.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE K - REGULATORY CAPITAL (CONTINUED)
<TABLE>
<CAPTION>
As of April 30, 1998
-------------------------------------------------------
To be "Well-
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) .... $12,675 32.4% >$3,129 >8.0% >$3,911 >10.0%
- - - -
Tier I capital
(to risk-weighted assets) .... 12,186 31.2 >1,565 >4.0 >2,347 >6.0
- - - -
Tier I leverage ................ 12,186 16.9 >2,884 >4.0 >3,605 >5.0
- - - -
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1997
-------------------------------------------------------
To be "Well-
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) .... $12,392 31.4% >$3,158 >8.0% >$3,948 >10.0%
- - - -
Tier I capital
(to risk-weighted assets) .... 11,899 30.1 >1,579 >4.0 >2,369 >6.0
- - - -
Tier I leverage ................ 11,899 16.6 >2,925 >4.0 >3,656 >5.0
- - - -
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1996
-------------------------------------------------------
To be "Well-
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) .... $11,714 33.0% >$2,837 >8.0% >$3,547 >10.0%
- - - -
Tier I capital
(to risk-weighted assets) .... 11,510 32.5 >1,419 >4.0 >2,128 >6.0
- - - -
Tier I leverage ................ 11,510 16.3 >2,832 >4.0 >3,539 >5.0
- - - -
</TABLE>
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
NOTE L - LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Association and of other savings associations
are insured by the FDIC through the Savings Association Insurance Fund ("SAIF").
The reserves of the SAIF were below the level required by law, because a
significant portion of the assessments paid into the fund are used to pay the
cost of prior thrift failures. The deposit accounts of commercial banks are
insured by the FDIC through the Bank Insurance Fund ("BIF"), except to the
extent such banks have acquired SAIF deposits. The reserves of the BIF met the
level required by law in May, 1995. As a result of the respective reserve levels
of the funds, deposit insurance assessments paid by healthy savings associations
exceeded those paid by healthy commercial banks by approximately $.19 per $100
in deposits in 1995. In 1996, no BIF assessments were required for healthy
commercial banks except for a $2,000 minimum fee.
During 1996, legislation was enacted to recapitalize the SAIF that provided
for a special assessment of $.657 per $100 of SAIF deposits held at March 31,
1995. The Association had $58.0 million in deposits at March 31, 1995, resulting
in an assessment of $378,000 or $249,000 after tax, which was recorded during
1996.
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 2000, assuming the elimination of the thrift charter
or of the separate federal regulation of thrifts prior to the merger of the
deposit insurance funds. This legislation would require the Association to be
regulated as a bank under federal laws which would subject it to the more
restrictive activity limits imposed on national banks. In the opinion of
management, such restrictions would not materially affect the Association's
operations.
Under separate legislation related to the recapitalization plan, the
Association would have been required to recapture as taxable income any
additions to its bad debt reserve which were added after 1987 and will be unable
to utilize the percentage of earnings method to compute its reserve in the
future. However, the Association has not made any additions to its bad debt
reserve post-1987.
NOTE M - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
On July 6, 1998, the Association's Board of Directors adopted an overall
plan of conversion and reorganization (the Plan) whereby the Association will
convert to the stock form of ownership, followed by the issuance of all the
Association's outstanding stock to a newly formed holding company, First Niles
Financial, Inc. Pursuant to the Plan, as amended, First Niles Financial, Inc.
will offer for sale between 1,670,000 and 2,270,000 common shares at $10.00 per
share to the Association's depositors, members of the community, and a newly
formed Employee Stock Ownership Plan (ESOP). The costs of issuing the common
stock will be deferred and deducted from the sale proceeds of the offering. If
the conversion is unsuccessful, all deferred costs will be charged to
operations. At April 30, 1998, the Association had not incurred any conversion
costs. The transaction is subject to approval by regulatory authorities and
members of the Association. At the completion of the conversion to stock form,
the Association will establish a liquidation account in the amount of retained
earnings contained in the final offering circular. The liquidation account will
be maintained for the benefit of eligible savings account holders who maintain
deposit accounts in the Association after conversion.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Four months ended April 30, 1998 and
1997 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
In the event of a complete liquidation (and only in such event), each
eligible member will be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted balance of
deposit accounts held, before any liquidation distribution may be made with
respect to common stock. Except for the repurchase of stock and payment of
dividends by the Association, the existence of the liquidation account will not
restrict the use or application of such retained earnings.
The Association may not declare, pay a cash dividend on, or repurchase any
of its common stock, if the effect thereof would cause retained earnings to be
reduced below either the amount required for the liquidation account or the
regulatory capital requirements for SAIF insured institutions.
F-26
<PAGE>
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus in connection with the
offering made hereby, and, if given or made, such other information or
representation must not be relied upon as having been authorized by the Company
or the Association. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so, or to any person to whom it is unlawful to make such offer or solicita tion
in such jurisdiction. Neither the delivery of this Prospectus nor any sale
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company or the Association since any of the
dates as of which information is furnished herein or since the date hereof.
--------------
TABLE OF CONTENTS
Page
----
Prospectus Summary...................................................... 1
Selected Consolidated Financial Information............................. 6
Risk Factors............................................................ 8
Home Federal Savings and Loan Association of Niles...................... 13
First Niles Financial, Inc.............................................. 14
Use of Proceeds......................................................... 15
Dividends............................................................... 16
Market for the Common Stock............................................. 17
Pro Forma Data.......................................................... 18
Comparison of Valuation and Pro Forma Information
With No Stock Contribution.......................................... 22
Pro Forma Regulatory Capital Analysis................................... 25
Capitalization.......................................................... 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 27
Business of Home Federal................................................ 40
Regulation.............................................................. 60
Management of the Holding Company....................................... 71
Management of the Association........................................... 72
The Conversion.......................................................... 78
Restrictions on Acquisitions of Stock and Related
Takeover Defensive Provisions........................................ 102
Description of Capital Stock............................................ 107
Legal and Tax Matters................................................... 108
Experts................................................................. 108
Additional Information ................................................. 109
Index to Consolidated Financial Statements.............................. F-1
Until the later of ________, 1998 or __ days after commencement of the
offering of Common Stock, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
================================================================================
UP TO
2,615,000 SHARES
FIRST NILES FINANCIAL, INC.
(Proposed Holding Company for Home Federal
Savings and Loan Association of Niles)
COMMON STOCK
--------------
PROSPECTUS
--------------
CHARLES WEBB & COMPANY, a
Division of Keefe, Bruyette &
Woods, Inc.
_________, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
- --------------------------------------------------
Article Tenth of First Niles Financial, Inc.'s Certificate of
Incorporation provides for indemnification of directors and officers of the
Holding Company against any and all liabilities, judgments, fines and reasonable
settlements, costs, expenses and attorneys' fees incurred in any actual,
threatened or potential proceeding, except to the extent that such
indemnification is limited by Delaware law and such law cannot be varied by
contract or bylaw. Article Tenth also provides for the authority to purchase
insurance with respect thereto.
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation's Board of Directors to grant indemnity under certain
circumstances to directors and officers, when made, or threatened to be made,
parties to certain proceedings by reason of such status with the corporation,
against judgments, fines, settlements and expenses, including attorneys' fees.
In addition, under certain circumstances such persons may be indemnified against
expenses actually and reasonably incurred in defense of a proceeding by or on
behalf of the corporation. Similarly, the corporation, under certain
circumstances, is authorized to indemnify directors and officers of other
corporations or enterprises who are serving as such at the request of the
corporation, when such persons are made, or threatened to be made, parties to
certain proceedings by reason of such status, against judgments, fines,
settlements and expenses, including attorneys' fees; and under certain
circumstances, such persons may be indemnified against expenses actually and
reasonably incurred in connection with the defense or settlement of a proceeding
by or in the right of such other corporation or enterprise. Indemnification is
permitted where such person (i) was acting in good faith; (ii) was acting in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation or other corporation or enterprise, as appropriate; (iii) with
respect to a criminal proceeding, has no reasonable cause to believe his conduct
was unlawful; and (iv) was not adjudged to be liable to the corporation or other
corporation or enterprise (unless the court where the proceeding was brought
determines that such person is fairly and reasonably entitled to indemnity).
Unless ordered by a court, indemnification of directors and officers
may be made only following a determination that such indemnification is
permissible because the person being indemnified has met the requisite standard
of conduct. Such determination may be made (i) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (ii) by a committee of such directors designated by
majority vote of such directors, even though less than a quorum, or (iii) if
there are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion, or (iv) by the stockholders.
Section 145 also permits expenses incurred by directors and officers in
defending a proceeding to be paid by the corporation in advance of the final
disposition of such proceedings upon the receipt of an undertaking by the
director or officer to repay such amount if it is ultimately determined that he
is not entitled to be indemnified by the corporation against such expenses.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
- ----------------------------------------------------
Set forth below is an estimate of the amount of fees and expenses
(other than underwriting discounts and commissions) to be incurred in connection
with the issuance of the shares.
Counsel fees and expenses ........................................ $ 80,000
Accounting fees and expenses ..................................... 40,000
Appraisal and business plan preparation fees and expenses ........ 30,000
Conversion Agent fees and expenses ............................... 10,000
Underwriting fees(1) (including financial advisory fee
and expenses) .................................................. 300,000
Underwriter's counsel fees and expenses .......................... 35,000
Printing, postage and mailing .................................... 80,000
Registration and Filing Fees ..................................... 70,000
Blue Sky fees and expenses ....................................... 10,000
Stock Transfer Agent and Certificates ............................ 7,500
Other expenses(1) ................................................ 2,500
--------
TOTAL ....................................................... $665,000
========
- -----------
(1) Based on maximum of Estimated Valuation Range.
Item 26. Recent Sales of Unregistered Securities
- ------------------------------------------------
The Registrant is newly incorporated, solely for the purpose of acting
as the holding company of the Home Federal Savings and Loan Association of
Niles, pursuant to the Plan of Conversion (filed as Exhibit 2 herein), and no
sales of its securities have occurred to date.
Item 27. Exhibits and Financial Statement Schedules
- ---------------------------------------------------
See the Exhibit Index filed as part of this Registration Statement.
Item 28. Undertakings
- ---------------------
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:
(i) Include any Prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) Reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which,
II-2
<PAGE>
individually or in the aggregate, represent a fundamental change in
the information set forth in the Registration Statement; and
(iii) Include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and it will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Niles, State of Ohio, on July 9, 1998.
FIRST NILES FINANCIAL, INC.
By: /s/ William L. Stephens
------------------------------------
William L. Stephens
Chairman of the Board, President and
Chief Executive Officer
(Duly Authorized Representative)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William L. Stephens his true and lawful
attorneys-in-fact and agents, with full power of substitution and
re-substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all said attorneys-in-fact and
agents or their substitutes or substitute may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ William L. Stephens /s/ Lawrence E. Safarek
- ------------------------------------- -----------------------------
William L. Stephens Lawrence E. Safarek
Chairman of the Board, President Treasurer
and Chief Executive Officer (Principal Financial and
(Principal Executive Officer) Accounting Officer)
Date: July 9, 1998 Date: July 9, 1998
------------------------------- -----------------------
/s/ George J. Swift /s/ Ralph A. Zuzolo
- ------------------------------------- -----------------------------
George J. Swift Ralph A. Zuzolo, Sr.
Director, Vice President and Secretary Director
Date: July 9, 1998 Date: July 9, 1998
------------------------------- -----------------------
/s/ Horace L. McLean /s/ P. James Kramer
- ------------------------------------- -----------------------------
Horace L. McLean P. James Kramer
Director Director
Date: July 9, 1998 Date: July 9, 1998
------------------------------- -----------------------
II-4
<PAGE>
As filed with the Securities and Exchange Commission on July 10, 1998
Registration No. 333-________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
EXHIBITS
TO
FORM SB-2
UNDER
THE SECURITIES ACT OF 1933
------------------------------
FIRST NILES FINANCIAL, INC.
55 N. Main Street
Niles, Ohio 44446-5097
================================================================================
<PAGE>
EXHIBIT INDEX
Exhibits:
1.1 Letter Agreement regarding management, marketing and consulting
services
1.2 Form of Agency Agreement*
2 Plan of Conversion, as amended
3.1 Certificate of Incorporation of the Holding Company
3.2 Bylaws of the Holding Company
3.3 Charter of Association in stock form
3.4 Bylaws of Association in stock form
4 Form of Stock Certificate of the Holding Company
5 Opinion of Silver, Freedman & Taff, L.L.P. with Respect to Legality
of Stock
8.1 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Federal
income tax consequences of the Stock Conversion*
8.2 Opinion of Anness, Gerlach & Williams with respect to Ohio
income tax consequences of the Stock Conversion*
10.1 Form of Employment Agreement
10.2 Letter Agreement regarding Appraisal Services and Business Plan
Preparation
10.3 Employee Stock Ownership Plan
10.4 Supplemental Executive Retirement Plan*
21 Subsidiaries
23.1 Consent of Silver, Freedman & Taff, L.L.P.
23.2 Consent of Anness, Gerlach & Williams
23.3 Consent of Keller & Company, Inc.
24 Power of Attorney (set forth on signature page)
27 Financial Data Schedule
99.1 Appraisal (P)
99.2 Proxy Statement and form of proxy to be furnished to the Association's
account holders
99.3 Stock Order Form and Order Form Instructions
99.4 Certification
99.5 Question and Answer Brochure
99.6 Advertising, Training and Community Informational Meeting
Materials
99.7 Letter of Appraiser with respect to Subscription Rights
- -----------
* To be filed supplementally or by amendment.
(P) Filed in paper format pursuant to continuing hardship exemption.
EXHIBIT 1.1
LETTER AGREEMENT REGARDING MANAGEMENT,
MARKETING AND CONSULTING SERVICES
<PAGE>
Exhibit 1.1
[CHARLES WEBB & COMPANY LETTERHEAD]
March 10, 1998
Mr. William L. Stephens
Chairman of the Board & Chief Executive Officer
Home Federal Savings and Loan Association
55 N. Main Street
Niles, OH 44446-5097
Dear Mr. Stephens:
This proposal is in connection with Home Federal Savings & Loan's (the "Bank")
intention to convert from a mutual to a capital stock form of organization (the
"Conversion"). In order to effect the Conversion, it is contemplated that all of
the Bank's common stock to be outstanding pursuant to the Conversion will be
issued to a holding company (the "Company") to be formed by the Bank, and that
the Company will offer and sell shares of its common stock first to eligible
persons (pursuant to the Bank's Plan of Conversion) in a Subscription and
Community Offering.
Charles Webb & Company ("Webb"), a Division of Keefe, Bruyette and Woods, Inc.
("KBW"), will act as the Bank's and the Comapny's exclusive financial advisor
and marketing agent in connection with the Conversion. This letter sets forth
selected terms and conditions of our engagement.
1. Advisory/Conversion Services. As the Bank's and Company's financial advisor
and marketing agent, Webb will provide the Bank and the Company with a
comprehensive program of conversion services designed to promote an orderly,
efficient, cost-effective and long-term stock distribution. Webb will provide
financial and logistical advice to the Bank and the Company concerning the
offering and related issues. Webb will assist in providing conversion
enhancement services intended to maximize stock sales in the Subscription
Offering and to residents of the Bank's market area, if necessary, in the
Community Offering.
Webb shall provide financial advisory services to the Bank which are typical in
connection with an equity offering and include, but are not limited to, overall
financial analysis of the
<PAGE>
client with a focus on identifying factors which impact the valuation of the
common stock and provide the appropriate recommendations for the betterment of
the equity valuation.
Additionally, post conversion financial advisory services will include advice on
shareholder relations, NASDAQ listing, dividend policy (for both regular and
special dividends), stock repurchase strategy and communication with market
makers. Prior to the closing of the offering, Webb shall furnish to client a
Post-Conversion reference manual which will include specifics relative to these
items. (The nature of the services to be provided by Webb as the Bank's and the
Company's financial advisor and marketing agent are further described in Exhibit
A attached hereto.)
2. Preparation of Offering Documents. The Bank, the Company and their counsel
will draft the Registration Statement, Application for Conversion, Prospectus
and other documents to be used in connection with the Conversion. Webb will
attend meetings to review these documents and advise you on their form and
content. Webb and its counsel will draft appropriate agency agreement and
related documents as well as marketing materials other than the Prospectus.
3. Due Diligence Review. Prior to filing the Registration Statement, Application
for Conversion or any offering or other documents naming Webb as the Bank's and
the Company's financial advisor and marketing agent, Webb and their
representatives will undertake substantial investigations to learn about the
Bank's business and operations ("due diligence review") in order to confirm
information provided to us and to evaluate information to be contained in the
Bank's and/or the Company's offering documents. The Bank agrees that it will
make available to Webb all relevant information, whether or not publicly
available, which Webb reasonably requests, and will permit Webb to discuss with
management the operations and prospects of the Bank. Webb will treat all
material non-public information as confidential. The Bank acknowledges that Webb
will rely upon the accuracy and completeness of all information received from
the Bank, its officers, directors, employees, agents and representatives,
accountants and counsel including this letter to serve as the Bank's and the
Company's financial advisor and marketing agent.
4. Regulatory Filings. The Bank and/or the Company will cause appropriate
offering documents to be filed with all regulatory agencies including, the
Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers ("NASD"), Office of Thrift Supervision ("OTS") and such state
securities commissioners as may be determined by the Bank.
5. Agency Agreement. The specific terms of the conversion services, conversion
offering enhancement and syndicated offering services contemplated in this
letter shall be set forth in an Agency Agreement between Webb and the Bank and
the Company to be executed prior to commencement of the offering, and dated the
date that the Company's Prospectus is declared effective and/or authorized to be
disseminated by the appropriate regulatory agencies, the SEC,
<PAGE>
the NASD, the OTS and such state securities commissioners and other regulatory
agencies as required by applicable law.
6. Representation, Warranties and Covenants. The Agency Agreement will provide
for customary representations, warranties and covenants by the Bank and Webb,
and for the Company to indemnify Webb and their controlling persons (and, if
applicable, the members of the selling group and their controlling persons), and
for Webb to indemnify the Bank and the Company against certain liabilities,
including, without limitation, liabilities under the Securities Act of 1933.
7. Fees. For the Services hereunder, the Bank and/or Company shall pay the
following fees to Webb at closing unless stated otherwise:
(a) A Management Fee of $25,000 payable in four consecutive monthly
installments of $6,250 commencing with the signing of this letter.
Such fees shall be deemed to have been earned when due. Should the
Conversion be terminated for any reason not attributable to the action
or inaction of Webb, Webb shall have earned and be entitled to be paid
fees accruing through the stage at which point the termination
occurred.
(b) A Success Fee of 1.50% of the aggregate Purchase Price of Common Stock
sold in the Subscription Offering and Community Offering excluding
shares purchased by the Bank's officers, directors, or employees (or
members of their immediate families) plus any ESOP, tax-qualified or
stock based compensation plans (except IRA's) or similar plan created
by the Bank for some or all of its directors or employees. The
Management Fee described in 7(a) will be applied against the Success
Fee.
(c) If any shares of the Company's stock remain available after the
Subscription Offering, at the request of the Bank, Webb will seek to
form a syndicate of registered broker-dealers to assist in the sale of
such common stock on a best efforts basis, subject to the terms and
conditions set forth in the selected dealers agreement. Webb will
endeavor to distribute the common stock among dealers in a fashion
which best meets the distribution objectives of the Bank and the Plan
of Conversion. Webb will be paid a fee not to exceed 5.5% of the
aggregate Purchase Price of the shares of common stock sold by them.
Webb will pass onto selected broker-dealers, who assist in the
syndicated community offering, an amount competitive with gross
underwriting discounts charged at such time for comparable amounts of
stock sold at a comparable price per share in a similar market
environment. Fees with respect to purchases effected with the
assistance of a broker/dealer other than Webb shall be transmitted by
Webb to such broker/dealer. The decision to utilize selected
broker-dealers will be made by the Bank upon consultation with Webb.
In the event, with respect to any stock purchases, fees are paid
pursuant to this subparagraph 7(c), such fees
<PAGE>
shall be in lieu of, and not in addition to, payment pursuant to
subparagraph 7(a) and 7(b).
8. Additional Services. Webb further agrees to provide financial advisory
assistance to the Company and the Bank for a period of one year following
completion of the Conversion, including formation of a dividend policy and share
repurchase program, assistance with shareholder reporting and shareholder
relations matters, general advice on mergers and acquisitions and other related
financial matters, without the payment by the Company and the Bank of any fees
in addition to those set forth in Section 7 hereof. Nothing in this Agreement
shall require the Company and the Bank to obtain such services from Webb.
Following this initial one year term, if both parties wish to continue the
relationship, a fee will be negotiated and an agreement entered into at that
time.
9. Expenses. The Bank will bear those expenses of the proposed offering
customarily borne by issuers including, without limitation, regulatory filing
fees, SEC, "Blue Sky," and NASD filing and registration fees; the fees of the
Bank's accountants, attorneys, appraiser, transfer agent and registrar,
printing, mailing and marketing expenses associated with the Conversion; the
fees set forth in Section 7; and fees for "Blue Sky" legal work. If Webb incurs
expenses on behalf of Client, Client will reimburse Webb for such expenses.
Webb shall be reimbursed for reasonable out-of-pocket expenses related to
travel, meals, lodging, photocopying, facsimile, and couriers. Such expenses
shall not exceed $10,000 without approval of the Bank. Also, Webb shall be
reimbursed for fees paid to Webb's counsel, including such counsel's reasonable
out-of-pocket expense for costs of travel, meals and lodging, photocopying,
telephone, facsimile, and couriers. Such fees and expenses will be agreed upon
by Webb and the Bank prior to the execution of the Agency agreement. The
selection of such counsel will be done by Webb, with the prior approval of the
Bank.
10. Conditions. Webb's willingness and obligation to proceed hereunder shall be
subject to, among other things, satisfaction of the following conditions in
Webb's opinion, which opinion shall have been formed in good faith by Webb after
reasonable determination and consideration of all relevant factors: (a) full and
satisfactory disclosure of all relevant material, financial and other
information in the disclosure documents and a determination by Webb, in its sole
discretion, that the sale of stock on the terms proposed is reasonable given
such disclosures; (b) no material adverse change in the condition or operations
of the Bank subsequent to the execution of the agreement; and (c) no adverse
market conditions at the time of offering which in Webb's opinion make the sale
of the shares by the Company inadvisable.
11. Benefit. This Agreement shall inure to the benefit of the parties hereto and
their respective successors and to the parties indemnified pursuant to the terms
and conditions of the Agency Agreement and their successors, and the obligations
and liabilities assumed hereunder by the parties hereto shall be binding upon
their respective successors provided, however, that this Agreement shall not be
assignable by Webb.
<PAGE>
12. Definitive Agreement. This letter reflects Webb's present intention of
proceeding to work with the Bank on its proposed conversion. It does not create
a binding obligation on the part of the Bank, the Company or Webb except as to
the agreement to maintain the confidentiality of non-public information set
forth in Section 3, the payment of certain fees as set forth in Section 7(a) and
7(b) and the assumption of expenses as set forth in Section 9, all of which
shall constitute the binding obligations of the parties hereto and which shall
survive the termination of this Agreement or the completion of the services
furnished hereunder and shall remain operative and in full force and effect. You
further acknowledge that any report or analysis rendered by Webb pursuant to
this engagement is rendered for use solely by the management of the Bank and its
agents in connection with the Conversion. Accordingly, you agree that you will
not provide any such information to any other person without our prior written
consent.
Webb acknowledges that in offering the Company's stock no person will be
authorized to give any information or to make any representation not contained
in the offering prospectus and related offering materials filed as part of a
registration statement to be declared effective in connection with the offering.
Accordingly, Webb agrees that in connection with the offering it will not give
any unauthorized information or make any unauthorized representation. We will be
pleased to elaborate on any of the matters discussed in this letter at your
convenience.
<PAGE>
If the foregoing correctly sets forth our mutual understanding, please so
indicate by signing and returning the original copy of this letter to the
undersigned.
Sincerely,
/s/ Harold T. Hanley III
- -------------------------------------------
Harold T. Hanley III, Senior Vice President
Home Federal Savings & Loan Association
By: /s/ William L. Stephens Date: May 20, 1998
-------------------------------------------------------- ------------
William L. Stephens, President and Chairman of the Board
<PAGE>
EXHIBIT A
CONVERSION SERVICES PROPOSAL
TO HOME FEDERAL SAVINGS & LOAN ASSOCIATION
Charles Webb & Company provides thrift institutions converting from mutual to
stock form of ownership with a comprehensive program of conversion services
designed to promote an orderly, efficient, cost-effective and long-term stock
distribution. The following list is representative of the conversion services,
if appropriate, we propose to perform on behalf of the Bank.
General Services
Assist management and legal counsel with the design of the transaction
structure.
Analyze and make recommendations on bids from printing, transfer agent, and
appraisal firms.
Assist officers and directors in obtaining bank loans to purchase stock, if
requested.
Assist in drafting and distribution of press releases as required or
appropriate.
Conversion Offering Enhancement Services
Establish and manage Stock Information Center at the Bank. Stock Information
Center personnel will track prospective investors; record stock orders; mail
order confirmations; provide the Bank's senior management with daily reports;
answer customer inquiries; and handle special situations as they arise.
Assign Webb's personnel to be at the Bank through completion of the Subscription
and Community Offerings to manage the Stock Information Center, meet with
prospective shareholders at individual and community information meetings,
solicit local investor interest through a tele- marketing campaign, answer
inquiries, and otherwise assist in the sale of stock in the Subscription and
Community Offerings. This effort will be lead by a Principal of Webb/KBW.
Create target investor list based upon review of the Bank's depositor base.
Provide intensive financial and marketing input for drafting of the prospectus.
Prepare other marketing materials, including prospecting letters and brochures,
and media advertisements.
Arrange logistics of community information meeting(s) as required.
<PAGE>
Prepare audio-visual presentation by senior management for community information
meeting(s).
Prepare management for question-and-answer period at community information
meeting(s).
Attend and address community information meeting(s) and be available to answer
questions.
Broker-Assisted Sales Services
Arrange for broker information meeting(s) as required.
Prepare audio-visual presentation for broker information meeting(s).
Prepare script for presentation by senior management at broker information
meeting(s).
Prepare management for question-and-answer period at broker information
meeting(s).
Attend and address broker information meeting(s) and be available to answer
questions.
Produce confidential broker memorandum to assist participating brokers in
selling the Bank's common stock.
Aftermarket Support Services
Webb will use their best efforts to secure market making and on-going research
commitment from at least three NASD firms, one of which will be Keefe, Bruyette
& Woods, Inc.
EXHIBIT 2
PLAN OF CONVERSION,
AS AMENDED
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NILES
Niles, Ohio
AMENDED PLAN OF CONVERSION
From Mutual to Stock Form of Organization
I. GENERAL
On July 6, 1998, the Board of Directors of Home Federal Savings and
Loan Association of Niles (the "Association") adopted and on the same day the
Board amended this Plan of Conversion whereby the Association would convert from
a mutual savings institution to a stock savings institution. The Plan includes,
as part of the conversion, the concurrent formation of a holding company, to be
named in the future. The Plan provides that non-transferable subscription rights
to purchase Holding Company Conversion Stock will be offered first to Eligible
Account Holders of record as of the Eligibility Record Date, then to the Holding
Company and the Association's Tax-Qualified Employee Plans, then to Supplemental
Eligible Account Holders of record as of the Supplemental Eligibility Record
Date, then to Other Members, and then to directors, officers and employees.
Concurrently with, at any time during, or promptly after the Subscription
Offering, and on a lowest priority basis, an opportunity to subscribe may also
be offered to the general public in a Direct Community Offering or a Public
Offering. The price of the Holding Company Conversion Stock will be based upon
an independent appraisal of the Association and will reflect its estimated pro
forma market value, as converted. It is the desire of the Board of Directors of
the Association to attract new capital to the Association in order to increase
its capital, support future savings growth and increase the amount of funds
available for residential and other lending. The Converted Association is also
expected to benefit from its management and other personnel having a stock
ownership in its business, since stock ownership is viewed as an effective
performance incentive and a means of attracting, retaining and compensating
management and other personnel. No change will be made in the Board of Directors
or management as a result of the Conversion.
In furtherance of the Association's long term commitment to its
community, the Plan provides that, in connection with the Conversion, the
Holding Company will make a donation to a charitable foundation established by
the Association of 30,000 shares of its stock. Under the terms of the Plan, this
donation will be subject to the approval of the voting members of the
Association. In the event that the donation is not approved, the Association may
determine to complete the Conversion without the donation.
II. DEFINITIONS
Acting in Concert: The term "acting in concert" shall have the same
meaning given it in ss.574.2(c) of the Rules and Regulations of the OTS.
Actual Subscription Price: The price per share, determined as provided
in Section V of the Plan, at which Holding Company Conversion Stock will be sold
in the Subscription Offering.
Affiliate: An "affiliate" of, or a Person "affiliated" with, a
specified Person, is a Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by or is under common control with,
the Person specified.
Associate: The term "associate," when used to indicate a relationship
with any Person, means (i) any corporation or organization (other than the
Holding Company, the Association or a majority-owned
P-1
<PAGE>
subsidiary of the Holding Company) of which such Person is an officer or partner
or is, directly or indirectly, the beneficial owner of ten percent or more of
any class of equity securities, (ii) any trust or other estate in which such
Person has a substantial beneficial interest or as to which such Person serves
as trustee or in a similar fiduciary capacity, and (iii) any relative or spouse
of such Person, or any relative of such spouse, who has the same home as such
Person or who is a director or officer of the Holding Company or the Association
or any subsidiary of the Holding Company; provided, however, that any
Tax-Qualified or Non-Tax-Qualified Employee Plan shall not be deemed to be an
associate of any director or officer of the Holding Company or the Association,
to the extent provided in Section V hereof.
Association: Home Federal Savings & Loan Association or such other name
as the institution may adopt.
Conversion: Change of the Association's charter and bylaws to federal
stock charter and bylaws; sale by the Holding Company of Holding Company
Conversion Stock; and issuance and sale by the Converted Association of
Converted Association Common Stock to the Holding Company, all as provided for
in the Plan.
Converted Association: The federally chartered stock savings
institution resulting from the Conversion of the Association in accordance with
the Plan.
Deposit Account: Any withdrawable or repurchasable account or deposit
in the Association including Savings Accounts and demand accounts.
Direct Community Offering: The offering to the general public of any
unsubscribed shares which may be effected as provided in Section V hereof.
Eligibility Record Date: The close of business on March 31, 1997.
Eligible Account Holder: Any Person holding a Qualifying Deposit in the
Association on the Eligibility Record Date.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Foundation: The Home Federal Savings and Loan Association Foundation,
Inc.
Holding Company: A corporation which upon completion of the Conversion
will own all of the outstanding common stock of the Converted Association, and
the name of which will be selected in the future.
Holding Company Conversion Stock: Shares of common stock, par value
$.01 per share, to be issued and sold by the Holding Company as a part of the
Conversion; provided, however, that for purposes of calculating Subscription
Rights and maximum purchase limitations under the Plan, references to the number
of shares of Holding Company Conversion Stock shall refer to the number of
shares offered in the Subscription Offering.
Local Community: The geographic area encompassing a radius of 35 miles
from the Association's headquarters.
P-2
<PAGE>
Market Maker: A dealer (i.e., any Person who engages directly or
indirectly as agent, broker or principal in the business of offering, buying,
selling, or otherwise dealing or trading in securities issued by another Person)
who, with respect to a particular security, (i) regularly publishes bona fide,
competitive bid and offer quotations in a recognized inter-dealer quotation
system; or (ii) furnishes bona fide competitive bid and offer quotations on
request; and (iii) is ready, willing, and able to effect transactions in
reasonable quantities at his quoted prices with other brokers or dealers.
Maximum Subscription Price: The price per share of Holding Company
Conversion Stock to be paid initially by subscribers in the Subscription
Offering.
Member: Any Person or entity that qualifies as a member of the
Association pursuant to its charter and bylaws.
Non-Tax-Qualified Employee Plan: Any defined benefit plan or defined
contribution plan of the Association or the Holding Company, such as an employee
stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which
with its related trust does not meet the requirements to be "qualified" under
Section 401 of the Internal Revenue Code.
OTS: Office of Thrift Supervision, Department of the Treasury, and its
successors.
Officer: An executive officer of the Holding Company or the
Association, including the Chairman of the Board, President, Executive Vice
Presidents, Senior Vice Presidents in charge of principal business functions,
Secretary and Treasurer.
Order Forms: Forms to be used in the Subscription Offering to exercise
Subscription Rights.
Other Members: Members of the Association, other than Eligible Account
Holders, Tax-Qualified Employee Plans or Supplemental Eligible Account Holders,
as of the Voting Record Date.
Person: An individual, a corporation, a partnership, an association, a
joint-stock company, a trust, any unincorporated organization, or a government
or political subdivision thereof.
Plan: This Plan of Conversion of the Association, including any
amendment approved as provided in this Plan.
Public Offering: The offering for sale through the Underwriters to
selected members of the general public of any shares of Holding Company
Conversion Stock not subscribed for in the Subscription Offering or the Direct
Community Offering, if any.
Public Offering Price: The price per share at which any unsubscribed
shares of Holding Company Conversion Stock are initially offered for sale in the
Public Offering.
Qualifying Deposit: The aggregate balance of $50 or more of each
Deposit Account of an Eligible Account Holder as of the Eligibility Record Date
or of a Supplemental Eligible Account Holder as of the Supplemental Eligibility
Record Date.
SAIF: Savings Association Insurance Fund.
P-3
<PAGE>
Savings Account: The term "Savings Account" means any withdrawable
account in the Association except a demand account.
SEC: Securities and Exchange Commission.
Special Meeting: The Special Meeting of Members called for the purpose
of considering and voting upon the Plan of Conversion.
Subscription Offering: The offering of shares of Holding Company
Conversion Stock for subscription and purchase pursuant to Section V of the
Plan.
Subscription Rights: Non-transferable, non-negotiable, personal rights
of the Association's Eligible Account Holders, Tax-Qualified Employee Plans,
Supplemental Eligible Account Holders, Other Members, and directors, Officers
and employees to subscribe for shares of Holding Company Conversion Stock in the
Subscription Offering.
Supplemental Eligibility Record Date: The last day of the calendar
quarter preceding approval of the Plan by the OTS.
Supplemental Eligible Account Holder: Any person holding a Qualifying
Deposit in the Association (other than an officer or director and their
associates) on the Supplemental Eligibility Record Date.
Tax-Qualified Employee Plans: Any defined benefit plan or defined
contribution plan of the Association or the Holding Company, such as an employee
stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which
with its related trust meets the requirements to be "qualified" under Section
401 of the Internal Revenue Code.
Underwriters: The investment banking firm or firms agreeing to offer
and sell Holding Company Conversion Stock in the Public Offering.
Voting Record Date: The date set by the Board of Directors in
accordance with federal regulations for determining Members eligible to vote at
the Special Meeting.
III. STEPS PRIOR TO SUBMISSION OF PLAN OF CONVERSION TO THE MEMBERS FOR APPROVAL
Prior to submission of the Plan of Conversion to its Members for
approval, the Association must receive from the OTS approval of the Application
for Approval of Conversion to convert to the federal stock form of organization.
The following steps must be taken prior to such regulatory approval:
A. The Board of Directors shall adopt the Plan by not less than a two-thirds
vote.
B. The Association shall notify its Members of the adoption of the Plan by
publishing a statement in a newspaper having a general circulation in each
community in which the Association maintains an office.
C. Copies of the Plan adopted by the Board of Directors shall be made
available for inspection at each office of the Association.
P-4
<PAGE>
D. The Association will promptly cause an Application for Approval of
Conversion on Form AC to be prepared and filed with the OTS, an
Application on Form H-(e)1 (or other applicable form) to be prepared and
filed with the OTS and a Registration Statement on Form S-1 to be prepared
and filed with the SEC.
E. Upon receipt of notice from the OTS to do so, the Association shall notify
its Members that it has filed the Application for Approval of Conversion
by posting notice in each of its offices and by publishing notice in a
newspaper having general circulation in each community in which the
Association maintains an office.
IV. CONVERSION PROCEDURE
Following approval of the application by the OTS, the Plan will be
submitted to a vote of the Members at the Special Meeting. If the Plan is
approved by Members holding a majority of the total number of votes entitled to
be cast at the Special Meeting, the Association will take all other necessary
steps pursuant to applicable laws and regulations to convert to a federal stock
savings institution as part of a concurrent holding company formation pursuant
to the terms of the Plan.
The Holding Company Conversion Stock will be offered for sale in the
Subscription Offering at the Maximum Subscription Price to Eligible Account
Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account Holders,
Other Members and directors, Officers and employees of the Association, prior to
or within 45 days after the date of the Special Meeting. The Association may,
either concurrently with, at any time during, or promptly after the Subscription
Offering, also offer the Holding Company Conversion Stock to and accept
subscriptions from other Persons in a Direct Community Offering or a Public
Offering; provided that the Association's Eligible Account Holders,
Tax-Qualified Employee Plans, Supplemental Eligible Account Holders, Other
Members and directors, Officers and employees shall have the priority rights to
subscribe for Holding Company Conversion Stock set forth in Section V of this
Plan. However, the Holding Company and the Association may delay commencing the
Subscription Offering beyond such 45-day period in the event there exist
unforeseen material adverse market or financial conditions. If the Subscription
Offering commences prior to the Special Meeting, subscriptions will be accepted
subject to the approval of the Plan at the Special Meeting.
The period for the Subscription Offering and Direct Community Offering
will be not less than 20 days nor more than 45 days unless extended by the
Association. Upon completion of the Subscription Offering and the Direct
Community Offering, if any, any unsubscribed shares of Holding Company
Conversion Stock may be sold through the Underwriters to selected members of the
general public in the Public Offering. If for any reason all of the shares are
not sold in the Subscription Offering, the Direct Community Offering, if any,
and the Public Offering, if any, the Holding Company and the Association will
use their best efforts to obtain other purchasers, subject to OTS approval.
Completion of the sale of all shares of Holding Company Conversion Stock not
sold in the Subscription Offering is required within 45 days after termination
of the Subscription Offering, subject to extension of such 45-day period by the
Holding Company and the Association with the approval of the OTS. The Holding
Company and the Association may jointly seek one or more extensions of such
45-day period if necessary to complete the sale of all shares of Holding Company
Conversion Stock. In connection with such extensions, subscribers and other
purchasers will be permitted to increase, decrease or rescind their
subscriptions or purchase orders to the extent required by the OTS in approving
the extensions. Completion of the sale of all shares of Holding Company
Conversion Stock is required within 24 months after the date of the Special
Meeting.
V. STOCK OFFERING
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A. Total Number of Shares and Purchase Price of Conversion Stock
The total number of shares of Holding Company Conversion Stock to
be issued in the Conversion will be determined jointly by the Boards
of Directors of the Holding Company and the Association prior to the
commencement of the Subscription Offering, subject to adjustment if
necessitated by market or financial conditions prior to consummation
of the Conversion. The total number of shares of Holding Company
Conversion Stock shall also be subject to increase in connection with
any oversubscriptions in the Subscription Offering or Direct Community
Offering.
The aggregate price for which all shares of Holding Company
Conversion Stock will be issued will be based on an independent
appraisal of the estimated total pro forma market value of the Holding
Company and the Converted Association. Such appraisal shall be
performed in accordance with OTS guidelines and will be updated as
appropriate under or required by applicable regulations.
The appraisal will be made by an independent investment banking
or financial consulting firm experienced in the area of thrift
institution appraisals. The appraisal will include, among other
things, an analysis of the historical and pro forma operating results
and net worth of the Converted Association and a comparison of the
Holding Company, the Converted Association and the Conversion Stock
with comparable thrift institutions and holding companies and their
respective outstanding capital stocks.
Based upon the independent appraisal, the Boards of Directors of
the Holding Company and the Association will jointly fix the Maximum
Subscription Price.
If, following completion of the Subscription Offering and Direct
Community Offering, if any, a Public Offering is effected, the Actual
Subscription Price for each share of Holding Company Conversion Stock
will be the same as the Public Offering Price at which unsubscribed
shares of Holding Company Conversion Stock are initially offered for
sale by the Underwriters in the Public Offering.
If, upon completion of the Subscription Offering, Public
Offering, if any, and Direct Community Offering, if any, all of the
Holding Company Conversion Stock is subscribed for or only a limited
number of shares remain unsubscribed for, subject to Part VII hereof,
the Actual Subscription Price for each share of Holding Company
Conversion Stock will be determined by dividing the estimated
appraised aggregate pro forma market value of the Holding Company and
the Converted Association, based on the independent appraisal as
updated upon completion of the Subscription Offering or other sale of
all of the Holding Company Conversion Stock, by the total number of
shares of Holding Company Conversion Stock to be issued by the Holding
Company upon Conversion. Such appraisal will then be expressed in
terms of a specific aggregate dollar amount rather than as a range.
B. Subscription Rights
Non-transferable Subscription Rights to purchase shares will be
issued without payment therefor to Eligible Account Holders,
Tax-Qualified Employee Plans, Supplemental Eligible Account Holders,
Other Members and directors, Officers and employees of the Association
as set forth below.
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1. Preference Category No. 1: Eligible Account Holders
Each Eligible Account Holder shall receive non-transferable
Subscription Rights to subscribe for shares of Holding Company
Conversion Stock in an amount equal to the greater of $150,000,
or one-tenth of one percent (.001%) of the total offering of
shares, or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of
common stock to be issued by a fraction of which the numerator is
the amount of the qualifying deposit of the Eligible Account
Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders in the converting
Association in each case on the Eligibility Record Date.
If sufficient shares are not available, shares shall be
allocated first to permit each subscribing Eligible Account
Holder to purchase to the extent possible 100 shares, and
thereafter among each subscribing Eligible Account Holder pro
rata in the same proportion that his Qualifying Deposit bears to
the total Qualifying Deposits of all subscribing Eligible Account
Holders whose subscriptions remain unsatisfied.
Non-transferable Subscription Rights to purchase Holding
Company Conversion Stock received by directors and Officers of
the Association and their Associates, based on their increased
deposits in the Association in the one-year period preceding the
Eligibility Record Date, shall be subordinated to all other
subscriptions involving the exercise of non-transferable
Subscription Rights of Eligible Account Holders.
2. Preference Category No. 2: Tax-Qualified Employee Plans
Each Tax-Qualified Employee Plan shall be entitled to
receive non-transferable Subscription Rights to purchase up to
10% of the shares of Holding Company Conversion Stock, provided
that singly or in the aggregate such plans (other than that
portion of such plans which is self-directed) shall not purchase
more than 10% of the shares of the Holding Company Conversion
Stock. Subscription Rights received pursuant to this Category
shall be subordinated to all rights received by Eligible Account
Holders to purchase shares pursuant to Category No. 1; provided,
however, that notwithstanding any other provision of this Plan to
the contrary, the Tax-Qualified Employee Plans shall have a first
priority Subscription Right to the extent that the total number
of shares of Holding Company Conversion Stock sold in the
Conversion exceeds the maximum of the appraisal range as set
forth in the subscription prospectus.
3. Preference Category No. 3: Supplemental Eligible Account Holders
Each Supplemental Eligible Account Holder shall receive
non-transferable Subscription Rights to subscribe for shares of
Holding Company Conversion Stock in an amount equal to the
greater of $150,000, or one-tenth of one percent (.001%) of the
total offering of shares, or 15 times the product (rounded down
to the next whole number) obtained by multiplying the total
number of shares of common stock to be issued by a fraction of
which the numerator is the amount of the qualifying deposit of
the Supplemental Eligible Account Holder and the denominator is
the total amount of qualifying deposits of all Supplemental
Eligible Account Holders in the converting Association in each
case on the Supplemental Eligibility Record Date.
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<PAGE>
Subscription Rights received pursuant to this category shall
be subordinated to all Subscription Rights received by Eligible
Account Holders and Tax-Qualified Employee Plans pursuant to
Category Nos. 1 and 2 above.
Any non-transferable Subscription Rights to purchase shares
received by an Eligible Account Holder in accordance with
Category No. 1 shall reduce to the extent thereof the
Subscription Rights to be distributed to such person pursuant to
this Category.
In the event of an oversubscription for shares under the
provisions of this subparagraph, the shares available shall be
allocated first to permit each subscribing Supplemental Eligible
Account Holder, to the extent possible, to purchase a number of
shares sufficient to make his total allocation (including the
number of shares, if any, allocated in accordance with Category
No. 1) equal to 100 shares, and thereafter among each subscribing
Supplemental Eligible Account Holder pro rata in the same
proportion that his Qualifying Deposit bears to the total
Qualifying Deposits of all subscribing Supplemental Eligible
Account Holders whose subscriptions remain unsatisfied.
4. Preference Category No. 4: Other Members
Each Other Member shall receive non-transferable
Subscription Rights to subscribe for shares of Holding Company
Conversion Stock remaining after satisfying the subscriptions
provided for under Category Nos. 1 through 3 above, subject to
the following conditions:
a. Each Other Member shall be entitled to subscribe for an
amount of shares equal to the greater of $150,000, or
one-tenth of one percent (.001%) of the total offering of
shares of common stock in the Conversion, to the extent that
Holding Company Conversion Stock is available.
b. In the event of an oversubscription for shares under the
provisions of this subparagraph, the shares available shall
be allocated among the subscribing Other Members pro rata in
the same proportion that his number of votes on the Voting
Record Date bears to the total number of votes on the Voting
Record Date of all subscribing Other Members on such date.
Such number of votes shall be determined based on the
Association's mutual charter and bylaws in effect on the
date of approval by members of this Plan of Conversion.
5. Preference Category No. 5: Directors, Officers and Employees
Each director, Officer and employee of the Association as of
the date of the commencement of the Subscription Offering shall
be entitled to receive non-transferable Subscription Rights to
purchase shares of the Holding Company Conversion Stock to the
extent that shares are available after satisfying subscriptions
under Category Nos. 1 through 4 above. The shares which may be
purchased under this Category are subject to the following
conditions:
a. The total number of shares which may be purchased under this
Category may not exceed 24% of the number of shares of
Holding Company Conversion Stock.
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<PAGE>
b. The maximum amount of shares which may be purchased under
this Category by any Person is $150,000 of Holding Company
Conversion Stock. In the event of an oversubscription for
shares under the provisions of this subparagraph, the shares
available shall be allocated pro rata among all subscribers
in this Category.
C. Public Offering and Direct Community Offering
1. Any shares of Holding Company Conversion Stock not subscribed for
in the Subscription Offering may be offered for sale in a Direct
Community Offering. This may involve an offering of all
unsubscribed shares directly to the general public with a
preference to those natural persons residing in the Local
Community. The purchase price per share to the general public in
a Direct Community Offering shall be the same as the Actual
Subscription Price. The Holding Company and the Association may
use an investment banking firm or firms on a best efforts basis
to sell the unsubscribed shares in the Subscription and Direct
Community Offering. The Holding Company and the Association may
pay a commission or other fee to such investment banking firm or
firms as to the shares sold by such firm or firms in the
Subscription and Direct Community Offering and may also reimburse
such firm or firms for expenses incurred in connection with the
sale. The Holding Company Conversion Stock will be offered and
sold in the Direct Community Offering, if any, in accordance with
OTS regulations, so as to achieve the widest distribution of the
Holding Company Conversion Stock. No person, by himself or
herself, or with an Associate or group of Persons acting in
concert, may subscribe for or purchase more than $150,000 of
Holding Company Conversion Stock in the Direct Community
Offering, if any. Further, the Association may limit total
subscriptions under this Section V.C.1 so as to assure that the
number of shares available for the Public Offering may be up to a
specified percentage of the number of shares of Holding Company
Conversion Stock. Finally, the Association may reserve shares
offered in the Direct Community Offering for sales to
institutional investors.
In the event of an oversubscription for shares in the Community
Offering, shares may be allocated (to the extent shares remain
available) first to cover orders of natural persons residing in
the Local Community, then to cover the orders of any other person
subscribing for shares in the Community Offering so that each
such person may receive 1,000 shares, and thereafter, on a pro
rata basis to such persons based on the amount of their
respective subscriptions.
The Association and the Holding Company, in their sole
discretion, may reject subscriptions, in whole or in part,
received from any Person under this Section V.C. Further, the
Association and the Holding Company may, at their sole
discretion, elect to forego a Direct Community Offering and
instead effect a Public Offering as described below.
2. Any shares of Holding Company Conversion Stock not sold in the
Subscription Offering or in the Direct Community Offering, if
any, may then be sold through the Underwriters to selected
members of the general public in the Public Offering. It is
expected that the Public Offering will commence as soon as
practicable after termination of the Subscription Offering and
the Direct Community Offering, if any. The Association and the
Holding Company, in their sole discretion, may reject any
subscription, in whole or in part, received in the Public
Offering. The Public Offering shall be completed within
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<PAGE>
45 days after the termination of the Subscription Offering,
unless such period is extended as provided in Section IV hereof.
No person, by himself or herself, or with an Associate or group
of Persons acting in concert, may purchase more than $150,000 in
the Public Offering, if any.
3. If for any reason any shares remain unsold after the Subscription
Offering, the Public Offering, if any, and the Direct Community
Offering, if any, the Boards of Directors of the Holding Company
and the Association will seek to make other arrangements for the
sale of the remaining shares. Such other arrangements will be
subject to the approval of the OTS and to compliance with
applicable securities laws.
D. Additional Limitations Upon Purchases of Shares of Holding Company
Conversion Stock
The following additional limitations shall be imposed on all
purchases of Holding Company Conversion Stock in the Conversion:
1. No Person, by himself or herself, or with an Associate or group
of Persons acting in concert, may subscribe for or purchase in
the Conversion a number of shares of Holding Company Conversion
Stock which exceeds an amount of shares equal to $300,000. For
purposes of this paragraph, an Associate of a Person does not
include a Tax-Qualified or Non-Tax Qualified Employee Plan in
which the person has a substantial beneficial interest or serves
as a trustee or in a similar fiduciary capacity. Moreover, for
purposes of this paragraph, shares held by one or more
Tax-Qualified or Non-Tax Qualified Employee Plans attributed to a
Person shall not be aggregated with shares purchased directly by
or otherwise attributable to that Person.
2. Directors and Officers and their Associates may not purchase in
all categories in the Conversion an aggregate of more than 34% of
the Holding Company Conversion Stock. For purposes of this
paragraph, an Associate of a Person does not include any
Tax-Qualified Employee Plan. Moreover, any shares attributable to
the Officers and directors and their Associates, but held by one
or more Tax-Qualified Employee Plans shall not be included in
calculating the number of shares which may be purchased under the
limitation in this paragraph.
3. The minimum number of shares of Holding Company Conversion Stock
that may be purchased by any Person in the Conversion is 25
shares, provided sufficient shares are available.
4. The Boards of Directors of the Holding Company and the
Association may, in their sole discretion, increase the maximum
purchase limitation referred to in subparagraph 1. herein up to
9.99%, provided that orders for shares exceeding 5% of the shares
being offered in the Conversion shall not exceed, in the
aggregate, 10% of the shares being offered in the Conversion.
Requests to purchase additional shares of Holding Company
Conversion Stock under this provision will be allocated by the
Boards of Directors on a pro rata basis giving priority in
accordance with the priority rights set forth in this Section V.
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<PAGE>
Depending upon market and financial conditions, the Boards of
Directors of the Holding Company and the Association, with the
approval of the OTS and without further approval of the Members, may
increase or decrease any of the above purchase limitations.
For purposes of this Section V, the directors of the Holding
Company and the Association shall not be deemed to be Associates or a
group acting in concert solely as a result of their serving in such
capacities.
Each Person purchasing Conversion Stock in the Conversion shall
be deemed to confirm that such purchase does not conflict with the
above purchase limitations.
E. Restrictions and Other Characteristics of Holding Company Conversion
Stock Being Sold
1. Transferability. Holding Company Conversion Stock purchased by
Persons other than directors and Officers of the Holding Company
or the Association will be transferable without restriction.
Shares purchased by directors or Officers shall not be sold or
otherwise disposed of for value for a period of one year from the
date of Conversion, except for any disposition of such shares (i)
following the death of the original purchaser, or (ii) resulting
from an exchange of securities in a merger or acquisition
approved by the applicable regulatory authorities. Any transfers
that could result in a change of control of the Association or
the Holding Company or result in the ownership by any Person or
group acting in concert of more than 10% of any class of the
Association's or the Holding Company's equity securities are
subject to the prior approval of the OTS.
The certificates representing shares of Holding Company
Conversion Stock issued to directors and Officers shall bear a
legend giving appropriate notice of the one-year holding period
restriction. Appropriate instructions shall be given to the
transfer agent for such stock with respect to the applicable
restrictions relating to the transfer of restricted stock. Any
shares of common stock of the Holding Company subsequently issued
as a stock dividend, stock split, or otherwise, with respect to
any such restricted stock, shall be subject to the same holding
period restrictions for Holding Company or Association directors
and Officers as may be then applicable to such restricted stock.
No director or Officer of the Holding Company or of the
Association, or Associate of such a director or Officer, shall
purchase any outstanding shares of capital stock of the Holding
Company for a period of three years following the Conversion
without the prior written approval of the OTS, except through a
broker or dealer registered with the SEC or in a "negotiated
transaction" involving more than one percent of the
then-outstanding shares of common stock of the Holding Company.
As used herein, the term "negotiated transaction" means a
transaction in which the securities are offered and the terms and
arrangements relating to any sale are arrived at through direct
communications between the seller or any Person acting on its
behalf and the purchaser or his investment representative. The
term "investment representative" shall mean a professional
investment advisor acting as agent for the purchaser and
independent of the seller and not acting on behalf of the seller
in connection with the transaction.
2. Repurchase and Dividend Rights. Except as permitted by applicable
regulations, for a period of three years following Conversion,
the Converted Association shall not repurchase any shares of its
capital stock, except in the case of an offer to repurchase on
P-11
<PAGE>
a pro rata basis made to all holders of capital stock of the
Converted Association. A repurchase of qualifying shares of a
director shall not be deemed to be a repurchase for purposes of
this Section V.E.2.
Present regulations also provide that the Converted Association
may not declare or pay a cash dividend on or repurchase any of
its stock (i) if the result thereof would be to reduce the
regulatory capital of the Converted Association below the amount
required for the liquidation account to be established pursuant
to Section XIII hereof, and (ii) except in compliance with
requirements of Section 563.134 of the Rules and Regulations of
the OTS.
The above limitations are subject to Section 563b.3 (g)(3) of the
Rules and Regulations of the OTS, which generally provides that
the Converted Association may repurchase its capital stock
provided (i) no repurchases occur within one year following
conversion, (ii) repurchases during the second and third year
after conversion are part of an open market stock repurchase
program that does not allow for a repurchase of more than 5% of
the Association's outstanding capital stock during a twelve-month
period without OTS approval, (iii) the repurchases do not cause
the Association to become undercapitalized, and (iv) the
Association provides notice to the OTS at least 10 days prior to
the commencement of a repurchase program and the OTS does not
object. In addition, the above limitations shall not preclude
payments of dividends or repurchases of capital stock by the
Converted Association or the Holding Company in the event
applicable federal regulatory limitations are liberalized or
waived subsequent to regulatory approval of the Plan.
3. Voting Rights. After Conversion, holders of deposit accounts will
not have voting rights in the Association or the Holding Company.
Exclusive voting rights as to the Association will be vested in
the Holding Company, as the sole stockholder of the Association.
Voting rights as to the Holding Company will be held exclusively
by its stockholders.
F. Exercise of Subscription Rights; Order Forms
1. If the Subscription Offering occurs concurrently with the
solicitation of proxies for the Special Meeting, the subscription
prospectus and Order Form may be sent to each Eligible Account
Holder, Tax-Qualified Employee Plan, Supplemental Eligible
Account Holder, Other Member, and director, Officer and employee
at their last known address as shown on the records of the
Association. However, the Association may, and if the
Subscription Offering commences after the Special Meeting the
Association shall, furnish a subscription prospectus and Order
Form only to Eligible Account Holders, Tax- Qualified Employee
Plans, Supplemental Eligible Account Holders, Other Members, and
directors, Officers and employees who have returned to the
Association by a specified date prior to the commencement of the
Subscription Offering a post card or other written communication
requesting a subscription prospectus and Order Form. In such
event, the Association shall provide a postage-paid post card for
this purpose and make appropriate disclosure in its proxy
statement for the solicitation of proxies to be voted at the
Special Meeting and/or letter sent in lieu of the proxy statement
to those Eligible Account Holders, Tax-Qualified Employee Plans
or Supplemental Eligible Account Holders who are not Members on
the Voting Record Date.
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<PAGE>
2. Each Order Form will be preceded or accompanied by a subscription
prospectus describing the Holding Company and the Converted
Association and the shares of Holding Company Conversion Stock
being offered for subscription and containing all other
information required by the OTS or the SEC or necessary to enable
Persons to make informed investment decisions regarding the
purchase of Holding Company Conversion Stock.
3. The Order Forms (or accompanying instructions) used for the
Subscription Offering will contain, among other things, the
following:
(i) A clear and intelligible explanation of the Subscription
Rights granted under the Plan to Eligible Account Holders,
Tax-Qualified Employee Plans, Supplemental Eligible Account
Holders, Other Members, and directors, Officers and
employees;
(ii) A specified expiration date by which Order Forms must be
returned to and actually received by the Association or its
representative for purposes of exercising Subscription
Rights, which date will be not less than 20 days after the
Order Forms are mailed by the Association;
(iii)The Maximum Subscription Price to be paid for each share
subscribed for when the Order Form is returned;
(iv) A statement that 25 shares is the minimum number of shares
of Holding Company Conversion Stock that may be subscribed
for under the Plan;
(v) A specifically designated blank space for indicating the
number of shares being subscribed for;
(vi) A set of detailed instructions as to how to complete the
Order Form including a statement as to the available
alternative methods of payment for the shares being
subscribed for;
(vii)Specifically designated blank spaces for dating and signing
the Order Form;
(viii) An acknowledgment that the subscriber has received the
subscription prospectus;
(ix) A statement of the consequences of failing to properly
complete and return the Order Form, including a statement
that the Subscription Rights will expire on the expiration
date specified on the Order Form unless such expiration date
is extended by the Holding Company and the Association, and
that the Subscription Rights may be exercised only by
delivering the Order Form, properly completed and executed,
to the Association or its representative by the expiration
date, together with required payment of the Maximum
Subscription Price for all shares of Holding Company
Conversion Stock subscribed for;
(x) A statement that the Subscription Rights are
non-transferable and that all shares of Holding Company
Conversion Stock subscribed for upon exercise of
Subscription Rights must be purchased on behalf of the
Person exercising the Subscription Rights for his own
account; and
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<PAGE>
(xi) A statement that, after receipt by the Association or its
representative, a subscription may not be modified,
withdrawn or canceled without the consent of the
Association.
G. Method of Payment
Payment for all shares of Holding Company Conversion Stock
subscribed for, computed on the basis of the Maximum Subscription
Price, must accompany all completed Order Forms. Payment may be made
in cash (if presented in Person), by check, or, if the subscriber has
a Deposit Account in the Association (including a certificate of
deposit), the subscriber may authorize the Association to charge the
subscriber's account.
If a subscriber authorizes the Association to charge his or her
account, the funds will continue to earn interest, but may not be used
by the subscriber until all Holding Company Conversion Stock has been
sold or the Plan of Conversion is terminated, whichever is earlier.
The Association will allow subscribers to purchase shares by
withdrawing funds from certificate accounts without the assessment of
early withdrawal penalties with the exception of prepaid interest in
the form of promotional gifts. In the case of early withdrawal of only
a portion of such account, the certificate evidencing such account
shall be canceled if the remaining balance of the account is less than
the applicable minimum balance requirement, in which event the
remaining balance will earn interest at the passbook rate. This waiver
of the early withdrawal penalty is applicable only to withdrawals made
in connection with the purchase of Holding Company Conversion Stock
under the Plan of Conversion. Interest will also be paid, at not less
than the then-current passbook rate, on all orders paid in cash, by
check or money order, from the date payment is received until
consummation of the Conversion. Payments made in cash, by check or
money order will be placed by the Association in an escrow or other
account established specifically for this purpose.
In the event of an unfilled amount of any subscription order, the
Converted Association will make an appropriate refund or cancel an
appropriate portion of the related withdrawal authorization, after
consummation of the Conversion, including any difference between the
Maximum Subscription Price and the Actual Subscription Price (unless
subscribers are afforded the right to apply such difference to the
purchase of additional whole shares). If for any reason the Conversion
is not consummated, purchasers will have refunded to them all payments
made and all withdrawal authorizations will be canceled in the case of
subscription payments authorized from accounts at the Association.
If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee
Plans subscribe for shares during the Subscription Offering, such
plans will not be required to pay for the shares subscribed for at the
time they subscribe, but may pay for such shares of Holding Company
Conversion Stock subscribed for upon consummation of the Conversion.
In the event that, after the completion of the Subscription Offering,
the amount of shares to be issued is increased above the maximum of
the appraisal range included in the Prospectus, the Tax Qualified and
Non-Tax Qualified Employee Plans shall be entitled to increase their
subscriptions by a percentage equal to the percentage increase in the
amount of shares to be issued above the maximum of the appraisal range
provided that such subscriptions shall continue to be subject to
applicable purchase limits and stock allocation procedures.
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<PAGE>
H. Undelivered, Defective or Late Order Forms; Insufficient Payment
The Boards of Directors of the Holding Company and the
Association shall have the absolute right, in their sole discretion,
to reject any Order Form, including but not limited to, any Order
Forms which (i) are not delivered or are returned by the United States
Postal Service (or the addressee cannot be located); (ii) are not
received back by the Association or its representative, or are
received after the termination date specified thereon; (iii) are
defectively completed or executed; (iv) are not accompanied by the
total required payment for the shares of Holding Company Conversion
Stock subscribed for (including cases in which the subscribers'
Deposit Accounts or certificate accounts are insufficient to cover the
authorized withdrawal for the required payment); or (v) are submitted
by or on behalf of a Person whose representations the Boards of
Directors of the Holding Company and the Association believe to be
false or who they otherwise believe, either alone or acting in concert
with others, is violating, evading or circumventing, or intends to
violate, evade or circumvent, the terms and conditions of this Plan.
In such event, the Subscription Rights of the Person to whom such
rights have been granted will not be honored and will be treated as
though such Person failed to return the completed Order Form within
the time period specified therein. The Association may, but will not
be required to, waive any irregularity relating to any Order Form or
require submission of corrected Order Forms or the remittance of full
payment for subscribed shares by such date as the Association may
specify. The interpretation of the Holding Company and the Association
of the terms and conditions of this Plan and of the proper completion
of the Order Form will be final, subject to the authority of the OTS.
I. Member in Non-Qualified States or in Foreign Countries
The Holding Company and the Association will make reasonable
efforts to comply with the securities laws of all states in the United
States in which Persons entitled to subscribe for Holding Company
Conversion Stock pursuant to the Plan reside. However, no shares will
be offered or sold under the Plan of Conversion to any such Person who
(1) resides in a foreign country or (2) resides in a state of the
United States in which a small number of Persons otherwise eligible to
subscribe for shares under the Plan of Conversion reside or as to
which the Holding Company and the Association determine that
compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including, but not
limited to, a requirement that the Holding Company or the Association
or any of their officers, directors or employees register, under the
securities laws of such state, as a broker, dealer, salesman or agent.
No payments will be made in lieu of the granting of Subscription
Rights to any such Person.
VI. FEDERAL STOCK CHARTER AND BYLAWS
A. As part of the Conversion, the Association will take all appropriate
steps to amend its charter to read in the form of federal stock
savings institution charter as prescribed by the OTS. The name of the
Association, as converted, will be "Home Federal Savings and Loan
Association of Niles." A copy of the proposed stock charter is
available upon request. By their approval of the Plan, the Members of
the Association will thereby approve and adopt such charter.
B. The Association will also take appropriate steps to amend its bylaws
to read in the form prescribed by the OTS for a federal stock savings
institution. A copy of the proposed federal stock bylaws is available
upon request.
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<PAGE>
C. The effective date of the adoption of the Association's federal stock
charter and bylaws shall be the date of the issuance and sale of the
Holding Company Conversion Stock as specified by the OTS.
VII. ESTABLISHMENT AND FUNDING OF CHARITABLE FOUNDATION
As part of the Conversion, and notwithstanding any other statement
herein to the contrary, the Holding Company intends to issue 30,000 shares of
its Common Stock from its authorized but unissued shares to the charitable
organization created under Section 501(c)(3) of the Internal Revenue Code (the
"Foundation"). Such issuance (the "Contribution") shall be in the form of either
a direct contribution or a sale for the aggregate amount of the par value. The
Contribution is being made in connection with the Conversion in order to
complement the Association's existing community reinvestment activities and to
support the communities in which the Association operates. The Contribution is
expected to be completed not later than twelve months after the completion of
the Conversion.
The Foundation is dedicated to the promotion of charitable purposes
within the communities in which the Association operates, including, but not
limited to, grants or donations to support not-for-profit medical facilities,
cultural activities, community groups and other types of organizations or
projects. As a private foundation, the Foundation is required to distribute
annually in grants or donations at least 5% of its net investment assets.
The authority for the affairs of the Foundation is vested in the Board
of Trustees of the Foundation, none of whom may vote as directors of the
Association or the Holding Company on the Contribution.
The Contribution is subject to the approval of a majority of the total
outstanding votes of the Association's members eligible to be cast at the
Special Meeting. The Contribution will be considered as a separate matter from
approval of the Plan of Conversion. If the Association's members approve the
Plan of Conversion, but not the Contribution, the Association intends to
complete the Conversion without the Contribution. Failure to approve the
Contribution may materially increase the pro forma market value of the Common
Stock being offered since the estimated valuation range takes into account the
after-tax impact of the Contribution. If such an event occurs, the Association
would be required to resolicit subscribers. For comparison purposes, voting
members will be provided with a projection of the pro forma market value of the
Conversion Stock, an estimated price range and certain selected pro forma data
that would result if the Conversion were consummated without the Contribution.
VIII. HOLDING COMPANY CERTIFICATE OF INCORPORATION
A copy of the proposed certificate of incorporation of the Holding
Company will be made available to members upon request.
IX. DIRECTORS OF THE CONVERTED ASSOCIATION
Each Person serving as a member of the Board of Directors of the
Association at the time of the Conversion will thereupon become a director of
the Converted Association.
X. STOCK OPTION AND INCENTIVE PLAN AND RECOGNITION AND RETENTION PLAN
In order to provide an incentive for directors, Officers and employees
of the Holding Company and its subsidiaries (including the Association), the
Board of Directors of the Holding Company intends to adopt,
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<PAGE>
subject to shareholder approval, a stock option and incentive plan and a
recognition and retention plan following the Conversion.
XI. CONTRIBUTIONS TO TAX-QUALIFIED EMPLOYEE PLANS
The Converted Association and the Holding Company may in their
discretion make scheduled contributions to any Tax-Qualified Employee Plans,
provided that any such contributions which are for the acquisition of Holding
Company Conversion Stock, or the repayment of debt incurred for such an
acquisition, do not cause the Converted Association to fail to meet its
regulatory capital requirements.
XII. SECURITIES REGISTRATION AND MARKET MAKING
Promptly following the Conversion, the Holding Company will register
its stock with the SEC pursuant to the Exchange Act. In connection with the
registration, the Holding Company will undertake not to deregister such stock,
without the approval of the OTS, for a period of three years thereafter.
The Holding Company shall use its best efforts to encourage and assist
two or more market makers to establish and maintain a market for its common
stock promptly following Conversion. The Holding Company will also use its best
efforts to cause its common stock to be quoted on the Nasdaq System or to be
listed on a national or regional securities exchange.
XIII. STATUS OF SAVINGS ACCOUNTS AND LOANS SUBSEQUENT TO CONVERSION
Each Deposit Account holder shall retain, without payment, a
withdrawable Deposit Account or Accounts in the Converted Association, equal in
amount to the withdrawable value of such account holder's Deposit Account or
Accounts prior to Conversion. All Deposit Accounts will continue to be insured
by the SAIF up to the applicable limits of insurance coverage, and shall be
subject to the same terms and conditions (except as to voting and liquidation
rights) as such Deposit Account in the Association at the time of the
Conversion. All loans shall retain the same status after Conversion as these
loans had prior to Conversion.
XIV. LIQUIDATION ACCOUNT
For purposes of granting to Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain Deposit Accounts at the
Converted Association a priority in the event of a complete liquidation of the
Converted Association, the Converted Association will, at the time of
Conversion, establish a liquidation account in an amount equal to the net worth
of the Association as shown on its latest statement of financial condition
contained in the final offering circular used in connection with the Conversion.
The creation and maintenance of the liquidation account will not operate to
restrict the use or application of any of the regulatory capital accounts of the
Converted Association; provided, however, that such regulatory capital accounts
will not be voluntarily reduced below the required dollar amount of the
liquidation account. Each Eligible Account Holder and Supplemental Eligible
Account Holder shall, with respect to the Deposit Account held, have a related
inchoate interest in a portion of the liquidation account balance ("subaccount
balance").
The initial subaccount balance of a Deposit Account held by an Eligible
Account Holder and/or Supplemental Eligible Account Holder shall be determined
by multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of the Qualifying Deposit in the Deposit
Account on the Eligibility Record Date and/or the Supplemental Eligibility
Record Date and the denominator is the total amount of the Qualifying Deposits
of all Eligible Account Holders and Supplemental
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<PAGE>
Eligible Account Holders on such record dates in the Association. For Deposit
Accounts in existence at both dates, separate subaccounts shall be determined on
the basis of the Qualifying Deposits in such Deposit Accounts on such record
dates. Such initial subaccount balance shall not be increased, and it shall be
subject to downward adjustment as provided below.
If the deposit balance in any Deposit Account of an Eligible Account
Holder or Supplemental Eligible Account Holder at the close of business on any
annual closing date subsequent to the record date is less than the lesser of (i)
the deposit balance in such Deposit Account at the close of business on any
other annual closing date subsequent to the Eligibility Record Date or the
Supplemental Eligibility Record Date or (ii) the amount of the Qualifying
Deposit in such Deposit Account on the Eligibility Record Date or Supplemental
Eligibility Record Date, the subaccount balance shall be reduced in an amount
proportionate to the reduction in such deposit balance. In the event of a
downward adjustment, the subaccount balance shall not be subsequently increased,
notwithstanding any increase in the deposit balance of the related Deposit
Account. If all funds in such Deposit Account are withdrawn, the related
subaccount balance shall be reduced to zero.
In the event of a complete liquidation of the Association (and only in
such event), each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then-current adjusted subaccount
balances for Deposit Accounts then held before any liquidation distribution may
be made to stockholders. No merger, consolidation, bulk purchase of assets with
assumptions of Deposit Accounts and other liabilities, or similar transactions
with another institution the accounts of which are insured by the SAIF, shall be
considered to be a complete liquidation. In such transactions, the liquidation
account shall be assumed by the surviving institution.
XV. RESTRICTIONS ON ACQUISITION OF CONVERTED ASSOCIATION
Regulations of the OTS limit acquisitions, and offers to acquire,
direct or indirect beneficial ownership of more than 10% of any class of an
equity security of the Converted Association or the Holding Company. In
addition, consistent with the regulations of the OTS, the charter of the
Converted Association shall provide that for a period of five years following
completion of the Conversion: (i) no Person (i.e., no individual, group acting
in concert, corporation, partnership, association, joint stock company, trust,
or unincorporated organization or similar company, syndicate, or any other group
formed for the purpose of acquiring, holding or disposing of securities of an
insured institution) shall directly or indirectly offer to acquire or acquire
beneficial ownership of more than 10% of any class of the Association's equity
securities. Shares beneficially owned in violation of this charter provision
shall not be counted as shares entitled to vote and shall not be voted by any
Person or counted as voting shares in connection with any matter submitted to
the shareholders for a vote. This limitation shall not apply to any offer to
acquire or acquisition of beneficial ownership of more than 10% of the common
stock of the Association by a corporation whose ownership is or will be
substantially the same as the ownership of the Association, provided that the
offer or acquisition is made more than one year following the date of completion
of the Conversion; (ii) shareholders shall not be permitted to cumulate their
votes for elections of directors; and (iii) special meetings of the shareholders
relating to changes in control or amendment of the charter may only be called by
the Board of Directors.
XVI. AMENDMENT OR TERMINATION OF PLAN
If necessary or desirable, the Plan may be amended at any time prior to
submission of the Plan and proxy materials to the Members by a two-thirds vote
of the respective Boards of Directors of the Holding
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<PAGE>
Company and the Association. After submission of the Plan and proxy materials to
the Members, the Plan may be amended by a two-thirds vote of the respective
Boards of Directors of the Holding Company and the Association only with the
concurrence of the OTS. In the event that the Association determines that for
tax purposes or otherwise it is in the best interest of the Association to
convert from a federal mutual to a federal stock institution without the
concurrent formation of a holding company, the Plan may be substantively
amended, with OTS approval, in such respects as the Board of Directors of the
Association deems appropriate to reflect such change from a holding company
conversion to a direct conversion. In the event the Plan is so amended, common
stock of the Association will be substituted for Holding Company Conversion
Stock in the Subscription, Direct Community or Public Offerings, and subscribers
will be resolicited as described in Section V hereof. Any amendments to the Plan
(including amendments to reflect the elimination of the concurrent holding
company formation) made after approval by the Members with the concurrence of
the OTS shall not necessitate further approval by the Members unless otherwise
required.
The Plan may be terminated by a two-thirds vote of the Association's
Board of Directors at any time prior to the Special Meeting of Members, and at
any time following such Special Meeting with the concurrence of the OTS. In its
discretion, the Board of Directors of the Association may modify or terminate
the Plan upon the order or with the approval of the OTS and without further
approval by Members. The Plan shall terminate if the sale of all shares of
Conversion Stock is not completed within 24 months of the date of the Special
Meeting. A specific resolution approved by a majority of the Board of Directors
of the Association is required in order for the Association to terminate the
Plan prior to the end of such 24-month period.
XVII. EXPENSES OF THE CONVERSION
The Holding Company and the Association shall use their best efforts to
assure that expenses incurred by them in connection with the Conversion shall be
reasonable.
XVIII. TAX RULING
Consummation of the Conversion is expressly conditioned upon prior
receipt of either a ruling of the United States Internal Revenue Service or an
opinion of tax counsel with respect to federal taxation, and either a ruling of
the Ohio taxation authorities or an opinion of tax counsel or other tax advisor
with respect to Ohio taxation, to the effect that consummation of the
transactions contemplated herein will not be taxable to the Holding Company or
the Association.
XIX. EXTENSION OF CREDIT FOR PURCHASE OF STOCK
The Association may not knowingly loan funds or otherwise extend credit
to any Person to purchase in the Conversion shares of Holding Company Conversion
Stock.
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EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF THE HOLDING COMPANY
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
FIRST NILES FINANCIAL, INC.
FIRST: The name of the Corporation is First Niles Financial, Inc.
(hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of the registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
FOURTH:
A. The total number of shares of all classes of stock which the
Corporation shall have the authority to issue is six million five hundred
thousand (6,500,000) consisting of:
1. five hundred thousand (500,000) shares of preferred stock, par
value one cent ($.01) per share (the "Preferred Stock"); and
2. six million (6,000,000) shares of common stock, par value one cent
($.01) per share (the "Common Stock").
B. The Board of Directors is hereby expressly authorized, subject to
any limitations prescribed by law, to provide for the issuance of the shares of
Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware (such certificate being hereinafter
referred to as a "Preferred Stock Designation"), to establish from time to time
the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and any qualifications, limitations or restrictions thereof. The number of
authorized shares of the Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote of
the holders of a majority of the Common Stock, without a vote of the holders of
the Preferred Stock, or of any series thereof, unless a vote of any such holders
is required pursuant to the terms of any Preferred Stock Designation.
C. 1. Notwithstanding any other provision of this Certificate of
Incorporation, in no event shall any record owner of any outstanding Common
Stock which is beneficially owned, directly or indirectly, by a person who, as
of any record date for the determination of stockholders entitled to vote on any
matter, beneficially owns in excess of 10% of the then-outstanding shares of
Common Stock (the "Limit"), be entitled, or permitted to any vote in respect of
the shares held in excess of the Limit. The number of votes which may be cast by
any record owner by virtue of the provisions hereof in respect of Common Stock
beneficially owned by such person owning shares in excess of the Limit shall be
a number equal to the total number of
<PAGE>
votes which a single record owner of all Common Stock owned by such person would
be entitled to cast, multiplied by a fraction, the numerator of which is the
number of shares of such class or series beneficially owned by such person and
owned of record by such record owner and the denominator of which is the total
number of shares of Common Stock beneficially owned by such person owning shares
in excess of the Limit.
2. The following definitions shall apply to this Section C of this
Article FOURTH:
(a) An "affiliate" of a specified person shall mean a person that
directly, or indirectly through one or more intermediaries, controls,
or is controlled by, or is under common control with, the person
specified.
(b) "Beneficial ownership" shall be determined pursuant to Rule
13d-3 of the General Rules and Regulations under the Securities
Exchange Act of 1934 (or any successor rule or statutory provision),
or, if said Rule 13d-3 shall be rescinded and there shall be no
successor rule or statutory provision thereto, pursuant to said Rule
13d-3 as in effect on May 31, 1998; provided, however, that a person
shall, in any event, also be deemed the "beneficial owner" of any
Common Stock:
(1) which such person or any of its affiliates beneficially
owns, directly or indirectly; or
(2) which such person or any of its affiliates has (i) the
right to acquire (whether such right is exercisable immediately
or only after the passage of time), pursuant to any agreement,
arrangement or understanding (but shall not be deemed to be the
beneficial owner of any voting shares solely by reason of an
agreement, contract, or other arrangement with this Corporation
to effect any transaction which is described in any one or more
of the clauses of Section A of Article EIGHTH) or upon the
exercise of conversion rights, exchange rights, warrants, or
options or otherwise, or (ii) sole or shared voting or investment
power with respect thereto pursuant to any agreement,
arrangement, understanding, relationship or otherwise (but shall
not be deemed to be the beneficial owner of any voting shares
solely by reason of a revocable proxy granted for a particular
meeting of stockholders, pursuant to a public solicitation of
proxies for such meeting, with respect to shares of which neither
such person nor any such affiliate is otherwise deemed the
beneficial owner); or
(3) which are beneficially owned, directly or indirectly, by
any other person with which such first mentioned person or any of
its affiliates acts as a partnership, limited partnership,
syndicate or other group pursuant to any agreement, arrangement
or understanding for the purpose of acquiring, holding, voting or
disposing of any shares of capital stock of this Corporation;
and provided further, however, that (1) no director or officer of this
Corporation (or any affiliate of any such director or officer) shall,
solely by reason of any or all of such directors
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<PAGE>
or officers acting in their capacities as such, be deemed, for any
purposes hereof, to beneficially own any Common Stock beneficially
owned by any other such director or officer (or any affiliate
thereof), and (2) neither any employee stock ownership or similar plan
of this Corporation or any subsidiary of this Corporation nor any
trustee with respect thereto (or any affiliate of such trustee) shall,
solely by reason of such capacity of such trustee, be deemed, for any
purposes hereof, to beneficially own any Common Stock held under any
such plan. For purposes of computing the percentage beneficial
ownership of Common Stock of a person, the outstanding Common Stock
shall include shares deemed owned by such person through application
of this subsection but shall not include any other Common Stock which
may be issuable by this Corporation pursuant to any agreement, or upon
exercise of conversion rights, warrants or options, or otherwise. For
all other purposes, the outstanding Common Stock shall include only
Common Stock then outstanding and shall not include any Common Stock
which may be issuable by this Corporation pursuant to any agreement,
or upon the exercise of conversion rights, warrants or options, or
otherwise.
(c) A "person" shall mean any individual, firm, corporation, or
other entity.
(d) The Board of Directors shall have the power to construe and
apply the provisions of this section and to make all determinations
necessary or desirable to implement such provisions, including but not
limited to matters with respect to (1) the number of shares of Common
Stock beneficially owned by any person, (2) whether a person is an
affiliate of another, (3) whether a person has an agreement,
arrangement, or understanding with another as to the matters referred
to in the definition of beneficial ownership, (4) the application of
any other definition or operative provision of this Section to the
given facts, or (5) any other matter relating to the applicability or
effect of this Section.
3. The Board of Directors shall have the right to demand that any
person who is reasonably believed to beneficially own Common Stock in excess of
the Limit (or holds of record Common Stock beneficially owned by any person in
excess of the Limit) (a "Holder in Excess") supply the Corporation with complete
information as to (a) the record owner(s) of all shares beneficially owned by
such Holder in Excess, and (b) any other factual matter relating to the
applicability or effect of this section as may reasonably be requested of such
Holder in Excess. The Board of Directors shall further have the right to receive
from any Holder in Excess reimbursement for all expenses incurred by the Board
in connection with its investigation of any matters relating to the
applicability or effect of this section on such Holder in Excess, to the extent
such investigation is deemed appropriate by the Board of Directors as a result
of the Holder in Excess refusing to supply the Corporation with the information
described in the previous sentence.
4. Except as otherwise provided by law or expressly provided in this
Section C, the presence, in person or by proxy, of the holders of record of
shares of capital stock of the Corporation entitling the holders thereof to cast
one-third of the votes (after giving effect, if required, to the provisions of
this Section) entitled to be cast by the holders of shares of capital stock of
the Corporation entitled to vote shall constitute a quorum at all meetings of
the stockholders, and every reference in this Certificate of Incorporation to a
majority or other proportion of capital stock (or the holders thereof) for
purposes of determining any quorum requirement or any requirement for
3
<PAGE>
stockholder consent or approval shall be deemed to refer to such majority or
other proportion of the votes (or the holders thereof) then entitled to be cast
in respect of such capital stock.
5. Any constructions, applications, or determinations made by the Board
of Directors, pursuant to this Section in good faith and on the basis of such
information and assistance as was then reasonably available for such purpose,
shall be conclusive and binding upon the Corporation and its stockholders.
6. In the event any provision (or portion thereof) of this Section C
shall be found to be invalid, prohibited or unenforceable for any reason, the
remaining provisions (or portions thereof) of this Section shall remain in full
force and effect, and shall be construed as if such invalid, prohibited or
unenforceable provision had been stricken herefrom or otherwise rendered
inapplicable, it being the intent of this Corporation and its stockholders that
each such remaining provision (or portion thereof) of this Section C remain, to
the fullest extent permitted by law, applicable and enforceable as to all
stockholders, including stockholders owning an amount of stock over the Limit,
notwithstanding any such finding.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by Statute or by this Certificate of
Incorporation or the By-laws of the Corporation, the directors are hereby
empowered to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by written
ballot unless the By-laws so provide.
C. Subject to the rights of holders of any class or series of Preferred
Stock, any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
D. Subject to the rights of holders of any class or series of Preferred
Stock, special meetings of stockholders of the Corporation may be called only by
the Board of Directors pursuant to a resolution adopted by a majority of the
total number of directors which the Corporation would have if there were no
vacancies on the Board of Directors (the "Whole Board").
E. Stockholders shall not be permitted to cumulate their votes for the
election of directors.
4
<PAGE>
SIXTH:
A. The number of directors shall be fixed from time to time exclusively
by the Board of Directors pursuant to a resolution adopted by a majority of the
Whole Board. The directors, other than those who may be elected by the holders
of any class or series of Preferred Stock, shall be divided into three classes,
as nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the conclusion
of the annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the conclusion of the annual meeting of
stockholders two years thereafter, with each director to hold office until his
or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders following such initial classification and election,
directors elected to succeed those directors whose terms expire shall be elected
for a term of office to expire at the third succeeding annual meeting of
stockholders after their election, with each director to hold office until his
or her successor shall have been duly elected and qualified.
B. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office, though less than a quorum, and directors so chosen shall hold
office for a term expiring at the annual meeting of stockholders at which the
term of office of the class to which they have been elected expires, and until
such director's successor shall have been duly elected and qualified. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
C. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
By-laws of the Corporation.
D. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, any directors, or the entire Board of Directors, may be
removed from office at any time, but only for cause and only by the affirmative
vote of the holders of at least 80% of the voting power of all of the
then-outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (after giving effect to the provisions of
Article FOURTH of this Certificate of Incorporation), voting together as a
single class.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or
repeal the By-laws of the Corporation. Any adoption, amendment or repeal of the
By-laws of the Corporation by the Board of Directors shall require the approval
of a majority of the Whole Board. The stockholders shall also have power to
adopt, amend or repeal the By-laws of the Corporation. In addition to any vote
of the holders of any class or series of stock of this Corporation required by
law or by this Certificate of Incorporation, the affirmative vote of the holders
of at least 80% of the voting power of all of the then-outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election of
directors (after giving effect to the provisions of Article FOURTH hereof),
voting together as a single class, shall be required to adopt, amend or repeal
any provisions of the By-laws of the Corporation.
5
<PAGE>
EIGHTH:
A. In addition to any affirmative vote required by law or this
Certificate of Incorporation, and except as otherwise expressly provided in this
Section:
1. any merger or consolidation of the Corporation or
any Subsidiary (as hereinafter defined) with (a) any Interested
Stockholder (as hereinafter defined) or (b) any other corporation
(whether or not itself an Interested Stockholder) which is, or after
such merger or consolidation would be, an Affiliate (as hereinafter
defined) of an Interested Stockholder; or
2. any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a series of
transactions) to or with any Interested Stockholder, or any Affiliate
of any Interested Stockholder, of any assets of the Corporation or any
Subsidiary having an aggregate Fair Market Value (as hereafter defined)
equaling or exceeding 25% or more of the combined assets of the
Corporation and its Subsidiaries; or
3. the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of transactions) of any
securities of the Corporation or any Subsidiary to any Interested
Stockholder or any Affiliate of any Interested Stockholder in exchange
for cash, securities or other property (or a combination thereof)
having an aggregate Fair Market Value equaling or exceeding 25% of the
combined assets of the Corporation and its Subsidiaries except pursuant
to an employee benefit plan of the Corporation or any Subsidiary
thereof; or
4. the adoption of any plan or proposal for the
liquidation or dissolution of the Corporation proposed by or on behalf
of any Interested Stockholder or any Affiliate of any Interested
Stockholder; or
5. any reclassification of securities (including any
reverse stock split), or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its Subsidiaries
or any other transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which has the effect, directly or
indirectly, of increasing the proportionate share of the outstanding
shares of any class of equity or convertible securities of the
Corporation or any Subsidiary which is directly or indirectly owned by
any Interested Stockholder or any Affiliate of any Interested
Stockholder (a "Disproportionate Transaction"); provided, however, that
no such transaction shall be deemed a Disproportionate Transaction if
the increase in the proportionate ownership of the Interested
Stockholder or Affiliate as a result of such transaction is no greater
than the increase experienced by the other stockholders generally;
shall require the affirmative vote of the holders of at least 80% of the voting
power of the then-outstanding shares of stock of the Corporation entitled to
vote in the election of directors (the "Voting Stock"), voting together as a
single class. Such affirmative vote shall be required notwithstanding the fact
that no vote may be required, or that a lesser percentage may be specified,
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<PAGE>
by law or by any other provisions of this Certificate of Incorporation or any
Preferred Stock Designation or in any agreement with any national securities
exchange or quotation system or otherwise.
The term "Business Combination" as used in this Article EIGHTH shall
mean any transaction which is referred to in any one or more of paragraphs 1
through 5 of Section A of this Article EIGHTH.
B. The provisions of Section A of this Article EIGHTH shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only the affirmative vote of the majority of the outstanding
shares of capital stock entitled to vote, or such vote as is required by law or
by this Certificate of Incorporation, if, in the case of any Business
Combination that does not involve any cash or other consideration being received
by the stockholders of the Corporation solely in their capacity as stockholders
of the Corporation, the condition specified in the following paragraph 1 is met
or, in the case of any other Business Combination, all of the conditions
specified in either of the following paragraphs 1 and 2 are met:
1. The Business Combination shall have been approved by a majority of
the Disinterested Directors (as hereinafter defined).
2. All of the following conditions shall have been met:
(a) The aggregate amount of the cash and the Fair Market Value as
of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by the holders
of Common Stock in such Business Combination shall at least be equal
to the higher of the following:
(1) (if applicable) the Highest Per Share Price, including
any brokerage commissions, transfer taxes and soliciting dealers'
fees, paid by the Interested Stockholder or any of its Affiliates
for any shares of Common Stock acquired by it (i) within the
two-year period immediately prior to the first public
announcement of the proposal of the Business Combination (the
"Announcement Date"), or (ii) in the transaction in which it
became an Interested Stockholder, whichever is higher.
(2) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (such latter date is
referred to in this Article EIGHTH as the "Determination Date"),
whichever is higher.
(b) The aggregate amount of the cash and the Fair Market Value as
of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by holders of
shares of any class of outstanding Voting Stock other than Common
Stock shall be at least equal to the highest of the following (it
being intended that the requirements of this subparagraph (b) shall be
required to be met with respect to every such class of outstanding
Voting
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Stock, whether or not the Interested Stockholder has previously
acquired any shares of a particular class of Voting Stock):
(1) (if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage commissions,
transfer taxes and soliciting dealers' fees, paid by the
Interested Stockholder for any shares of such class of Voting
Stock acquired by it (i) within the two-year period immediately
prior to the Announcement Date, or (ii) in the transaction in
which it became an Interested Stockholder, whichever is higher;
(2) (if applicable) the highest preferential amount per
share to which the holders of shares of such class of Voting
Stock are entitled in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation; and
(3) the Fair Market Value per share of such class of Voting
Stock on the Announcement Date or on the Determination Date,
whichever is higher.
(c) The consideration to be received by holders of a particular
class of outstanding Voting Stock (including Common Stock) shall be in
cash or in the same form as the Interested Stockholder has previously
paid for shares of such class of Voting Stock. If the Interested
Stockholder has paid for shares of any class of Voting Stock with
varying forms of consideration, the form of consideration to be
received per share by holders of shares of such class of Voting Stock
shall be either cash or the form used to acquire the largest number of
shares of such class of Voting Stock previously acquired by the
Interested Stockholder. The price determined in accordance with
Section B.2 of this Article EIGHTH shall be subject to appropriate
adjustment in the event of any stock dividend, stock split,
combination of shares or similar event.
(d) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business
Combination; (i) except as approved by a majority of the Disinterested
Directors, there shall have been no failure to declare and pay at the
regular date therefor any full quarterly dividends (whether or not
cumulative) on any outstanding stock having preference over the Common
Stock as to dividends or liquidation; (ii) there shall have been (X)
no reduction in the annual rate of dividends paid on the Common Stock
(except as necessary to reflect any subdivision of the Common Stock),
except as approved by a majority of the Disinterested Directors, and
(Y) an increase in such annual rate of dividends as necessary to
reflect any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which has
the effect of reducing the number of outstanding shares of Common
Stock, unless the failure to so increase such annual rate is approved
by a majority of the Disinterested Directors; and (iii) neither such
Interested Stockholder nor any of its Affiliates shall have become the
beneficial owner of any additional shares of Voting Stock except
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<PAGE>
as part of the transaction which results in such Interested
Stockholder becoming an Interested Stockholder.
(e) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a
stockholder), of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages
provided by the Corporation, whether in anticipation of or in
connection with such Business Combination or otherwise.
(f) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder (or any subsequent provisions replacing such Act, rules or
regulations) shall be mailed to stockholders of the Corporation at
least 30 days prior to the consummation of such Business Combination
(whether or not such proxy or information statement is required to be
mailed pursuant to such Act or subsequent provisions).
C. For the purposes of this Article EIGHTH:
1. A "Person" shall include an individual, a group acting in concert, a
corporation, a partnership, an association, a joint venture, a pool, a joint
stock company, a trust, an unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities.
2. "Interested Stockholder" shall mean any Person (other than the
Corporation or any holding company or Subsidiary thereof) who or which:
(a) is the beneficial owner, directly or indirectly, of more than
10% of the voting power of the outstanding Voting Stock; or
(b) is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 10% or more of the voting
power of the then-outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to any shares of
Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any
Interested Stockholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act
of 1933.
3. A Person shall be a "beneficial owner" of any Voting Stock:
9
<PAGE>
(a) which such Person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly within
the meaning of Rule 13d-3 under the Securities Exchange Act of 1934,
as in effect on May 31, 1998; or
(b) which such Person or any of its Affiliates or Associates has
(i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise,
or (ii) the right to vote pursuant to any agreement, arrangement or
understanding (but neither such Person nor any such Affiliate or
Associate shall be deemed to be the beneficial owner of any shares of
Voting Stock solely by reason of a revocable proxy granted for a
particular meeting of stockholders, pursuant to a public solicitation
of proxies for such meeting, and with respect to which shares neither
such Person nor any such Affiliate or Associate is otherwise deemed
the beneficial owner); or
(c) which are beneficially owned, directly or indirectly within
the meaning of Rule 13d-3 under the Securities Exchange Act of 1934,
as in effect on May 31, 1998, by any other Person with which such
Person or any of its Affiliates or Associates has any agreement,
arrangement or understanding for the purposes of acquiring, holding,
voting (other than solely by reason of a revocable proxy as described
in Subparagraph (b) of this Paragraph 3) or in disposing of any shares
of Voting Stock;
provided, however, that, in the case of any employee stock ownership or
similar plan of the Corporation or of any Subsidiary in which the
beneficiaries thereof possess the right to vote any shares of Voting Stock
held by such plan, no such plan nor any trustee with respect thereto (nor
any Affiliate of such trustee), solely by reason of such capacity of such
trustee, shall be deemed, for any purposes hereof, to beneficially own any
shares of Voting Stock held under any such plan.
4. For the purpose of determining whether a Person is an Interested
Stockholder pursuant to Section C.2., the number of shares of Voting Stock
deemed to be outstanding shall include shares deemed owned through application
of this Section C.3. but shall not include any other shares of Voting Stock
which may be issuable pursuant to any agreement, arrangement or understanding,
or upon exercise of conversion rights, warrants or options, or otherwise.
5. "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as in effect on May 31, 1998.
6. "Subsidiary" means any corporation of which a majority of any class
of equity security is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in this Section C.2.,
10
<PAGE>
the term "Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by the Corporation.
7. "Disinterested Director" means any member of the Board of Directors
who is unaffiliated with the Interested Stockholder and was a member of the
Board of Directors prior to the time that the Interested Stockholder became an
Interested Stockholder, and any director who is thereafter chosen to fill any
vacancy on the Board of Directors or who is elected and who, in either event, is
unaffiliated with the Interested Stockholder, and in connection with his or her
initial assumption of office is recommended for appointment or election by a
majority of Disinterested Directors then on the Board of Directors.
8. "Fair Market Value" means: (a) in the case of stock, the highest
closing sales price of the stock during the 30-day period immediately preceding
the date in question of a share of such stock of the National Association of
Securities Dealers Automated Quotations ("NASDAQ") System or any system then in
use, or, if such stock is admitted to trading on a principal United States
securities exchange registered under the Securities Exchange Act of 1934, Fair
Market Value shall be the highest sale price reported during the 30-day period
preceding the date in question, or, if no such quotations are available, the
Fair Market Value on the date in question of a share of such stock as determined
by the Board of Directors in good faith, in each case with respect to any class
of stock, appropriately adjusted for any dividend or distribution in shares of
such stock or in combination or reclassification of outstanding shares of such
stock into a smaller number of shares of such stock, and (b) in the case of
property other than cash or stock, the Fair Market Value of such property on the
date in question as determined by the Board of Directors in good faith.
9. Reference to "Highest Per Share Price" shall in each case with
respect to any class of stock reflect an appropriate adjustment for any dividend
or distribution in shares of such stock or any stock split or reclassification
of outstanding shares of such stock into a greater number of shares of such
stock or any combination or reclassification of outstanding shares of such stock
into a smaller number of shares of such stock.
10. In the event of any Business Combination in which the Corporation
survives, the phrase "consideration other than cash to be received" as used in
Sections B.2.(a) and B.2.(b) of this Article EIGHTH shall include the shares of
Common Stock and/or the shares of any other class of outstanding Voting Stock
retained by the holders of such shares.
D. A majority of the Disinterested Directors of the Corporation shall
have the power and duty to determine for the purposes of this Article
EIGHTH, on the basis of information known to them after reasonable inquiry,
(a) whether a person is an Interested Stockholder; (b) the number of shares
of Voting Stock beneficially owned by any person; (c) whether a person is
an Affiliate or Associate of another; and (d) whether the assets which are
the subject of any Business Combination have, or the consideration to be
received for the issuance or transfer of securities by the Corporation or
any Subsidiary in any Business Combination has an aggregate Fair Market
Value equaling or exceeding 25% of the combined assets of the Corporation
and its Subsidiaries. A
11
<PAGE>
majority of the Disinterested Directors shall have the further power to
interpret all of the terms and provisions of this Article EIGHTH.
E. Nothing contained in this Article EIGHTH shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by
law.
F. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any affirmative vote of the holders of
any particular class or series of the Voting Stock required by law, this
Certificate of Incorporation or any Preferred Stock Designation, the
affirmative vote of the holders of at least 80% of the voting power of all
of the then-outstanding shares of the Voting Stock, voting together as a
single class, shall be required to alter, amend or repeal this Article
EIGHTH.
NINTH: The Board of Directors of the Corporation, when evaluating any offer
of another Person (as defined in Article EIGHTH hereof) to (A) make a tender or
exchange offer for any equity security of the Corporation, (B) merge or
consolidate the Corporation with another corporation or entity or (C) purchase
or otherwise acquire all or substantially all of the properties and assets of
the Corporation, may, in connection with the exercise of its judgment in
determining what is in the best interest of the Corporation and its
stockholders, give due consideration to all relevant factors, including, without
limitation, the social and economic effect of acceptance of such offer on the
Corporation's present and future customers and employees and those of its
Subsidiaries (as defined in Article EIGHTH hereof); on the communities in which
the Corporation and its Subsidiaries operate or are located; on the ability of
the Corporation to fulfill its corporate objectives as a financial institution
holding company and on the ability of its subsidiary financial institution to
fulfill the objectives of a federally insured financial institution under
applicable statutes and regulations.
TENTH:
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a director or an officer of the
Corporation or is or was serving at the request of the Corporation as a director
or officer of another corporation, including, without limitation, any Subsidiary
(as defined in Article EIGHTH herein), partnership, joint venture, trust or
other enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a director or officer or in any other capacity
while serving as a director or officer, shall be indemnified and held harmless
by the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith; provided, however, that,
except as provided in Section C hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof)
12
<PAGE>
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication"), that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article shall be contract rights
and such rights shall continue as to an indemnitee who has ceased to be a
director or officer and shall inure to the benefit of the indemnitee's heirs,
executors and administrators.
C. If a claim under Section A or B of this Article is not paid in full
by the Corporation within 60 days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall also be entitled to be paid the
expense of prosecuting or defending such suit. In (1) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (2) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article shall not be exclusive of any other right which any
person may have or hereafter
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acquire under any statute, the Corporation's Certificate of Incorporation,
By-laws, agreement, vote of stockholders or Disinterested Directors or
otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by a
majority vote of the disinterested directors, grant rights to indemnification
and to the advancement of expenses to any employee or agent of the Corporation
to the fullest extent of the provisions of this Article with respect to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
ELEVENTH: A director of this Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (A) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (B) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (C) under Section 174 of the Delaware General Corporation Law,
or (D) for any transaction from which the director derived an improper personal
benefit. If the Delaware General Corporation Law is hereafter amended to further
eliminate or limit the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
TWELFTH: The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation; provided, however, that,
notwithstanding any other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the stock of this
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 80% of the voting power of all of
the then-outstanding shares of the capital stock of the Corporation entitled to
vote generally in the election of directors (after giving effect to the
provisions of Article FOURTH), voting together as a single class, shall be
required to amend or repeal this Article TWELFTH, Sections B or C of Article
FOURTH, Sections C or D of Article FIFTH, Article SIXTH, Article SEVENTH,
Article EIGHTH, or Article TENTH.
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THIRTEENTH: The name and mailing address of the sole incorporator are as
follows:
NAME MAILING ADDRESS
---- ---------------
William L. Stephens Home Federal Savings and
Loan Association of Niles
55 North Main Street
Niles, Ohio 44446
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I, THE UNDERSIGNED, being the incorporator, for the purpose of forming
a corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and, accordingly, have hereto set my hand this 7th day of July 1998.
/s/ William L. Stephens
---------------------------------
William L. Stephens, Incorporator
16
EXHIBIT 3.2
BYLAWS
OF THE HOLDING COMPANY
<PAGE>
FIRST NILES FINANCIAL, INC.
BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, special meetings of stockholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors which the
Corporation would have if there were no vacancies on the Board of Directors
(hereinafter the "Whole Board").
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten nor more than 60 days before the
date on which the meeting is to be held, to each stockholder entitled to vote at
such meeting, except as otherwise provided herein or required by law (meaning,
here and hereinafter, as required from time to time by the Delaware General
Corporation Law or the Certificate of Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than 30
days after the date for which the meeting was originally noticed, or if a new
record date is fixed for the adjourned meeting, written notice of the place,
date and time of the adjourned meeting shall be given in conformity herewith. At
any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of at least one-third
of all of the shares of the stock entitled to vote at the meeting, present in
person or by proxy, shall constitute a quorum for all purposes, unless or except
to the extent that the presence of a larger number may be required by law. Where
a separate vote by a class or classes is required, a majority of the shares of
such class or
<PAGE>
classes, present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
Section 5. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the President of the Corporation or, in his or her
absence, such person as may be chosen by the holders of a majority of the shares
entitled to vote who are present, in person or by proxy, shall call to order any
meeting of the stockholders and act as chairman of the meeting. In the absence
of the Secretary of the Corporation, the secretary of the meeting shall be such
person as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall determine the
order of business and the procedure at the meeting, including such
regulation of the manner of voting and the conduct of discussion as seem to
him or her in order.
(b) At any annual meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting (i) by or
at the direction of the Board of Directors or (ii) by any stockholder of
the Corporation who is entitled to vote with respect thereto and who
complies with the notice procedures set forth in this Section 6(b). For
business to be properly brought before an annual meeting by a stockholder,
the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered or mailed to and received at the principal executive offices of
the Corporation not less than 60 days prior to the anniversary of the
preceding year's annual meeting; provided, however, that in the event that
the date of the annual meeting is advanced by more than twenty days, or
delayed by more than 60 days from such anniversary date, notice by the
stockholder to be timely must be so delivered not later than the close of
business on the later of the 60th day prior to such annual meeting or the
earlier of the tenth day following the day on which notice of the date of
the annual meeting was mailed or public announcement of the date of such
meeting is first made. A stockholder's notice to the Secretary shall set
forth as to each matter such stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they appear
on the Corporation's books, of the stockholder who proposed such business,
(iii) the class and number of shares of the Corporation's capital stock
that are beneficially
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owned by such stockholder and (iv) any material interest of such
stockholder in such business. Notwithstanding anything in these By-laws to
the contrary, no business shall be brought before or conducted at an annual
meeting except in accordance with the provisions of this Section 6(b). The
officer of the Corporation or other person presiding over the annual
meeting shall, if the facts so warrant, determine and declare to the
meeting that business was not properly brought before the meeting in
accordance with the provisions of this Section 6(b) and, if he should so
determine, he shall so declare to the meeting and any such business so
determined to be not properly brought before the meeting shall not be
transacted.
At any special meeting of the stockholders, only such business shall
be conducted as shall have been brought before the meeting by or at the
direction of the Board of Directors.
(c) Only persons who are nominated in accordance with the procedures
set forth in these By-laws shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders at which directors are
to be elected only (i) by or at the direction of the Board of Directors or
(ii) by any stockholder of the Corporation entitled to vote for the
election of directors at the meeting who complies with the notice
procedures set forth in this Section 6(c). Such nominations, other than
those made by or at the direction of the Board of Directors, shall be made
by timely notice in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice shall be delivered or mailed to and received
at the principal executive offices of the Corporation not less than 60 days
prior to the date of the meeting; provided, however, that in the event that
less than 70 days' notice of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received
not later than the close of business on the earlier of the tenth day
following the day on which such notice of the date of the meeting was
mailed or public announcement of the date of such meeting was first made.
Such stockholder's notice shall set forth (1) as to each person whom such
stockholder proposes to nominate for election or re-election as a director,
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (including such person's written consent
to being named in the proxy statement as a nominee and to serving as a
director if elected); and (2) as to the stockholder giving the notice: (x)
the name and address, as they appear on the Corporation's books, of such
stockholder and (y) the class and number of shares of the Corporation's
capital stock that are beneficially owned by such stockholder. At the
request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be
eligible for election as a director of the Corporation unless nominated in
accordance with the provisions of this Section 6(c). The officer of the
Corporation or other person presiding at the meeting shall, if the facts so
warrant, determine that a nomination was not made in accordance with such
provisions and, if he or she should so determine, he or she shall so
declare to the meeting and the defective nomination shall be disregarded.
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Section 7. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote
may vote in person or by proxy authorized by an instrument in writing (or as
otherwise permitted under applicable law) by the stockholder or his duly
authorized attorney-in-fact filed in accordance with the procedure established
for the meeting. Proxies solicited on behalf of the management shall be voted as
directed by the stockholder or in the absence of such direction, as determined
by a majority of the Board of Directors. No proxy shall be valid after eleven
months from the date of its execution except for a proxy coupled with an
interest.
Each stockholder shall have one vote for every share of stock entitled
to vote which is registered in his or her name on the record date for the
meeting, except as otherwise provided herein or in the Certificate of
Incorporation of the Corporation or as required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefore by a stockholder entitled to vote on his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballot, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballot shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or as provided in the Certificate of
Incorporation, all other matters shall be determined by a majority of the votes
cast.
Section 8. Stock List.
The officer who has charge of the stock transfer books of the
Corporation shall prepare and make, in the time and manner required by
applicable law, a list of stockholders entitled to vote and shall make such list
available for such purposes, at such places, at such times and to such persons
as required by applicable law. The stock transfer books shall be the only
evidence as to the identity of the stockholders entitled to examine the stock
transfer books or to vote in person or by proxy at any meeting of stockholders.
Section 9. Consent of Stockholders in Lieu of Meeting.
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, any action required or permitted to be taken
by the stockholders of the Corporation must be effected at a duly called annual
or special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders.
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Section 10. Inspectors of Election
The Board of Directors shall, in advance of any meeting of
stockholders, appoint one or more persons as inspectors of election, to act at
the meeting or any adjournment thereof and make a written report thereof, in
accordance with applicable law.
ARTICLE II
BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office.
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. The number of directors shall be
as provided for in the Certificate of Incorporation. The Board of Directors
shall annually elect a Chairman of the Board and a President from among its
members and shall designate, when present, either the Chairman of the Board or
the President to preside at its meetings.
The directors, other than those who may be elected by the holders of
any class or series of preferred stock, shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the conclusion
of the annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the conclusion of the annual meeting of
stockholders two years thereafter, with each director to hold office until his
or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, commencing with the first annual meeting, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of stockholders
after their election, with each director to hold office until his or her
successor shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of
preferred stock then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies in the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause may be filled only by a majority vote of the
directors then in office, though less than a quorum, and directors so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been elected expires,
and until such director's successor shall have been duly elected and qualified.
No decrease in the number of authorized directors constituting the Board shall
shorten the term of any incumbent director.
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Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place
or places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by one-third
(1/3) of the directors then in office (rounded up to the nearest whole number)
or by the President and shall be held at such place, on such date, and at such
time as they or he or she shall fix. Notice of the place, date, and time of each
such special meeting shall be given to each director by whom it is not waived by
mailing written notice not less than five days before the meeting or by
telegraphing or telexing or by facsimile transmission of the same not less than
twenty-four (24) hours before the meeting. Unless otherwise indicated in the
notice thereof, any and all business may be transacted at a special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the authorized
number of directors then constituting the Board shall constitute a quorum for
all purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted
in such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 8. Powers.
The Board of Directors may, except as otherwise required by law,
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, including, without limiting the generality of the
foregoing, the unqualified power:
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(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it
may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any officer of the Corporation with or without cause,
and from time to time to devolve the powers and duties of any officer upon
any other person for the time being;
(5) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
(6) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for directors, officers, employees and
agents of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and
(8) To adopt from time to time regulations, not inconsistent with
these By-laws, for the management of the Corporation's business and
affairs.
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
Board of Directors.
ARTICLE III
COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Board of
Directors, may from time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for those committees and any others provided
for herein, elect a director or directors to serve as the member or members,
designating, if it desires, other directors as alternate members who may replace
any absent or disqualified member at any meeting of the committee. Any such
committee, to the extent provided in the resolution(s) of the
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Board of Directors, shall have and may exercise all the powers and authority of
the Board in the management of the business and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority to: (i)
approve or adopt, or recommend to the stockholders, any action or matter
expressly required by law to be submitted to stockholders for approval, or (ii)
adopt, amend or repeal any bylaw of the Corporation. In the absence or
disqualification of any member of any committee and any alternate member in his
or her place, the member or members of the committee present at the meeting and
not disqualified from voting, whether or not he or she or they constitute a
quorum, may by unanimous vote appoint another member of the Board of Directors
to act at the meeting in the place of the absent or disqualified member.
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one or two members, in
which event one member shall constitute a quorum; and all matters shall be
determined by a majority vote of the members present. Action may be taken by any
committee without a meeting if all members thereof consent thereto in writing,
and the writing or writings are filed with the minutes of the proceedings of
such committee.
Section 3. Nominating Committee.
The Board of Directors may appoint a Nominating Committee of the Board,
consisting of not less than three members, one of which shall be the President
if, and only so long as, the President remains in office as a member of the
Board of Directors. The Nominating Committee shall have authority (i) to review
any nominations for election to the Board of Directors made by a stockholder of
the Corporation pursuant to Section 6(c)(ii) of Article I of these By-laws in
order to determine compliance with such By-law and (ii) to recommend to the
Whole Board nominees for election to the Board of Directors to replace those
directors whose terms expire at the annual meeting of stockholders next ensuing.
ARTICLE IV
OFFICERS
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after the
annual meeting of stockholders shall choose a President, a Secretary and a
Treasurer and from time to time may choose such other officers as it may
deem proper. The President shall be chosen from among the directors. Any
number of offices may be held by the same person.
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(b) The term of office of all officers shall be until the next annual
election of officers and until their respective successors are chosen, but
any officer may be removed from office at any time by the affirmative vote
of a majority of the authorized number of directors then constituting the
Board of Directors.
(c) All officers chosen by the Board of Directors shall each have such
powers and duties as generally pertain to their respective offices, subject
to the specific provisions of this Article IV. Such officers shall also
have such powers and duties as from time to time may be conferred by the
Board of Directors or by any committee thereof.
Section 2. President.
The President shall be the chief executive officer and, subject to the
control of the Board of Directors, shall have general power over the management
and oversight of the administration and operation of the Corporation's business
and general supervisory power and authority over its policies and affairs. The
President shall see that all orders and resolutions of the Board of Directors
and of any committee thereof are carried into effect.
Each meeting of the stockholders and of the Board of Directors shall be
presided over by such officer as has been designated by the Board of Directors
or, in his absence, by such officer or other person as is chosen at the meeting.
The Secretary or, in the Secretary's absence, the General Counsel of the
Corporation or such officer as has been designated by the Board of Directors or,
in his absence, such officer or other person as is chosen by the person
presiding, shall act as secretary of each such meeting.
Section 3. Vice President.
The Vice President or Vice Presidents, if any, shall perform the duties
of the President in his absence or during his disability to act. In addition,
the Vice Presidents shall perform the duties and exercise the powers usually
incident to their respective offices and/or such other duties and powers as may
be properly assigned to them from time to time by the Board of Directors, the
Chairman of the Board or the President.
Section 4. Secretary.
The Secretary or an Assistant Secretary shall issue notices of
meetings, shall keep their minutes, shall have charge of the seal and the
corporate books, shall perform such other duties and exercise such other powers
as are usually incident to such offices and/or such other duties and powers as
are properly assigned thereto by the Board of Directors, the Chairman of the
Board or the President.
Section 5. Treasurer.
The Treasurer shall have charge of all monies and securities of the
Corporation, other than monies and securities of any division of the Corporation
which has a treasurer or financial officer
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appointed by the Board of Directors, and shall keep regular books of account.
The funds of the Corporation shall be deposited in the name of the Corporation
by the Treasurer with such banks or trust companies or other entities as the
Board of Directors from time to time shall designate. The Treasurer shall sign
or countersign such instruments as require his signature, shall perform all such
duties and have all such powers as are usually incident to such office and/or
such other duties and powers as are properly assigned to him by the Board of
Directors, the Chairman of the Board or the President, and may be required to
give bond, payable by the Corporation, for the faithful performance of his
duties in such sum and with such surety as may be required by the Board of
Directors.
Section 6. Assistant Secretaries and Other Officers.
The Board of Directors may appoint one or more assistant secretaries
and one or more assistant treasurers, or one appointee to both such positions,
which officers shall have such powers and shall perform such duties as are
provided in these By-laws or as may be assigned to them by the Board of
Directors, the Chairman of the Board or the President.
Section 7. Action with Respect to Securities of Other Corporations
Unless otherwise directed by the Board of Directors, the President or
any officer of the Corporation authorized by the President shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of stockholders of or with respect to any action of stockholders of
any other corporation in which this Corporation may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other Corporation.
ARTICLE V
STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in
the name of the Corporation by, the President or a Vice President, and by the
Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer,
certifying the number of shares owned by him or her. Any or all of the
signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these
By-laws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefore.
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Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
60 nor less than ten days before the date of any meeting of stockholders, nor
more than 60 days prior to the time for such other action as hereinbefore
described; provided, however, that if no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held, and, for determining stockholders entitled to receive payment of any
dividend or other distribution or allotment of rights or to exercise any rights
of change, conversion or exchange of stock or for any other purpose, the record
date shall be at the close of business on the day on which the Board of
Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of
stock shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI
NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law,
all notices required to be given to any stockholder, director, officer, employee
or agent shall be in writing and may in every instance be effectively given by
hand delivery to the recipient thereof, by depositing such notice in the mail,
postage paid, by sending such notice by prepaid telegram or mailgram or by
sending such notice by facsimile machine or other electronic transmission. Any
such notice shall be addressed
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to such stockholder, director, officer, employee or agent at his or her last
known address as the same appears on the books of the Corporation. The time when
such notice is received, if hand delivered, or dispatched, if delivered through
the mail, by telegram or mailgram or by facsimile machine or other electronic
transmission, shall be the time of the giving of the notice.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder, director,
officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed equivalent to the notice required
to be given to such stockholder, director, officer, employee or agent. Neither
the business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII
MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these By-laws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name
of the Corporation, which seal shall be in the charge of the Secretary. If and
when so directed by the Board of Directors or a committee thereof, duplicates of
the seal may be kept and used by the Treasurer or by an Assistant Secretary or
Assistant Treasurer.
Section 3. Reliance upon Books, Reports and Records.
Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
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Section 5. Time Periods.
In applying any provision of these By-laws which requires that an act
be done or not be done a specified number of days prior to an event or that an
act be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded
and the day of the event shall be included.
ARTICLE VIII
AMENDMENTS
The By-laws of the Corporation may be adopted, amended or repealed as
provided in Article SEVENTH of the Certificate of Incorporation of the
Corporation.
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EXHIBIT 3.3
FEDERAL STOCK CHARTER
<PAGE>
Exhibit 3.3
FEDERAL STOCK CHARTER
HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF NILES
SECTION 1. Corporate Title. The full corporate title of the association
is "Home Federal Savings and Loan Association of Niles."
SECTION 2. Office. The home office shall be located at 55 N. Main
Street, in the City of Niles, County of Trumbull, in the State of Ohio.
SECTION 3. Duration. The duration of the association is perpetual.
SECTION 4. Purpose and Powers. The purpose of the association is to
pursue any or all of the lawful objectives of a federal savings association
chartered under SECTION 5 of the Home Owners' Loan Act and to exercise all of
the express, implied, and incidental powers conferred thereby and by all acts
amendatory thereof and supplemental thereto, subject to the Constitution and
laws of the United States as they are now in effect, or as they may hereafter be
amended, and subject to all lawful and applicable rules, regulations, and orders
of the Office of Thrift Supervision ("Office").
SECTION 5. Capital Stock. The total number of shares of all classes of
the capital stock that the association has the authority to issue is six million
five hundred thousand (6,500,000), of which six million (6,000,000) shall be
common stock of par value of $.01 per share, and of which five hundred thousand
(500,000) shall be serial preferred stock of par value $.01 per share. The
shares may be issued from time to time as authorized by the board of directors
without further approval of stockholders, except as otherwise provided in this
SECTION 5 or to the extent that such approval is required by governing law, rule
or regulation. The consideration for the issuance of the shares shall be paid in
full before their issuance and shall not be less than the par value. Neither
promissory notes nor future services shall constitute payment or part payment
for the issuance of shares of the association. The consideration for the shares
shall be cash, tangible or intangible property (to the extent direct investment
in such property would be permitted to the association), labor, or services
actually performed for the association, or any combination of the foregoing. In
the absence of actual fraud in the transaction, the value of such property,
labor, or services, as determined by the board of directors of the association,
shall be conclusive. Upon payment of such consideration, such shares shall be
deemed to be fully paid and nonassessable. In the case of a stock dividend, that
part of the retained earnings of the association that is transferred to common
stock or paid-in capital accounts upon the issuance of shares as a stock
dividend shall be deemed to be the consideration for their issuance.
<PAGE>
Except for shares issued in the initial organization of the association
or in connection with the conversion of the association from the mutual to the
stock form of capitalization, no shares of capital stock (including shares
issuable upon conversion, exchange, or exercise of other securities) shall be
issued, directly or indirectly, to officers, directors, or controlling persons
of the association other than as part of a general public offering or as
qualifying shares to a director, unless their issuance or the plan under which
they would be issued has been approved by a majority of the total votes eligible
to be cast at a legal meeting.
Nothing contained in this SECTION 5 (or in any supplementary sections
hereto) shall entitle the holders of any class of a series of capital stock to
vote as a separate class or series, or to more than one vote per share:
Provided, That this restriction on voting separately by class or series shall
not apply:
(i) To any provision that would authorize the holders of preferred stock,
voting as a class or series, to elect some members of the board of
directors, less than a majority thereof, in the event of default in
the payment of dividends on any class or series of preferred stock;
(ii) To any provision which would require the holders of preferred stock,
voting as a class or series, to approve the merger or consolidation of
the association with another corporation or the sale, lease, or
conveyance (other than by mortgage or pledge) of properties or
business in exchange for securities of a corporation other than the
association if the preferred stock is exchanged for securities of such
other corporation: Provided, That no provision may require such
approval for transactions undertaken with the assistance or pursuant
to the direction of the Office or the Federal Deposit Insurance
Corporation;
(iii) To any amendment which would adversely change the specific terms of
any class or series of capital stock as set forth in this SECTION 5
(or in any supplementary sections hereto), including any amendment
which would create or enlarge any class or series ranking prior
thereto in rights and preferences. An amendment which increases the
number of authorized shares of any class or series of capital stock,
or substitutes the surviving association in a merger or consolidation
for the association, shall not be considered to be such an adverse
change.
A description of the different classes and series (if any) of the
association's capital stock and a statement of the designations, and the
relative rights, preferences, and limitations of the shares of each class and
series (if any) of capital stock are as follows:
A. Common Stock. Except as provided in this SECTION 5 (or in any
supplementary sections thereto) the holders of the common stock shall
exclusively possess all voting power. Each holder of shares of common stock
shall be entitled to one vote for each share held by such holder.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the
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payment of dividends, the full amount of dividends and of sinking fund,
retirement fund, or other retirement payments, if any, to which such holders are
respectively entitled in preference to the common stock, then dividends may be
paid on the common stock and on any class or series of stock entitled to
participate therewith as to dividends out of any assets legally available for
the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the
association, the holders of the common stock (and the holders of any class or
series of stock entitled to participate with the common stock in the
distribution of assets) shall be entitled to receive, in cash or in kind, the
assets of the association available for distribution remaining after: (i)
payment or provision for payment of the association's debts and liabilities;
(ii) distributions or provision for distributions in settlement of its
liquidation account; and (iii) distributions or provisions for distributions to
holders of any class or series of stock having preference over the common stock
in the liquidation, dissolution, or winding up of the association. Each share of
common stock shall have the same relative rights as and be identical in all
respects with all the other shares of common stock.
B. Preferred Stock. The association may provide in supplementary
sections to its charter for one or more classes of preferred stock, which shall
be separately identified. The shares of any class may be divided into and issued
in series, with each series separately designated so as to distinguish the
shares thereof from the shares of all other series and classes. The terms of
each series shall be set forth in a supplementary section to the charter. All
shares of the same class shall be identical except as to the following relative
rights and preferences, as to which there may be variations between different
series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the shares
of such series, whether dividends shall be cumulative and, if so, from
which date(s), the payment date(s) for dividends, and the
participating or other special rights, if any, with respect to
dividends;
(c) The voting powers, full or limited, if any, of shares of such series;
(d) Whether the shares of such series shall be redeemable and, if so, the
price(s) at which, and the terms and conditions on which such shares
may be redeemed;
(e) The amount(s) payable upon the shares of such series in the event of
voluntary or involuntary liquidation, dissolution, or winding up of
the association;
(f) Whether the shares of such series shall be entitled to the benefit of
a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund
and the manner of its application, including the price(s) at which
such shares may be redeemed or purchased through the application of
such fund;
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(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of the
association and, if so, the conversion price(s), or the rate(s) of
exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and conditions
of such conversion or exchange;
(h) The price or other consideration for which the shares of such series
shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares of
the same or any other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
The board of directors shall have authority to divide, by the adoption
of supplementary charter sections, any authorized class of preferred stock into
series, and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
Prior to the issuance of any preferred shares of a series established
by a supplementary charter section adopted by the board of directors, the
association shall file with the Secretary to the Office a dated copy of that
supplementary section of this charter established and designating the series and
fixing and determining the relative rights and preferences thereof.
SECTION 6. Preemptive Rights. Holders of the capital stock of the
association shall not be entitled to preemptive rights with respect to any
shares of the association which may be issued.
SECTION 7. Directors. The association shall be under the direction of a
board of directors. The authorized number of directors, as stated in the
association's bylaws, shall not be fewer than five nor more than fifteen except
when a greater or lesser number is approved by the Director of the Office or his
or her delegate.
SECTION 8. Beneficial Ownership Limitation. Notwithstanding anything
contained in the association's charter or bylaws to the contrary, for a period
of five years from the effective date of this charter, no person other than
First Niles Financial, Inc., the parent holding company of the association shall
directly or indirectly offer to acquire or acquire the beneficial ownership of
more than 10% of any class of an equity security of the association. This
limitation shall not apply to a transaction in which the association forms a
holding company without change in the respective beneficial ownership interests
of its stockholders other than pursuant to the exercise of any dissenter and
appraisal rights, the purchase of shares by underwriters in connection with a
public offering, or the purchase of shares by a tax-qualified employee stock
benefit plan which is exempt from the approval requirements under Section
574.3(c)(1)(vi) of the Office's regulations.
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In the event shares are acquired in violation of this SECTION 8, all
shares beneficially owned by any person in excess of 10% shall be considered
"excess shares" and shall not be counted as shares entitled to vote and shall
not be voted by any person or counted as voting shares in connection with any
matters submitted to the stockholders for a vote.
For purposes of this SECTION 8, the following definitions apply:
(1) The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of the
equity securities of the association.
(2) The term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value.
(3) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise.
(4) The term "acting in concert" means (a) knowing participation in a
joint activity or conscious parallel action towards a common goal whether or not
pursuant to an express agreement, or (b) a combination or pooling of voting or
other interests in the securities of an issuer for a common purpose pursuant to
any contract, understanding, relationship, agreement or other arrangements,
whether written or otherwise.
SECTION 9. Cumulative Voting Limitation. Stockholders shall not be
permitted to cumulate their votes for election of directors.
SECTION 10. Call for Special Meetings. Special meetings of stockholders
relating to changes in control of the association or amendments to its charter
shall be called only upon direction of the board of directors.
SECTION 11. Priority of Accounts. In any situation which the priority
of the accounts of the association is in controversy, all such accounts shall,
to the extent of their withdrawable value, be debts of the association having at
least as high a priority as the claims of general creditors of the association
not having priority (other than any priority arising or resulting from
consensual subordination) over other general creditors of the association.
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SECTION 12. Amendment of Charter. Except as provided in SECTION 5, no
amendment, addition, alteration, change or repeal of this charter shall be made,
unless such is first proposed by the board of directors of the association,
approved by the shareholders by a majority of the votes eligible to be cast at a
legal meeting, unless a higher vote is otherwise required, and approved or
preapproved by the Office.
HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF NILES
ATTEST: _____________________________ By: __________________________________
George J. Swift, Secretary William L. Stephens, President and
Chief Executive Officer
DIRECTOR OF THE OFFICE OF
THRIFT SUPERVISION
ATTEST: _____________________________ By: _________________________________
Secretary of the Office of Director of the Office of Thrift
Thrift Supervision Supervision
Declared effective this ____ day of ___________, 1998.
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EXHIBIT 3.4
BYLAWS OF THE ASSOCIATION IN STOCK FORM
<PAGE>
Exhibit 3.4
HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF NILES
STOCK BYLAWS
Article I - Home Office
The home office of the association shall be at 55 N. Main Street, in
the City of Niles, in the County of Trumbull, in the State of Ohio.
Article II - Shareholders
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the association or at such
other convenient place as the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the
association for the election of directors and for the transaction of any other
business of the association shall be held annually within 120 days after the end
of the association's fiscal year on the third Wednesday of each April if not a
legal holiday, and if a legal holiday, then on the next day following which is
not a legal holiday, at 2:00 p.m., or at such other date and time within such
120-day period as the board of directors may determine.
Section 3. Special Meetings. Special meetings of the shareholders for
any purpose or purposes, unless otherwise prescribed by the regulations of the
Office of Thrift Supervision ("Office"), may be called at any time by the
chairman of the board, the president, or a majority of the board of directors,
and shall be called by the chairman of the board, the president, or the
secretary upon the written request of the holders of not less than one-tenth of
all of the outstanding capital stock of the association entitled to vote at the
meeting. Such written request shall state the purpose or purposes of the meeting
and shall be delivered to the home office of the association addressed to the
chairman of the board, the president, or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules of Order
unless otherwise prescribed by regulations of the Office or these bylaws or the
board of directors adopts another written procedure for the conduct of meetings.
The board of directors shall designate, when present, either the chairman of the
board or president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day,
and hour of the meeting and the purpose(s) for which the meeting is called shall
be delivered not fewer than 20 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction
<PAGE>
of the chairman of the board, the president, or the secretary, or the directors
calling the meeting, to each shareholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed to be delivered when deposited
in the mail, addressed to the shareholder at the address as it appears on the
stock transfer books or records of the association as of the record date
prescribed in section 6 of this article II with postage prepaid. When any
shareholders' meeting, either annual or special, is adjourned for 30 days or
more, notice of the adjourned meeting shall be given as in the case of an
original meeting. It shall not be necessary to give any notice of the time and
place of any meeting adjourned for less than 30 days or of the business to be
transacted at the meeting, other than an announcement at the meeting at which
such adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the board of directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more than
60 days and, in case of a meeting of shareholders, not fewer than 10 days prior
to the date on which the particular action, requiring such determination of
shareholders, is to be taken. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made as provided in this section,
such determination shall apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books for
shares of the association shall make a complete list of the shareholders of
record entitled to vote at such meeting, or any adjournment thereof, arranged in
alphabetical order, with the address and the number of shares held by each. This
list of shareholders shall be kept on file at the home office of the association
and shall be subject to inspection by any shareholder of record or the
shareholder's agent at any time during usual business hours for a period of 20
days prior to such meeting. Such list shall also be produced and kept open at
the time and place of the meeting and shall be subject to inspection by any
shareholder of record or any shareholder's agent during the entire time of the
meeting. The original stock transfer book shall constitute prima facie evidence
of the shareholders entitled to examine such list or transfer books or to vote
at any meeting of shareholders. In lieu of making the shareholder list available
for inspection by shareholders as provided in the preceding paragraph, the board
of directors may elect to follow the procedures prescribed in ss. 552.6(d) of
the Office's regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the
association entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. If less than a majority of the
outstanding shares is represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to constitute less than a quorum. If a quorum is present,
the affirmative vote of the majority of the shares represented at the meeting
and entitled to vote on the subject matter shall be the act of the shareholders,
unless the vote of a greater number of
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shareholders voting together or voting by classes is required by law or the
charter. Directors, however, are elected by a plurality of the votes cast at an
election of directors.
Section 9. Proxies. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his or her duly
authorized attorney in fact. Proxies may be given telephonically or
electronically as long as the holder uses a procedure for verifying the identity
of the shareholder. Proxies solicited on behalf of the management shall be voted
as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid more
than eleven months from the date of its execution except for a proxy coupled
with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When
ownership stands in the name of two or more persons, in the absence of written
directions to the association to the contrary, at any meeting of the
shareholders of the association any one or more of such shareholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose names shares of stock stand, the vote or votes to
which those persons are entitled shall be cast as directed by a majority of
those holding such and present in person or by proxy at such meeting, but no
votes shall be cast for such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him or her,
either in person or by proxy, without a transfer of such shares into his or her
name. Shares standing in the name of a trustee may be voted by him or her,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him or her without a transfer of such shares into his or her name.
Shares held in trust in an IRA or Keogh Account, however, may be voted by the
association if no other instructions are received. Shares standing in the name
of a receiver may be voted by such receiver, and shares held by or under the
control of a receiver may be voted by such receiver without the transfer into
his or her name if authority to do so is contained in an appropriate order of
the court or other public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the association nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
association, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Unless otherwise provided in the charter
of the Association, every shareholder entitled to vote at an election for
directors shall have the right to vote, in person or by proxy, the number of
shares owned by the shareholder for as many persons as there
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are directors to be elected and for whose election the shareholder has a right
to vote, or to cumulate the votes by giving one candidate as many votes as the
number of such directors to be elected multiplied by the number of shares shall
equal or by distributing such votes on the same principle among any number of
candidates.
Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any person other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails or
refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by regulations of the Office, the duties of
such inspectors shall include: determining the number of shares and the voting
power of each share, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies; receiving votes,
ballots, or consents; hearing and determining all challenges and questions in
any way arising in connection with the rights to vote; counting and tabulating
all votes or consents; determining the result; and such acts as may be proper to
conduct the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of nominee substituted as a result of the death or
other incapacity of a management nominee, the nominating committee shall deliver
written nominations to the secretary at least 20 days prior to the date of the
annual meeting. Upon delivery, such nominations shall be posted in a conspicuous
place in each office of the association. No nominations for directors except
those made by the nominating committee shall be voted upon at the annual meeting
unless other nominations by shareholders are made in writing and delivered to
the secretary of the association at least five days prior to the date of the
annual meeting. Upon delivery, such nominations shall be posted in a conspicuous
place in each office of the association. Ballots bearing the names of all
persons nominated by the nominating committee and by shareholders shall be
provided for use at the annual meeting. However, if the nominating committee
shall fail or refuse to act at least 20 days prior to the annual meeting,
nominations for directors may be made at the annual meeting by any shareholder
entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the
association at least five days before the date of the annual meeting, and all
business so stated, proposed, and filed shall be considered at the annual
meeting; but no other proposal shall be acted upon at the annual meeting. Any
shareholder may make any other proposal at the annual meeting and the same may
be discussed and considered, but unless stated in writing and filed with the
secretary at least five days before the meeting, such
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proposal shall be laid over for action at an adjourned, special, or annual
meeting of the shareholders taking place 30 days or more thereafter. This
provision shall not prevent the consideration and approval or disapproval at the
annual meeting of reports of officers, directors, and committees; but in
connection with such reports, no new business shall be acted upon at such annual
meeting unless stated and filed as herein provided.
Section 16. Informal Action by Shareholders. Any action required to be
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of shareholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
Article III - Board of Directors
Section 1. General Powers. The business and affairs of the association
shall be under the direction of its board of directors. The board of directors
shall annually elect a chairman of the board and a president from among its
members and shall designate, when present, either the chairman of the board or
the president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of
nine members, and shall be divided into three classes as nearly equal in number
as possible. The members of each class shall be elected for a term of three
years and until their successors are elected and qualified. One class shall be
elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of
directors shall be held without other notice than this bylaw following the
annual meeting of shareholders. The board of directors may provide, by
resolution, the time and place, for the holding of additional regular meetings
without other notice than such resolution. Directors may participate in a
meeting by means of a conference telephone or similar communications device
through which all persons participating can hear each other at the same time.
Participation by such means shall constitute presence in person for all
purposes.
Section 4. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the association
unless the association is a wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board, the president,
or one-third of the directors. The persons authorized to call special meetings
of the board of directors may fix any place, within the association's normal
lending territory, as the place for holding any special meeting of the board of
directors called by such persons.
Members of the board of directors may participate in special meetings
by means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other. Such participation
shall constitute presence in person for all purposes.
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Section 6. Notice. Written notice of any special meeting shall be given
to each director at least 24 hours prior thereto when delivered personally or by
telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall be
deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if mailed, when delivered to the telegraph company if sent by telegram,
or when the association receives notice of delivery if electronically
transmitted. Any director may waive notice of any meeting by a writing filed
with the secretary. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the board of directors need be
specified in the notice or waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by
section 2 of this article III shall constitute a quorum for the transaction of
business at any meeting of the board of directors; but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by section 5 of this Article III.
Section 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by regulation of the Office
or by these bylaws.
Section 9. Action Without a Meeting. Any action required or permitted
to be taken by the board of directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors.
Section 10. Resignation. Any director may resign at any time by sending
a written notice of such resignation to the home office of the association
addressed to the chairman of the board or the president. Unless otherwise
specified, such resignation shall take effect upon receipt by the chairman of
the board or the president. More than three consecutive absences from regular
meetings of the board of directors, unless excused by resolution of the board of
directors, shall automatically constitute a resignation, effective when such
resignation is accepted by the board of directors.
Section 11. Vacancies. Any vacancy occurring on the board of directors
may be filled by the affirmative vote of a majority of the remaining directors
although less than a quorum of the board of directors. A director elected to
fill a vacancy shall be elected to serve only until the next election of
directors by the shareholders. Any directorship to be filled by reason of an
increase in the number of directors may be filled by election by the board of
directors for a term of office continuing only until the next election of
directors by the shareholders.
Section 12. Compensation. Directors, as such, may receive a stated
salary for their services. By resolution of the board of directors, a reasonable
fixed sum, and reasonable expenses of attendance, if any, may be allowed for
attendance at each regular or special meeting of the board of directors. Members
of either standing or special committees may be allowed such compensation for
attendance at committee meetings as the board of directors may determine.
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Section 13. Presumption of Assent. A director of the association who is
present at a meeting of the board of directors at which action on any
association matter is taken shall be presumed to have assented to the action
taken unless his or her dissent or abstention shall be entered in the minutes of
the meeting or unless he or she shall file a written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the secretary of the
association within five days after the date a copy of the minutes of the meeting
is received. Such right to dissent shall not apply to a director who voted in
favor of such action.
Section 14. Removal of Directors. At a meeting of shareholders called
expressly for that purpose, any director may be removed only for cause by a vote
of the holders of a majority of the shares then entitled to vote at an election
of directors. If less than the entire board is to be removed, no one of the
directors may be removed if the votes cast against the removal would be
sufficient to elect a director if then cumulatively voted at an election of the
class of directors of which such director is a part. If cumulative voting has
been deleted, the preceding sentence should be deleted. Whenever the holders of
the shares of any class are entitled to elect one or more directors by the
provisions of the charter or supplemental sections thereto, the provisions of
this section shall apply, in respect to the removal of a director or directors
so elected, to the vote of the holders of the outstanding shares of that class
and not to the vote of the outstanding shares as a whole.
Article IV - Executive and Other Committees
Section 1. Appointment. The board of directors, by resolution adopted
by a majority of the full board, may designate the chief executive officer and
two or more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the board of directors, or any director,
of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of
directors is not in session, shall have and may exercise all of the authority of
the board of directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the board of
directors with reference to: the declaration of dividends; the amendment of the
charter or bylaws of the association, or recommending to the shareholders a plan
of merger, consolidation, or conversion; the sale, lease, or other disposition
of all or substantially all of the property and assets of the association
otherwise than in the usual and regular course of its business; a voluntary
dissolution of the association; a revocation of any of the foregoing; or the
approval of a transaction in which any member of the executive committee,
directly or indirectly, has any material beneficial interest.
Section 3. Tenure. Subject to the provisions of section 8 of this
article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
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Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee may
be called by any member thereof upon not less than one day's notice stating the
place, date, and hour of the meeting, which notice may be written or oral. Any
member of the executive committee may waive notice of any meeting and no notice
of any meeting need be given to any member thereof who attends in person. The
notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted
to be taken by the executive committee at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the president or secretary of the association. Unless otherwise
specified, such resignation shall take effect upon its receipt; the acceptance
of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceeding and report the same to the board of directors for its information at
the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by resolution
establish an audit, loan, or other committee composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
association and may prescribe the duties, constitution, and procedures thereof.
Article V - Officers
Section 1. Positions. The officers of the association shall be a
president, one or more vice presidents, a secretary, and a treasurer or
comptroller, each of whom shall be elected by the board of directors. The board
of directors may also designate the chairman of the board as an officer. The
offices of the secretary and treasurer or comptroller may be held by the same
person and a vice president may also be either the secretary or the treasurer or
comptroller. The board of directors may designate one or more vice presidents as
executive vice president or senior vice president. The board
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of directors may also elect or authorize the appointment of such other officers
as the business of the association may require. The officers shall have such
authority and perform such duties as the board of directors may from time to
time authorize or determine. In the absence of action by the board of directors,
the officers shall have such powers and duties as generally pertain to their
respective offices.
Section 2. Election and Term of Office. The officers of the association
shall be elected annually at the first meeting of the board of directors held
after each annual meeting of the shareholders. If the election of officers is
not held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly elected
and qualified or until the officer's death, resignation, or removal in the
manner hereinafter provided. Election or appointment of an officer, employee, or
agent shall not of itself create contractual rights. The board of directors may
authorize the association to enter into an employment contract with any officer
in accordance with regulations of the Office; but no such contract shall impair
the right of the board of directors to remove any officer at any time in
accordance with section 3 of this article V.
Section 3. Removal. Any officer may be removed by the board of
directors whenever in its judgment the best interests of the association will be
served thereby, but such removal, other than for cause, shall be without
prejudice to the contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the board
of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the board of directors.
Article VI - Contracts, Loans, Checks, and Deposits
Section 1. Contracts. To the extent permitted by regulations of the
Office, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the board of directors may authorize any officer,
employee, or agent of the association to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the association. Such
authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
association and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
Section 3. Checks, Drafts, etc. All checks, drafts, or other orders for
the payment of money, notes, or other evidences of indebtedness issued in the
name of the association shall be signed by one or more officers, employees or
agents of the association in such manner as shall from time to time be
determined by the board of directors.
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Section 4. Deposits. All funds of the association not otherwise
employed shall be deposited from time to time to the credit of the association
in any duly authorized depositories as the board of directors may select.
Article VII - Certificates for Shares and Their Transfer
Section 1. Certificates for Shares. Certificates representing shares of
capital stock of the association shall be in such form as shall be determined by
the board of directors and approved by the Office. Such certificates shall be
signed by the chief executive officer or by any other officer of the association
authorized by the board of directors, attested by the secretary or an assistant
secretary, and sealed with the corporate seal or a facsimile thereof. The
signatures of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a registrar
other than the association itself or one of its employees. Each certificate for
shares of capital stock shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares are issued, with the
number of shares and date of issue, shall be entered on the stock transfer books
of the association. All certificates surrendered to the association for transfer
shall be canceled and no new certificate shall be issued until the former
certificate for a like number of shares has been surrendered and canceled,
except that in the case of a lost or destroyed certificate, a new certificate
may be issued upon such terms and indemnity to the association as the board of
directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of
the association shall be made only on its stock transfer books. Authority for
such transfer shall be given only by the holder of record or by his or her legal
representative, who shall furnish proper evidence of such authority, or by his
or her attorney authorized by a duly executed power of attorney and filed with
the association. Such transfer shall be made only on surrender for cancellation
of the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the association shall be deemed by the association
to be the owner for all purposes.
Article VIII - Fiscal Year
The fiscal year of the association shall end on the 30th day of June of
each year. The appointment of accountants shall be subject to annual
ratification by the shareholders.
Article IX - Dividends
Subject to the terms of the association's charter and the regulations
and orders of the Office, the board of directors may, from time to time,
declare, and the association may pay, dividends on its outstanding shares of
capital stock.
Article X - Corporate Seal
The board of directors shall provide an association seal which shall be
two concentric circles between which shall be the name of the association. The
year of incorporation or an emblem may appear in the center.
10
<PAGE>
Article XI - Amendments
These bylaws may be amended in a manner consistent with regulations of
the Office and shall be effective after: (i) approval of the amendment by a
majority vote of the authorized board of directors, or by a majority vote of the
votes cast by the shareholders of the association at any legal meeting, and (ii)
receipt of any applicable regulatory approval. When an association fails to meet
its quorum requirements, solely due to vacancies on the board, then the
affirmative vote of a majority of the sitting board will be required to amend
the bylaws.
11
EXHIBIT 4
FORM OF STOCK CERTIFICATE OF THE HOLDING COMPANY
<PAGE>
Exhibit 4
NUMBER _____________
COMMON STOCK
CUSIP No. __________________
FIRST NILES FINANCIAL, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE OF
First Niles Financial, Inc.
(the "Corporation"), a Delaware corporation. The shares represented by this
certificate are transferable only on the stock transfer books of the Corporation
by the holder of record hereof, or by his duly authorized attorney or legal
representative, upon the surrender of this certificate properly endorsed. This
certificate is not valid until countersigned and registered by the Corporation's
transfer agent and registrar. THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS
NOT FEDERALLY INSURED OR GUARANTEED.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
DATED_______________
____________________ _____________________________
George J. Swift William L. Stephens
Corporate Secretary [Seal] President and Chief Executive
Officer
Countersigned and Registered:
[ Name ]
____________________________
Transfer Agent and Registrar
<PAGE>
FIRST NILES FINANCIAL, INC.
The shares represented by this certificate are issued subject to all
the provisions of the Certificate of Incorporation and Bylaws of First Niles
Financial, Inc. (the "Corporation") as from time to time amended (copies of
which are on file at the principal executive offices of the Corporation).
The Corporation's Certificate of Incorporation provides that no
"person" (as defined in the Certificate of Incorporation) who "beneficially
owns" (as defined in the Certificate of Incorporation) in excess of 10% of the
outstanding shares of the Corporation shall be entitled to vote any shares held
in excess of such limit. This provision of the Certificate of Incorporation
shall not apply to an acquisition of securities of the Corporation by an
employee stock purchase plan or other employee benefit plan of the Corporation
or any of its subsidiaries.
The Corporation's Certificate of Incorporation also includes a
provision the general effect of which is to require the affirmative vote of the
holders of 80% of the outstanding voting shares of the Corporation to approve
certain "business combinations" (as defined in the Certificate of Incorporation)
between the Corporation and a stockholder owning in excess of 10% of the
outstanding shares of the Corporation. However, only the affirmative vote of a
majority of the outstanding shares or such vote as is otherwise required by law
(rather than the 80% voting requirement) is applicable to the particular
transaction if it is approved by a majority of the "disinterested directors" (as
defined in the Certificate of Incorporation) or, alternatively, the transaction
satisfies certain minimum price and procedural requirements.
The Corporation will furnish to any stockholder upon request and
without charge a full statement of the powers, designations, preferences and
relative participating, optional or other special rights of each authorized
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights, to the extent that the same have
been fixed, and of the authority of the board of directors to designate the same
with respect to other series. Such request may be made to the Corporation or to
its Transfer Agent and Registrar.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT_____Custodian______
TEN ENT - as tenants by the entirety (Cust) (Minor)
JT TEN - as joint tenants with Under Uniform Gift to Minors Act -_______
right of survivorship (State)
and not as tenants
in common. UNIF TRANS MIN ACT_____Custodian_____
(Cust) (Minor)
Under Uniform Transfers to Minors Act -______
(State)
Additional abbreviations may also be used though not in
the above list.
For Value Received, ____________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
_____________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,
INCLUDING ZIP CODE, OF ASSIGNEE)
_________________ Shares of Common Stock represented by the within certificate,
and do hereby irrevocably constitute and appoint
_________ Attorney to transfer the said shares on the books of the within named
Corporation with full power of substitution in the premises.
Dated __________________ ______________
NOTICE: THE SIGNATURE TO THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
EXHIBIT 5
OPINION OF SILVER, FREEDMAN & TAFF, L.L.P.
WITH RESPECT TO LEGALITY OF STOCK
<PAGE>
Exhibit 5
[SILVER, FREEDMAN & TAFF LETTERHEAD]
July 9, 1998
The Board of Directors
First Niles Financial, Inc.
55 N. Main Street
Niles, Ohio 44446-5097
Re: Registration Statement
Under the Securities Act of 1933
--------------------------------
Gentlemen:
This opinion is rendered in connection with the Registration Statement
to be filed on Form SB-2 with the Securities and Exchange Commission under the
Securities Act of 1933 relating to the 2,645,000 shares of Common Stock of First
Niles Financial, Inc. (the "Company"), par value $.01 per share, to be issued.
As counsel, we have reviewed the Certificate of Incorporation of the Company and
such other documents as we have deemed appropriate for the purpose of this
opinion. We are rendering this opinion as of the time the Registration Statement
referred to above becomes effective.
Based on the foregoing, we are of the opinion that the shares of Common
Stock of the Company covered by the aforesaid Registration Statement will, when
sold, be validly issued, fully paid and non-assessable shares of Common Stock of
the Company.
Very truly yours,
/s/ Silver, Freedman & Taff, L.L.P.
-----------------------------------
SILVER, FREEDMAN & TAFF, L.L.P.
EXHIBIT 10.1
FORM OF EMPLOYMENT AGREEMENT
<PAGE>
Exhibit 10.1
FORM OF EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this ____ day of __________ 1998, by and between Home Federal Savings and Loan
Association of Niles, 55 North Main Street, Niles, Ohio (hereinafter referred to
as the "Association" whether in mutual or stock form), and __________ (the
"Employee").
WHEREAS, the Employee is currently serving as the ___________ of the
Association; and
WHEREAS, the Association has adopted a plan of conversion whereby the
Association will convert to capital stock form as the subsidiary of First Niles
Financial, Inc. (the "Holding Company"), subject to the approval of the
Association's members and the Office of Thrift Supervision (the "Conversion");
and
WHEREAS, the Board of Directors of the Association believes it is in
the best interests of the Association to enter into this Agreement with the
Employee in order to assure continuity of management of the Association and to
reinforce and encourage the continued attention and dedication of the Employee;
and
WHEREAS, the Board of Directors of the Association has approved and
authorized the execution of this Agreement with the Employee to take effect as
stated in Section 4 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Employment. The Employee is employed as the _______________ of the
Association. As _______________, Employee shall render administrative and
management services as are customarily performed by persons situated in similar
executive capacities, and shall have other powers and duties as may from time to
time be prescribed by the Board, provided that such duties are consistent with
the Employee's position as _______________ . The Employee shall continue to
devote his best efforts and substantially all his business time and attention to
the business and affairs of the Association and its subsidiaries and affiliated
companies.
2. Compensation.
(a) Salary. The Association agrees to pay the Employee during
the term of this Agreement a salary established by the Board of Directors. The
salary hereunder as of the Commencement Date (as defined in Section 4 hereof)
shall be $__________ per year. The Employee's salary shall be payable not less
frequently than monthly and not later than the tenth day following the
expiration of the month in question. The amount of the Employee's salary shall
be reviewed by the Board of Directors not less often than annually, beginning
not later than the date one year after the Commencement Date (as defined in
Section 4 hereof). Any adjustments in salary or other compensation shall in no
way limit or reduce any other obligation of the Association hereunder. The
Employee's salary in effect hereunder from time to time shall not thereafter be
reduced.
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<PAGE>
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the
Association in discretionary bonuses as authorized and declared by the Board of
Directors of the Association to its executive employees. No other compensation
provided for in this Agreement shall be deemed a substitute for the Employee's
right to participate in such bonuses when and as declared by the Board of
Directors.
(c) Expenses. During the term of his employment hereunder, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him in performing services hereunder, in accordance with
the Association's policies and procedures, provided that the Employee properly
accounts therefor in accordance with Association policy.
3. Benefits.
(a) Participation in Retirement and Employee Benefit Plans.
The Employee shall be entitled while employed hereunder to participate in, and
receive benefits under, all plans relating to pension, thrift, profit-sharing,
group life insurance, medical coverage, education, cash bonuses, and other
retirement or employee benefits or combinations thereof, that are maintained for
the benefit of the Association's executive employees or for its employees
generally.
(b) Fringe Benefits. The Employee shall be eligible while
employed hereunder to participate in, and receive benefits under, any other
fringe benefit plans which are or may become applicable to the Association's
executive employees or to its employees generally.
4. Term. The term of employment under this Agreement shall be a period
of three years commencing on the date of completion of the Conversion (the
"Commencement Date"), subject to earlier termination as provided herein.
Beginning on the first anniversary of the Commencement Date, and on each
anniversary thereafter, the term of employment under this Agreement shall be
extended for a period of one year in addition to the then-remaining term of
employment under this Agreement, unless either the Association or the Employee
gives contrary written notice to the other not less than 90 days in advance of
the date on which the term of employment under this Agreement would otherwise be
extended, provided that such term will not be automatically extended unless,
prior thereto, the Board of Directors of the Association explicitly reviews and
approves the extension. Reference herein to the term of employment under this
Agreement shall refer to both such initial term and such extended terms.
5. Vacations. The Employee shall be entitled, without loss of pay, to
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) the Employee shall be entitled to an annual vacation of not
less than _____ (__) weeks per year;
(b) the timing of vacations shall be scheduled in a reasonable
manner by the Employee; and
2
<PAGE>
(c) solely at the Employee's request, the Board of Directors
shall be entitled to grant to the Employee a leave or leaves of absence with or
without pay at such time or times and upon such terms and conditions as the
Board, in its discretion, may determine.
6. Termination of Employment; Death.
(a) The Association's Board of Directors may terminate the
Employee's employment at any time, but any termination by the Association's
Board of Directors other than termination for cause, shall not prejudice the
Employee's right to compensation or other benefits under this Agreement. If the
employment of the Employee is involuntarily terminated, other than for "cause"
as provided in this Section 6(a) or pursuant to any of Sections 6(d) through
6(g), or by reason of death or disability as provided in Sections 6(c) or 7, the
Employee shall be entitled to (i) his then applicable salary for the
then-remaining term of the Agreement as calculated in accordance with Section 4
hereof, payable in such manner and at such times as such salary would have been
payable to the Employee under Section 2 had he remained in the employ of the
Association, and (ii) health insurance benefits as maintained by the Association
for the benefit of its senior executive employees or its employees generally
over the then-remaining term of the Agreement as calculated in accordance with
Section 4 hereof.
The terms "termination" or "involuntarily terminated" in this Agreement
shall refer to the termination of the employment of Employee without his express
written consent, other than retirement. In addition, a material diminution of or
interference with the Employee's duties, responsibilities and benefits as
_______________ of the Association shall be deemed and shall constitute an
involuntary termination of employment to the same extent as express notice of
such involuntary termination. Any of the following actions shall constitute such
diminution or interference unless consented to in writing by the Employee: (1) a
change in the principal workplace of the Employee to a location outside of a 30
mile radius from the Association's headquarters office as of the date hereof;
(2) a material demotion of the Employee, a material reduction in the number or
seniority of other Association personnel reporting to the Employee, or a
material reduction in the frequency with which, or in the nature of the matters
with respect to which, such personnel are to report to the Employee, other than
as part of a Association- or Holding Company- wide reduction in staff; (3) a
material adverse change in the salary, perquisites, benefits, contingent
benefits or vacation time which had previously been provided to the Employee,
other than as part of an overall program applied uniformly and with equitable
effect to all members of the senior management of the Association or the Holding
Company; and (4) a material permanent increase in the required hours of work or
the workload of the Employee.
In case of termination of the Employee's employment for cause, the
Association shall pay the Employee his salary through the date of termination,
and the Association shall have no further obligation to the Employee under this
Agreement. For purposes of this Agreement, termination for "cause" shall include
termination for personal dishonesty, incompetence, willful misconduct, breach of
a fiduciary duty involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule, or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of this Agreement. Notwithstanding the
foregoing, the Employee shall not be deemed to have been terminated for cause
unless and until there shall have been delivered to the Employee a copy of a
resolution, duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Board of Directors of the Association at a meeting
of the Board called and held for such purpose (after reasonable notice to the
Employee and an opportunity for the Employee, together with the Employee's
counsel, to be heard before the
3
<PAGE>
Board), stating that in the good faith opinion of the Board the Employee was
guilty of conduct constituting "cause" as set forth above and specifying the
particulars thereof in detail.
(b) The Employee's employment may be voluntarily terminated by
the Employee at any time upon 90 days written notice to the Association or upon
such shorter period as may be agreed upon between the Employee and the Board of
Directors of the Association. In the event of such voluntary termination, the
Association shall be obligated to continue to pay the Employee his salary and
benefits only through the date of termination, at the time such payments are
due, and the Association shall have no further obligation to the Employee under
this Agreement.
(c) In the event of the death of the Employee during the term
of employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Association the salary of the
Employee through the last day of the calendar month in which his death shall
have occurred, and the term of employment under this Agreement shall end on such
last day of the month.
(d) If the Employee is suspended and/or temporarily prohibited
from participating in the conduct of the Association's affairs by a notice
served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
("FDIA"), 12 U.S.C. ss. 1818(e)(3) and (g)(1), the Association's obligations
under this Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the
Association may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of its obligations which were
suspended.
(e) If the Employee is removed and/or permanently prohibited
from participating in the conduct of the Association's affairs by an order
issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4) and
(g)(1), all obligations of the Association under this Agreement shall terminate
as of the effective date of the order, but vested rights of the contracting
parties shall not be affected.
(f) If the Association 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, but this provision shall not affect any vested rights of
the contracting parties.
(g) All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Association: (i) by the Director of the
Office of Thrift Supervision (the "Director") or his or her designee, at the
time the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation ("RTC") enters into an agreement to provide assistance to or on
4
<PAGE>
behalf of the Association under the authority contained in Section 13(c) of the
FDIA; or (ii) by the Director or his or her designee, at the time the Director
or his or her designee approves a supervisory merger to resolve problems related
to operation of the Association or when the Association is determined by the
Director to be in an unsafe or unsound condition. Any rights of the parties that
have already vested, however, shall not be affected by any such action.
(h) In the event the Association purports to terminate the
Employee for cause, but it is determined by a court of competent jurisdiction or
by an arbitrator pursuant to Section 16 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Association has failed to make timely payment of any amounts owed to
the Employee under this Agreement, the Employee shall be entitled to
reimbursement for all reasonable costs, including attorneys' fees, incurred in
challenging such termination or collecting such amounts. Such reimbursement
shall be in addition to all rights to which the Employee is otherwise entitled
under this Agreement.
7. Disability. If the Employee shall become disabled as defined in the
Association's then current disability plan or if the Employee shall be otherwise
unable to serve as _______________, the Employee shall be entitled to receive
group and other disability income benefits of the type then provided by the
Association for other executive employees.
8. Certain Reduction of Payments by the Association.
(a) Notwithstanding any other provision of this Agreement, if
the value and amounts of benefits under this Agreement, together with any other
amounts and the value of benefits received or to be received by the Employee
would cause any amount to be nondeductible by the Association or the Holding
Company for federal income tax purposes pursuant to Section 280G of the Code,
then amounts and benefits under this Agreement shall be reduced (not less than
zero) to the extent necessary so as to maximize amounts and the value of
benefits to the Employee without causing any amount to become nondeductible by
the Association or the Holding Company pursuant to or by reason of such Section
280G. The Employee shall determine the allocation of such reduction among
payments and benefits to the Employee.
(b) Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. 1828(k) and any regulations promulgated thereunder.
9. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
5
<PAGE>
10. No Assignments.
(a) This Agreement is personal to each of the parties hereto,
and neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that the Association will require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Association, by an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Association would be required to perform it if no such
succession or assignment had taken place. For purposes of implementing the
provisions of this Section 10(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or if there is no such designee, to the Employee's
estate.
11. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid. All notices to the Association
shall be sent to its home office, directed to the attention of the Board of
Directors of the Association, with a copy to the Secretary of the Association.
All notices to the Employee shall be sent to the home or other address the
Employee has most recently provided in writing to the Association.
12. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided. The parties hereto agree to amend this Agreement to comply with any
required provisions of 12 C.F.R. ss. 563.39(b), as the same may be amended.
13. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
14. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Ohio.
16. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF NILES
By: ______________________________
EMPLOYEE
__________________________________
7
EXHIBIT 10.2
LETTER AGREEMENT REGARDING
APPRAISAL SERVICES AND BUSINESS PLAN PREPARATION
<PAGE>
March 11, 1998
The Board of Directors
Home Federal Savings and Loan Association
55 N. Main Street
P.O. Box 311
Niles, Ohio 44446
Re: Business Plan Proposal
Attention: Mr. William L. Stephens, President and Chief Executive Officer
This letter represents our proposal to prepare a complete Business Plan for Home
Federal Savings and Loan Association ( "Home Federal" or the "Association") to
fulfill the requirements of the Office of Thrift Supervision ("OTS") relating to
the Association's stock conversion. The Plan will focus on Home Federal's new
three-year pro formas, the conversion impact on the Association and the planned
use of proceeds.
Keller & Company is experienced in preparing business plans for filing with and
approval by regulatory agencies. We prepared thirty-two business plans in 1995,
thirty in 1996 and thirty-four in 1997, and all have been approved. Your Plan
will be based on the format provided in the attached Exhibit A. We will prepare
the three-year pro formas and each discussion section in accordance with
regulatory requirements and based on your input. Our objective is to ensure that
your Business Plan is in compliance with all applicable requirements, and that
management and directorate are knowledgeable of and comfortable with the
assumptions, commitments and projections contained in the Plan, making the Plan
useful for the future.
Exhibit B provides a sample set of typical pro formas. Your pro formas will
incorporate the most current interest rate projections provided by OTS. Our
procedure is to request key financial information, including TFR Reports,
investment portfolio mix, recent lending activity, savings activity, costs and
yields and other data from Home Federal. Based on a review of this information,
I will then meet with management to discuss your plans and expectations for
1998, 1999 and 2000, focusing on such items as use of proceeds, deposit growth
expectations, loan origination projections, secondary market activity, new
products and services, increases in general valuation allowance, new branches,
capital improvements, increases in fixed assets, investment strategy, increases
in board fees and total compensation, etc. We will then prepare financial
projections tying the beginning figures to your December 31, 1997, balances,
incorporating your current yields on interest-earning assets and your current
costs of
<PAGE>
Board of Directors
March 11, 1998
Page 2
interest-bearing liabilities. Assets and liabilities will be repriced based on
their maturity period, with such items tied to rate indices and their yields and
costs adjusting based on interest rate trends. The projections will be based on
your actual performance in 1997, in conjunction with the input from our
discussions. We can introduce numerous scenarios for internal use as part of the
preparation of the business plan to show the impact of alternative strategies.
With each set of pro formas, we will send you a discussion summary of the
assumptions for easy review and comments (Exhibit C). After your review of the
pro formas, we will make any adjustments that are required. When the pro formas
are complete, we will provide you with the final pro forma financial statements,
as well as pro formas for the holding company (Exhibit D).
With regard to the Business Plan text, we will complete each section in draft
form for your review, and revise each section based on your comments and
requests. We will also send a copy to your counsel for their input and comments.
The Plan will be in full compliance with all regulatory requirements. We also
prepare a quarterly comparison chart each quarter after the conversion for your
presentation to the board, showing the quarterly variance in actual performance
relative to projections and provide comments on the variance.
Our fee for the preparation of the Business Plan text and pro formas is $5,000,
including out-of-pocket expenses for travel, copying and binding.
I look forward to possibly working with you.
Sincerely,
KELLER and COMPANY, INC.
/s/ Michael R. Keller
- ---------------------
Michael R. Keller
President
MRK:jmm
enclosure
Accepted this 3rd day of June, 1998.
/s/ William L. Stephens
- -------------------------------------
William L. Stephens
President and Chief Executive Officer
<PAGE>
March 11, 1998
The Board of Directors
Home Federal Savings and Loan Association
55 N. Main Street
P.O. Box 311
Niles, Ohio 44446
Re: Conversion Valuation Agreement
Attn: Mr. William L. Stephens, President
Keller and Company, Inc. (hereinafter referred to as KELLER) hereby
proposes to prepare an independent conversion appraisal of Home Federal Savings
and Loan Association, Niles, Ohio (hereinafter referred to as HOME FEDERAL),
relating to the conversion of HOME FEDERAL from a mutual to a stock institution.
KELLER will provide a pro forma valuation of the market value of the shares to
be sold in the proposed conversion of HOME FEDERAL.
KELLER is a financial consulting firm that primarily serves the financial
institution industry. KELLER is experienced in evaluating and appraising thrift
institutions and thrift institution holding companies. KELLER is an experienced
conversion appraiser for filings with the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC"), and is also approved by
the Internal Revenue Service as an expert in bank and thrift stock valuations.
KELLER agrees to prepare the conversion appraisal in the format required by
the OTS in a timely manner for prompt filing with the OTS and the Securities and
Exchange Commission and also agrees to prepare an analysis of the effect of the
establishment of a charitable foundation in connection with the conversion in
the conversion appraisal. KELLER will provide any additional information as
requested and will complete appraisal updates in accordance with regulatory
requirements.
<PAGE>
The appraisal report will provide a detailed description of HOME FEDERAL,
including its financial condition, operating performance, asset quality, rate
sensitivity position, liquidity level and management qualifications. The
appraisal will include a description of HOME FEDERAL's market area, including
both economic and demographic characteristics and trends. An analysis of other
publicly-traded thrift institutions will be performed to determine a comparable
group, and adjustments to the appraised value will be made based on a comparison
of HOME FEDERAL with the comparable group.
In making its appraisal, KELLER will rely upon the information in the
Subscription and Community Offering Circular (Prospectus), including the
financial statements. Among other factors, KELLER will also consider the
following: the present and projected operating results and financial condition
of HOME FEDERAL; the economic and demographic conditions in HOME FEDERAL's
existing marketing area; pertinent historical financial and other information
relating to HOME FEDERAL; a comparative evaluation of the operating and
financial statistics of HOME FEDERAL with those of other thrift institutions;
the proposed price per share; the aggregate size of the offering of common
stock; the impact of the conversion on HOME FEDERAL's capital position and
earnings potential; HOME FEDERAL's proposed dividend policy; and the trading
market for securities of comparable institutions and general conditions in the
market for such securities. In preparing the appraisal, KELLER will rely solely
upon, and assume the accuracy and completeness of, financial and statistical
information provided by HOME FEDERAL, and will not independently value the
assets or liabilities of HOME FEDERAL in order to prepare the appraisal.
Upon completion of the conversion appraisal, KELLER will make a
presentation to the board of directors of HOME FEDERAL to review the content of
the appraisal, the format and the assumptions. A written presentation will be
provided to each board member as a part of the overall presentation.
For its services in making this appraisal, KELLER's fee will be $19,000,
plus out-of-pocket expenses not to exceed $500. The appraisal fee will include
the preparation of one valuation update and any requested analysis regarding the
financial impact of a charitable foundation in the conversion appraisal. All
additional valuation updates will be subject to an additional fee of $1,000
each. Upon the acceptance of this proposal, KELLER shall be paid a retainer of
$3,000 to be applied to the total appraisal fee of $19,000, the balance of which
will be payable at the time of the completion of the appraisal.
HOME FEDERAL agrees, by the acceptance of this proposal, to indemnify
KELLER and its employees and affiliates for certain costs and expenses,
including reasonable legal fees, in connection with claims or litigation
relating to the appraisal and arising out of any misstatement
<PAGE>
or untrue statement of a material fact in information supplied to KELLER by HOME
FEDERAL or by an intentional omission by HOME FEDERAL to state a material fact
in the information so provided, except where KELLER or its employees and
affiliates have been negligent or at fault.
KELLER agrees to indemnify HOME FEDERAL and its employees and affiliates
for certain cost and expenses, including reasonable legal fees, in connection
with claims or litigation relating to or based upon the negligence or willful
misconduct of KELLER or its employees or affiliates.
This proposal will be considered accepted upon the execution of the two
enclosed copies of this agreement and the return of one executed copy to KELLER,
accompanied by the specified retainer.
KELLER and COMPANY, INC.
By: /s/ Michael R. Keller
---------------------
Michael R. Keller
President
HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION
By: /s/ William L. Stephens
-----------------------
William L. Stephens
President
Date: June 3, 1998
EXHIBIT 10.3
FORM OF
EMPLOYEE STOCK OWNERSHIP PLAN
<PAGE>
FIRST NILES FINANCIAL, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
Effective as of January 1, 1998
<PAGE>
FIRST NILES FINANCIAL, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
TABLE OF CONTENTS
Page
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PREAMBLE................................................................1
ARTICLE I DEFINITION OF TERMS AND CONSTRUCTION...................2
1.1 Definitions...................................2
(a) Account.......................................2
(b) Act...........................................2
(c) Administrator.................................2
(d) Annual Additions..............................2
(e) Authorized Leave of Absence...................2
(f) Beneficiary...................................3
(g) Board of Directors............................3
(h) Break.........................................3
(i) Code..........................................3
(j) Compensation..................................3
(k) Date of Hire..................................3
(l) Disability....................................3
(m) Disability Retirement Date....................4
(n) Early Retirement Date.........................4
(o) Effective Date................................4
(p) Eligibility Period............................4
(q) Employee......................................4
(r) Employee Stock Ownership Account..............4
(s) Employee Stock Ownership Contribution.........4
(t) Employee Stock Ownership Suspense Account.....4
(u) Employer......................................4
(v) Employer Securities...........................4
(w) Entry Date....................................5
(x) Exempt Loan...................................5
(y) Exempt Loan Suspense Account..................5
(z) Financed Shares...............................5
(aa) Former Participant............................5
(bb) Fund..........................................5
(cc) Hour of Service...............................5
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(dd) Investment Adjustments........................ 6
(ee) Limitation Year............................... 6
(ff) Normal Retirement Date........................ 6
(gg) Participant................................... 6
(hh) Plan.......................................... 6
(ii) Plan Year..................................... 6
(jj) Qualified Domestic Relations Order............ 7
(kk) Related Employer.............................. 7
(ll) Retirement.................................... 7
(mm) Service....................................... 7
(nn) Sponsor....................................... 7
(oo) Trust Agreement............................... 7
(pp) Trustee....................................... 7
(qq) Valuation Date................................ 7
(rr) Year of Eligibility Service................... 8
(ss) Year of Vesting Service....................... 8
1.2 Plurals and Gender..................................... 8
1.3 Incorporation of Trust Agreement....................... 8
1.4 Headings............................................... 8
1.5 Severability........................................... 8
1.6 References to Governmental Regulations................. 8
1.7 Notices................................................ 8
1.8 Evidence............................................... 9
1.9 Action by Employer..................................... 9
ARTICLE II PARTICIPATION..........................................10
2.1 Commencement of Participation..........................10
2.2 Termination of Participation...........................10
2.3 Resumption of Participation............................10
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2.4 Determination of Eligibility...........................11
2.5 Restricted Participation...............................11
ARTICLE III CREDITED SERVICE.......................................12
3.1 Service Counted for Eligibility Purposes...............12
3.2 Service Counted for Vesting Purposes...................12
3.3 Credit for Pre-Break Service...........................12
3.4 Service Credit During Authorized Leaves................12
3.5 Service Credit During Maternity or Paternity Leave.....13
3.6 Ineligible Employees...................................13
ARTICLE IV CONTRIBUTIONS..........................................14
4.1 Employee Stock Ownership Contribution..................14
4.2 Time and Manner of Employee Stock
Ownership Contribution...............................14
4.3 Records of Contributions...............................15
4.4 Erroneous Contributions................................15
ARTICLE V ACCOUNTS, ALLOCATIONS AND INVESTMENTS..................17
5.1 Establishment of Separate Participant Accounts.........17
5.2 Establishment of Suspense Accounts.....................18
5.3 Allocation of Earnings, Losses and Expenses............18
5.4 Allocation of Forfeitures..............................18
5.5 Allocation of Employee Stock Ownership Contribution....18
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5.6 Limitation on Annual Additions.........................19
5.7 Erroneous Allocations..................................22
5.8 Value of Participant's Account.........................22
5.9 Investment of Account Balances.........................22
ARTICLE VI RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY.......23
6.1 Normal Retirement......................................23
6.2 Early Retirement.......................................23
6.3 Disability Retirement..................................23
6.4 Death Benefits.........................................23
6.5 Designation of Beneficiary and Manner of Payment.......24
ARTICLE VII VESTING AND FORFEITURES................................25
7.1 Vesting on Death, Disability and Normal Retirement.....25
7.2 Vesting on Termination of Participation................25
7.3 Disposition of Forfeitures.............................25
ARTICLE VIII EMPLOYEE STOCK OWNERSHIP PROVISIONS....................27
8.1 Right to Demand Employer Securities....................27
8.2 Voting Rights..........................................27
8.3 Nondiscrimination in Employee Stock
Ownership Contribution...............................27
8.4 Dividends..............................................28
8.5 Exempt Loans...........................................28
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8.6 Exempt Loan Payments...................................29
8.7 Put Option.............................................31
8.8 Diversification Requirements...........................31
8.9 Independent Appraiser..................................32
8.10 Nonterminable Rights...................................32
ARTICLE IX PAYMENTS AND DISTRIBUTIONS.............................33
9.1 Payments on Termination of Service - In General........33
9.2 Commencement of Payments...............................33
9.3 Mandatory Commencement of Benefits.....................33
9.4 Required Beginning Dates...............................36
9.5 Form of Payment........................................36
9.6 Payments Upon Termination of Plan......................37
9.7 Distributions Pursuant to Qualified Domestic
Relations Orders.....................................37
9.8 Cash-Out Distributions.................................37
9.9 ESOP Distribution Rules................................38
9.10 Direct Rollover........................................38
9.11 Waiver of 30-day Notice................................39
9.12 Re-employed Veterans...................................39
9.13 Share Legend...........................................40
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Page
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ARTICLE X PROVISIONS RELATING TO TOP-HEAVY PLANS.................41
10.1 Top-Heavy Rules to Control.............................41
10.2 Top-Heavy Plan Definitions.............................41
10.3 Calculation of Accrued Benefits........................43
10.4 Determination of Top-Heavy Status......................44
10.5 Determination of Super Top-Heavy Status................44
10.6 Minimum Contribution...................................45
10.7 Vesting................................................46
10.8 Maximum Benefit Limitation.............................46
ARTICLE XI ADMINISTRATION.........................................47
11.1 Appointment of Administrator...........................47
11.2 Resignation or Removal of Administrator................47
11.3 Appointment of Successors: Terms of Office, Etc.......47
11.4 Powers and Duties of Administrator.....................47
11.5 Action by Administrator................................49
11.6 Participation by Administrator.........................49
11.7 Agents.................................................49
11.8 Allocation of Duties...................................49
11.9 Delegation of Duties...................................50
11.10 Administrator's Action Conclusive......................50
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11.11 Compensation and Expenses of Administrator.............50
11.12 Records and Reports....................................50
11.13 Reports of Fund Open to Participants...................50
11.14 Named Fiduciary........................................50
11.15 Information from Employer..............................51
11.16 Reservation of Rights by Employer......................51
11.17 Liability and Indemnification..........................51
11.18 Service as Trustee and Administrator...................51
ARTICLE XII CLAIMS PROCEDURE.......................................52
12.1 Notice of Denial.......................................52
12.2 Right to Reconsideration...............................52
12.3 Review of Documents....................................52
12.4 Decision by Administrator..............................52
12.5 Notice by Administrator................................52
ARTICLE XIII AMENDMENTS, TERMINATION AND MERGER.....................54
13.1 Amendments.............................................54
13.2 Consolidation, Merger or Other Transactions
of Employer..........................................54
13.3 Consolidation or Merger of Trust.......................55
13.4 Bankruptcy or Insolvency of Employer...................55
13.5 Voluntary Termination..................................56
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Page
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13.6 Partial Termination of Plan or Permanent
Discontinuance of Contributions......................56
ARTICLE XIV MISCELLANEOUS..........................................57
14.1 No Diversion of Funds..................................57
14.2 Liability Limited......................................57
14.3 Facility of Payment....................................57
14.4 Spendthrift Clause.....................................57
14.5 Benefits Limited to Fund...............................58
14.6 Cooperation of Parties.................................58
14.7 Payments Due Missing Persons...........................58
14.8 Governing Law..........................................58
14.9 Nonguarantee of Employment.............................59
14.10 Counsel................................................59
-viii-
<PAGE>
FIRST NILES FINANCIAL, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
PREAMBLE
Effective as of January 1, 1998, First Niles Financial, Inc., a
Delaware corporation (the "Sponsor"), has adopted the First Niles Financial,
Inc. Employee Stock Ownership Plan in order to enable Participants to share in
the growth and prosperity of the Sponsor and its wholly owned subsidiary, Home
Federal Savings and Loan Association of Niles, and to provide Participants with
an opportunity to accumulate capital for their future economic security by
accumulating funds to provide retirement, death and disability benefits. The
Plan is a stock bonus plan designed to meet the applicable requirements of
Section 409 of the Code and of an employee stock ownership plan, as defined in
Section 4975(e)(7) of the Code and Section 407(d)(6) of the Act. The employee
stock ownership plan is intended to invest primarily in "qualifying employer
securities" as defined in Section 4975(e)(8) of the Code. The Sponsor intends
that the Plan will qualify under Sections 401(a) and 501(a) of the Code and will
comply with the provisions of the Act. The Plan has been drafted to comply with
all applicable provisions of law, including the Tax Reform Act of 1986, the
Omnibus Budget Reconciliation Act of 1986, the Omnibus Budget Reconciliation Act
of 1987, the Technical and Miscellaneous Revenue Act of 1988, the Revenue
Reconciliation Act of 1989, the Omnibus Budget Reconciliation Act of 1993, the
Small Business Job Protection Act of 1996, and the Taxpayer Relief Act of 1997.
The terms of this Plan shall apply only with respect to Employees of
the Employer on and after January 1, 1998.
-1-
<PAGE>
ARTICLE I
DEFINITION OF TERMS AND CONSTRUCTION
1.1 Definitions.
Unless a different meaning is plainly implied by the context, the
following terms as used in this Plan shall have the following meanings:
(a) "Account" shall mean a Participant's or Former Participant's
entire accrued benefit under the Plan, including the balance credited to
his Employee Stock Ownership Account and any other account described in
Section 5.1.
(b) "Act" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, or any successor statute, together with
the applicable regulations promulgated thereunder.
(c) "Administrator" shall mean the fiduciary provided for in Article
XI.
(d) "Annual Additions" shall mean, with respect to each Participant,
the sum of those amounts allocated to the Participant's Account under this
Plan and accounts under any other qualified defined contribution plan to
which the Employer or a Related Employer contributes for any Limitation
Year, consisting of the following:
(1) Employer contributions;
(2) Forfeitures; and
(3) Employee contributions (if any).
Annual Additions shall not include any employer contributions which are
used by the Trust to pay interest on an Exempt Loan nor any forfeitures of
Employer Securities purchased with the proceeds of an Exempt Loan, provided that
not more than one-third of the employer contributions are allocated to
Participants who are among the group of employees deemed "highly compensated
employees" within the meaning of Code Section 414(q), as further described in
Section 8.3.
(e) "Authorized Leave of Absence" shall mean an absence from Service
with respect to which the Employee may or may not be entitled to
Compensation and which meets any one of the following requirements:
(1) Service in any of the armed forces of the United States
for up to 36 months, provided that the Employee resumes Service
within 90 days after discharge, or such longer period of time
during which such Employee's employment rights are protected by
law; or
-2-
<PAGE>
(2) Any other absence or leave expressly approved and
granted by the Employer which does not exceed 24 months, provided
that the Employee resumes Service at or before the end of such
approved leave period. In approving such leaves of absence, the
Employer shall treat all Employees on a uniform and
nondiscriminatory basis.
(f) "Beneficiary" shall mean such legal or natural persons, who may be
designated contingently or successively, as may be designated by the
Participant pursuant to Section 6.5 to receive benefits after the death of
the Participant, or in the absence of a valid designation, such persons
specified in Section 6.5(b) to receive benefits after the death of the
Participant.
(g) "Board of Directors" shall mean the Board of Directors of the
Sponsor.
(h) "Break" shall mean a Plan Year during which an Employee fails to
complete more than 500 Hours of Service.
(i) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute, together with the applicable
regulations promulgated thereunder.
(j) "Compensation" shall mean the amount of remuneration paid to an
Employee by the Employer, after the date on which the Employee becomes a
Participant, for services rendered to the Employer during a Plan Year,
including base salary, bonuses, overtime and commissions, elective
deferrals to a cash or deferred arrangement described in Code Section
401(k), and any amount contributed on a pre-tax salary reduction basis to a
cafeteria plan described in Section 125 of the Code, but excluding amounts
paid by the Employer or accrued with respect to this Plan or any other
qualified or non-qualified unfunded plan of deferred compensation or other
employee welfare plan to which the Employer contributes, payments for group
insurance, medical benefits, reimbursement for expenses, and other forms of
extraordinary pay, and excluding amounts accrued for a prior Plan Year.
Notwithstanding anything herein to the contrary, the annual Compensation of
each Participant taken into account under the Plan for any purpose during
any Plan Year shall not exceed $150,000, as adjusted from time to time in
accordance with Section 415(d) of the Code.
(k) "Date of Hire" shall mean the date on which an Employee shall
perform his first Hour of Service. Notwithstanding the foregoing, in the
event that an Employee incurs one or more consecutive Breaks after his
initial Date of Hire which results in the forfeiture of his pre-Break
Service pursuant to Section 3.3, his "Date of Hire" shall thereafter be the
date on which he completes his first Hour of Service after such Break or
Breaks.
(l) "Disability" shall mean a physical or mental impairment which
prevents a Participant from performing the duties assigned to him by the
Employer and which either has caused the Social Security Administration to
classify the individual as "disabled" for purposes of Social Security or
has been determined by a qualified physician selected by the Administrator.
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<PAGE>
(m) "Disability Retirement Date" shall mean the first day of the month
after which a Participant incurs a Disability.
(n) "Early Retirement Date" shall mean the first day of the month
coincident with or next following the later of the date on which a
Participant attains age 55 and completes 5 Years of Vesting Service.
(o) "Effective Date" shall mean January 1, 1998.
(p) "Eligibility Period" shall mean the period of 12 consecutive
months commencing on an Employee's Date of Hire. Succeeding Eligibility
Periods after the initial Eligibility Period shall be based on Plan Years,
the first of which shall include the first anniversary of an Employee's
Date of Hire.
(q) "Employee" shall mean any person who is classified as an employee
by the Employer or a Related Employer, including officers, but excluding
directors in their capacity as such.
(r) "Employee Stock Ownership Account" shall mean the separate
bookkeeping account established for each Participant pursuant to Section
5.1(a).
(s) "Employee Stock Ownership Contribution" shall mean the cash,
Employer Securities, or both that are contributed to the Plan by the
Employer pursuant to Article IV.
(t) "Employee Stock Ownership Suspense Account" shall mean the
temporary account in which the Trustee shall maintain any Employee Stock
Ownership Contribution that is made prior to the last day of the Plan Year
for which it is made, as described in Section 5.2.
(u) "Employer" shall mean First Niles Financial, Inc., a Delaware
corporation, and its wholly owned subsidiary, Home Federal Savings and Loan
Association of Niles, or any successors to the aforesaid corporations by
merger, consolidation or otherwise, which may agree to continue this Plan,
or any Related Employer or any other business organization which, with the
consent of the Sponsor, shall agree to become a party to this Plan. To the
extent required by the Code or the Act, references herein to the Employer
shall also include all Related Employers, whether or not they are
participating in this Plan.
(v) "Employer Securities" shall mean the First Niles Financial, Inc.
common stock issued by , a Delaware corporation. Such term shall also mean,
in the discretion of the Board of Directors, any other common stock issued
by the Employer or any Related Employer having voting power and dividend
rights equal to or in excess of:
(a) that class of common stock of the Employer or a Related
Employer having the greatest voting power, and
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<PAGE>
(b) that class of common stock of the Employer or a Related
Employer having the greatest dividend rights.
Non-callable preferred stock shall be treated as Employer Securities if such
stock is convertible at any time into stock which meets the requirements of (a)
and (b) next above and if such conversion is at a conversion price which (as of
the date of the acquisition by the Plan) is reasonable. For purposes of the last
preceding sentence, preferred stock shall be treated as non-callable if, after
the call, there will be a reasonable opportunity for a conversion which meets
the requirements of the last preceding sentence.
(w) "Entry Date" shall mean each January 1 and July 1.
(x) "Exempt Loan" shall mean a loan described at Section 4975(d)(3) of
the Code to the Trustee to purchase Employer Securities for the Plan, made
or guaranteed by a disqualified person, as defined at Section 4975(e)(2) of
the Code, including, but not limited to, a direct loan of cash, a purchase
money transaction, an assumption of an obligation of the Trustee, an
unsecured guarantee or the use of assets of such disqualified person as
collateral for such a loan.
(y) "Exempt Loan Suspense Account" shall mean the account to which
Financed Shares are initially credited until they are released in
accordance with Section 8.5.
(z) "Financed Shares" shall mean the Employer Securities acquired by
the Trustee with the proceeds of an Exempt Loan and which are credited to
the Exempt Loan Suspense Account until they are released in accordance with
Section 8.5.
(aa) "Former Participant" shall mean any previous Participant whose
participation has terminated but who has a vested Account in the Plan which
has not been distributed in full.
(bb) "Fund" shall mean the trust fund maintained by the Trustee
pursuant to the Trust Agreement in order to provide for the payment of the
benefits specified in the Plan.
(cc) "Hour of Service" shall mean each hour for which an Employee is
directly or indirectly paid or entitled to payment by the Employer or a
Related Employer for the performance of duties or for reasons other than
the performance of duties (such as vacation time, holidays, sickness,
disability, paid lay-offs, jury duty and similar periods of paid nonworking
time). To the extent not otherwise included, Hours of Service shall also
include each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by the Employer or a Related
Employer. Hours of working time shall be credited on the basis of actual
hours worked, even though compensated at a premium rate for overtime or
other reasons. In computing and crediting Hours of Service for an Employee
under this Plan, the rules set forth in Sections 2530.200b-2(b) and (c) of
the Department of Labor Regulations shall apply, said sections being herein
incorporated by reference. Hours of Service shall be credited to the Plan
Year or other relevant period during which the services were performed or
the nonworking time occurred, regardless of the time when compensation
therefor
-5-
<PAGE>
may be paid. Any Employee for whom no hourly employment records are kept by
the Employer or a Related Employer shall be credited with 45 Hours of
Service for each calendar week in which he would have been credited with a
least one Hour or Service under the foregoing provisions, if hourly records
were available. Solely for purposes of determining whether a Break for
participation and vesting purposes has occurred in an Eligibility Period or
a Plan Year, an individual who is absent from work for maternity or
paternity reasons shall receive credit for the Hours of Service which would
otherwise have been credited to such individual but for such absence, or in
any case in which such hours cannot be determined, 8 Hours of Service per
day of such absence. For purposes of this Section 1.1(cc), an absence from
work for maternity or paternity reasons means an absence (1) by reason of
the pregnancy of the individual, (2) by reason of the birth of a child of
the individual, (3) by reason of the placement of a child with the
individual in connection with the adoption of such child by such
individual, or (4) for purposes of caring for such child for a period
beginning immediately following such birth or placement. The Hours of
Service credited under this provision shall be credited (1) in the
computation period in which the absence begins if the crediting is
necessary to prevent a Break in that period, or (2) in all other cases, in
the following computation period.
(dd) "Investment Adjustments" shall mean the increases and/or
decreases in the value of a Participant's Account attributable to earnings,
gains, losses and expenses of the Fund, as set forth in Section 5.3.
(ee) "Limitation Year" shall mean the Plan Year.
(ff) "Normal Retirement Date" shall mean the first day of the month
coincident with or next following the later of the date on which a
Participant attains age 65 or the fifth anniversary of the date he
commenced participation in the Plan.
(gg) "Participant" shall mean an Employee who has met all of the
eligibility requirements of the Plan and who is currently included in the
Plan as provided in Article II hereof; provided, however, that the term
"Participant" shall not include (1) leased Employees, (2) any Employee who
is regularly employed outside the Employer's own offices in connection with
the operation and maintenance of buildings or other properties acquired
through foreclosure or deed, (3) any individual who is employed by a
Related Employer that has not adopted the Plan in accordance with Section
1.1(u) hereof, (4) any Employee who is a non-resident alien individual and
who has no earned income from sources within the United States, or (5) any
Employee who is included in a unit of Employees covered by a
collective-bargaining agreement with the Employer or a Related Employer
that does not expressly provide for participation of such Employees in the
Plan, where there has been good-faith bargaining between the Employer or a
Related Employer and Employees' representatives on the subject of
retirement benefits. To the extent required by the Code or the Act, or
appropriate based on the context, references herein to Participant shall
include Former Participant.
(hh) "Plan" shall mean the First Niles Financial, Inc. Employee Stock
Ownership Plan, as described herein or as hereafter amended from time to
time.
(ii) "Plan Year" shall mean any 12 consecutive month period commencing
on each January 1 and ending on the next following December 31.
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<PAGE>
(jj) "Qualified Domestic Relations Order" shall mean any judgment,
decree or order that satisfies the requirements to be a "qualified domestic
relations order," as defined in Section 414(p) of the Code.
(kk) "Related Employer" shall mean any entity that is:
(1) a member of a controlled group of corporations that includes
the Employer, while it is a member of such controlled group (within
the meaning of Section 414(b) of the Code);
(2) a member of a group of trades or businesses under common
control with the Employer, while it is under common control (within
the meaning of Section 414(c) of the Code);
(3) a member of an affiliated service group that includes the
Employer, while it is a member of such affiliated service group
(within the meaning of Section 414(m) of the Code); or
(4) a leasing or other organization that is required to be
aggregated with the Employer pursuant to the provisions of Section
414(n) or 414(o) of the Code.
(ll) "Retirement" shall mean termination of employment which qualifies
as early, normal or Disability retirement as described in Article VI.
(mm) "Service" shall mean, for purposes of eligibility to participate
and vesting, employment with the Employer or any Related Employer, and for
purposes of allocation of the Employee Stock Ownership Contribution and
forfeitures, employment with the Employer.
(nn) "Sponsor" shall mean Home Federal Savings and Loan Association of
Niles, a Delaware corporation.
(oo) "Trust Agreement" shall mean the agreement, dated ___________, by
and between First Niles Financial, Inc., a Delaware corporation, and First
Bankers Trust Company, N.A., of Quincy, Illinois.
(pp) "Trustee" shall mean the trustee or trustees by whom the assets
of the Plan are held, as provided in the Trust Agreement, or his or their
successors.
(qq) "Valuation Date" shall mean the last day of each Plan Year. The
Trustee may make additional valuations, at the direction of the
Administrator, but in no event may the Administrator request additional
valuations by the Trustee more frequently than quarterly. Whenever such
date falls on a Saturday, Sunday or holiday, the preceding business day
shall be the Valuation Date.
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(rr) "Year of Eligibility Service" shall mean an Eligibility Period
during which an Employee is credited with at least 1,000 Hours of Service,
except as otherwise specified in Article III.
(ss) "Year of Vesting Service" shall mean a Plan Year during which an
Employee is credited with at least 1,000 Hours of Service, except as
otherwise specified in Article III.
1.2 Plurals and Gender.
Where appearing in the Plan and the Trust Agreement, the masculine
gender shall include the feminine and neuter genders, and the singular shall
include the plural, and vice versa, unless the context clearly indicates a
different meaning.
1.3 Incorporation of Trust Agreement.
The Trust Agreement, as the same may be amended from time to time, is
intended to be and hereby is incorporated by reference into this Plan. All
contributions made under the Plan will be held, managed and controlled by the
Trustee pursuant to the terms and conditions of the Trust Agreement.
1.4 Headings.
The headings and sub-headings in this Plan are inserted for the
convenience of reference only and are to be ignored in any construction of the
provisions hereof.
1.5 Severability.
In case any provision of this Plan shall be held illegal or void, such
illegality or invalidity shall not affect the remaining provisions of this Plan,
but shall be fully severable, and the Plan shall be construed and enforced as if
said illegal or invalid provisions had never been inserted herein.
1.6 References to Governmental Regulations.
References in this Plan to regulations issued by the Internal Revenue
Service, the Department of Labor, or other governmental agencies shall include
all regulations, rulings, procedures, releases and other position statements
issued by any such agency.
1.7 Notices.
Any notice or document required to be filed with the Administrator or
Trustee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Administrator in care of the Sponsor or
to the Trustee, each at its principal business offices. Any notice required
under the Plan may be waived in writing by the person entitled to notice.
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1.8 Evidence.
Evidence required of anyone under the Plan may be by certificate,
affidavit, document or other information which the person acting on it considers
pertinent and reliable, and signed, made or presented by the proper party or
parties.
1.9 Action by Employer.
Any action required or permitted to be taken by any entity constituting
the Employer under the Plan shall be by resolution of its Board of Directors or
by a person or persons authorized by its Board of Directors.
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ARTICLE II
PARTICIPATION
2.1 Commencement of Participation.
(a) Any Employee who is otherwise eligible to become a Participant in
accordance with Section 1.1(gg) hereof shall initially become a Participant on
the Entry Date coincident with or next following the later of the following
dates, provided he is employed by the Employer on that Entry Date:
(1) The date on which he completes [a Year] of Eligibility Service;
and
(2) The date on which he attains age [21].
(b) Any Employee who had satisfied the requirements set forth in
Section 2.1(a) during the 12 consecutive month period prior to the Effective
Date shall become a Participant on the Effective Date, provided he is still
employed by the Employer on the Effective Date.
2.2 Termination of Participation.
After commencement or resumption of his participation, an Employee
shall remain a Participant during each consecutive Plan Year thereafter until
the earliest of the following dates:
(a) His actual Retirement date;
(b) His date of death; or
(c) The last day of a Plan Year during which he incurs a Break.
2.3 Resumption of Participation.
(a) Any Participant whose employment terminates and who resumes Service
before he incurs a Break shall resume participation immediately on the date he
is reemployed.
(b) Except as otherwise provided in Section 2.3(c), any Participant who
incurs one or more Breaks and resumes Service shall resume participation
retroactively as of the first day of the first Plan Year in which he completes a
Year of Eligibility Service after such Break(s).
(c) Any Participant who incurs one or more Breaks and resumes Service,
but whose pre-Break Service is not reinstated to his credit pursuant to Section
3.3, shall be treated as a new Employee and shall again be required to satisfy
the eligibility requirements contained in Section 2.1(a) before resuming
participation on the appropriate Entry Date, as specified in Section 2.1(a).
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2.4 Determination of Eligibility.
The Administrator shall determine the eligibility of Employees in
accordance with the provisions of this Article. For each Plan Year, the Employer
shall furnish the Administrator a list of all Employees, indicating their Date
of Hire, their Hours of Service during their Eligibility Period, their date of
birth, the original date of their reemployment with the Employer, if any, and
any Breaks they may have incurred.
2.5 Restricted Participation
Subject to the terms and conditions of the Plan, during the period
between the Participant's date of termination of participation in the Plan (as
described in Section 2.2) and the distribution of his entire Account (as
described in Article IX), and during any period that a Participant does not meet
the requirements of Section 2.1(a) or is employed by a Related Employer that is
not participating in the Plan, the Participant or, in the event of the
Participant's death, the Beneficiary of the Participant, will be considered and
treated as a Participant for all purposes of the Plan, except as follows:
(a) the Participant will not share in the Employee Stock Ownership
Contribution and forfeitures (as described in Sections 7.2 and 7.3), except
as provided in Sections 5.4 and 5.5; and
(b) the Beneficiary of a deceased Participant cannot designate a
Beneficiary under Section 6.5.
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ARTICLE III
CREDITED SERVICE
3.1 Service Counted for Eligibility Purposes.
Except as provided in Section 3.3, all Years of Eligibility Service
completed by an Employee shall be counted in determining his eligibility to
become a Participant on and after the Effective Date, whether such Service was
completed before or after the Effective Date.
3.2 Service Counted for Vesting Purposes.
All Years of Vesting Service completed by an Employee (including Years
of Vesting Service completed prior to the Effective Date) shall be counted in
determining his vested interest in this Plan, except the following:
(a) Service which is disregarded under the provisions of Section 3.3;
(b) Service prior to the Effective Date of this Plan if such Service
would have been disregarded under the "break in service" rules (within the
meaning of Section 1.411(a)-5(b)(6) of the Treasury Regulations).
3.3 Credit for Pre-Break Service.
Upon his resumption of participation following one or a series of
consecutive Breaks, an Employee's pre-Break Service shall be reinstated to his
credit for eligibility and vesting purposes only if either:
(a) He was vested in any portion of his accrued benefit at the time
the Break(s) began; or
(b) The number of his consecutive Breaks does not equal or exceed the
greater of 5 or the number of his Years of Eligibility Service or Years of
Vesting Service, as the case may be, credited to him before the Breaks
began.
Except as provided in the foregoing, none of an Employee's Service
prior to one or a series of consecutive Breaks shall be counted for any purpose
in connection with his participation in this Plan thereafter.
3.4 Service Credit During Authorized Leaves.
An Employee shall receive no Service credit under Section 3.1 or 3.2
during any Authorized Leave of Absence. However, solely for the purpose of
determining whether he has
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incurred a Break during any Plan Year in which he is absent from Service for one
or more Authorized Leaves of Absence, he shall be credited with 45 Hours of
Service for each week during any such leave period. Notwithstanding the
foregoing, if an Employee fails to return to Service on or before the end of a
leave period, he shall be deemed to have terminated Service as of the first day
of such leave period and his credit for Hours of Service, determined under this
Section 3.4, shall be revoked. Notwithstanding anything contained herein to the
contrary, an Employee who is absent by reason of military service as set forth
in Section 1.1(e)(1) shall be given Service credit under this Plan for such
military leave period to the extent, and for all purposes, required by law.
3.5 Service Credit During Maternity or Paternity Leave.
For purposes of determining whether a Break has occurred for
participation and vesting purposes, an individual who is on maternity or
paternity leave as described in Section 1.1(cc), shall be deemed to have
completed Hours of Service during such period of absence, all in accordance with
Section 1.1(cc). Notwithstanding the foregoing, no credit shall be given for
such Hours of Service unless the individual furnishes to the Administrator such
timely information as the Administrator may reasonably require to determine:
(a) that the absence from Service was attributable to one of the
maternity or paternity reasons enumerated in Section 1.1(cc); and
(b) the number of days of such absence.
In no event, however, shall any credit be given for such leave other than for
determining whether a Break has occurred.
3.6 Ineligible Employees.
Notwithstanding any provisions of this Plan to the contrary, any
Employee who is ineligible to participate in this Plan either because of his
failure
(a) To meet the eligibility requirements contained in Article II; or
(b) To be a Participant, as defined in Section 1.1(gg),
shall, nevertheless, earn Years of Eligibility Service and Years of Vesting
Service pursuant to the rules contained in this Article III. However, such
Employee shall not be entitled to an allocation of any contributions or
forfeitures hereunder unless and until he becomes a Participant in this Plan,
and then, only during his period of participation.
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ARTICLE IV
CONTRIBUTIONS
4.1 Employee Stock Ownership Contribution.
(a) Subject to all of the provisions of this Article IV, for each Plan
Year commencing on or after the Effective Date, the Employer shall make an
Employee Stock Ownership Contribution to the Fund in such amount as may be
determined by resolution of the Board of Directors in its discretion; provided,
however, that the Employer shall contribute an amount in cash not less than the
amount required to enable the Trustee to discharge any indebtedness incurred
with respect to an Exempt Loan in accordance with Section 8.6(c). If any part of
the Employee Stock Ownership Contribution under this Section 4.1 for any Plan
Year is in cash in an amount exceeding the amount needed to pay the amount due
during or prior to such Plan Year with respect to an Exempt Loan, such cash
shall be applied by the Trustee, as directed by the Administrator in its sole
discretion, either to the purchase of Employer Securities or to repay an Exempt
Loan. Contributions hereunder shall be in the form of cash, Employer Securities
or any combination thereof. In determining the value of Employer Securities
transferred to the Fund as an Employee Stock Ownership Contribution, the
Administrator may determine the average of closing prices of such securities for
a period of up to 90 consecutive days immediately preceding the date on which
the securities are contributed to the Fund. In the event that the Employer
Securities are not readily tradable on an established securities market, the
value of the Employer Securities transferred to the Fund shall be determined by
an independent appraiser in accordance with Section 8.9.
(b) In no event shall the Employee Stock Ownership Contribution exceed
for any Plan Year the maximum amount that may be deducted by the Employer under
Section 404 of the Code, nor shall such contribution cause the Employer to
violate its regulatory capital requirements. Each Employee Stock Ownership
Contribution by the Employer shall be deemed to be made on the express condition
that the Plan, as then in effect, shall be qualified under Sections 401(a) and
501(a) of the Code and that the amount of such contribution shall be deductible
from the Employer's income under Section 404 of the Code.
4.2 Time and Manner of Employee Stock Ownership Contribution.
(a) The Employee Stock Ownership Contribution (if any) for each Plan
Year shall be paid to the Trustee in one lump sum or installments at any time on
or before the expiration of the time prescribed by law (including any
extensions) for filing of the Employer's federal income tax return for its
fiscal year ending concurrent with or during such Plan Year. Any portion of the
Employee Stock Ownership Contribution for each Plan Year that may be made prior
to the last day of the Plan Year shall be maintained by the Trustee in the
Employee Stock Ownership Suspense Account described in Section 5.2 until the
last day of such Plan Year.
(b) If an Employee Stock Ownership Contribution for a Plan Year is paid
after the close of the Employer's fiscal year which ends concurrent with or
during such Plan Year but on or
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prior to the due date (including any extensions) for filing of the Employer's
federal income tax return for such fiscal year, it shall be considered, for
allocation purposes, as an Employee Stock Ownership Contribution to the Fund for
the Plan Year for which it was computed and accrued, unless such contribution is
accompanied by a statement to the Trustee, signed by the Employer, which
specifies that the Employee Stock Ownership Contribution is made with respect to
the Plan Year in which it is received by the Trustee. Any Employee Stock
Ownership Contribution paid by the Employer during any Plan Year but after the
due date (including any extensions) for filing of its federal income tax return
for the fiscal year of the Employer ending on or before the last day of the
preceding Plan Year shall be treated, for allocation purposes, as an Employee
Stock Ownership Contribution to the Fund for the Plan Year in which the
contribution is paid to the Trustee.
(c) Notwithstanding anything contained herein to the contrary, no
Employee Stock Ownership Contribution shall be made for any Plan Year during
which a limitations account created pursuant to Section 5.6(c)(3) is in
existence until the balance of such limitations account has been reallocated in
accordance with Section 5.6(c)(3).
4.3 Records of Contributions.
The Employer shall deliver at least annually to the Trustee, with
respect to the Employee Stock Ownership Contribution contemplated in Section
4.1, a certificate of the Administrator, in such form as the Trustee shall
approve, setting forth:
(a) The aggregate amount of such contribution, if any, to the Fund for
such Plan Year;
(b) The names, Internal Revenue Service identifying numbers and
current residential addresses of all Participants in the Plan;
(c) The amount and category of contributions to be allocated to each
such Participant; and
(d) Any other information reasonably required for the proper operation
of the Plan.
4.4 Erroneous Contributions.
(a) Notwithstanding anything herein to the contrary, upon the
Employer's request, a contribution which was made by a mistake of fact, or
conditioned upon the initial qualification of the Plan, under Code Section
401(a), or upon the deductibility of the contribution under Section 404 of the
Code, shall be returned to the Employer by the Trustee within one year after the
payment of the contribution, the denial of the qualification or the disallowance
of the deduction (to the extent disallowed), whichever is applicable; provided,
however, that in the case of denial of the initial qualification of the Plan, a
contribution shall not be returned unless an Application for Determination has
been timely filed with the Internal Revenue Service. Any portion of a
contribution returned pursuant to this Section 4.4 shall be adjusted to reflect
its proportionate share of the losses of the Fund, but shall not be adjusted to
reflect any earnings or gains. Notwithstanding any provisions of
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this Plan to the contrary, the right or claim of any Participant or Beneficiary
to any asset of the Fund or any benefit under this Plan shall be subject to and
limited by this Section 4.4.
(b) In no event shall Employee contributions be accepted. Any such
Employee contributions (and any earnings attributable thereto) mistakenly
received by the Trustee shall promptly be returned to the Participant.
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ARTICLE V
ACCOUNTS, ALLOCATIONS AND INVESTMENTS
5.1 Establishment of Separate Participant Accounts.
The Administrator shall establish and maintain a separate Account for
each Participant in the Plan and for each Former Participant in accordance with
the provisions of this Article V. Such separate Account shall be for bookkeeping
purposes only and shall not require a segregation of the Fund, and no
Participant, Former Participant or Beneficiary shall acquire any right to or
interest in any specific assets of the Fund as a result of the allocations
provided for under this Plan.
(a) Employee Stock Ownership Accounts.
The Administrator shall establish a separate Employee Stock Ownership
Account in the Fund for each Participant. The Administrator may establish
subaccounts hereunder, an Employer Stock Account reflecting a Participant's
interest in Employer Securities held by the Trust, and an Other Investments
Account reflecting the Participant's interest in his Employee Stock Ownership
Account other than Employer Securities. Each Participant's Employer Stock
Account shall reflect his share of any Employee Stock Ownership Contribution
made in Employer Securities, his allocable share of forfeitures (as described in
Section 5.4), and any Employer Securities attributable to earnings on such
stock. Each Participant's Other Investments Account shall reflect any Employee
Stock Ownership Contribution made in cash, any cash dividends on Employer
Securities allocated and credited to his Employee Stock Ownership Account (other
than currently distributable dividends) and his share of corresponding cash
forfeitures, and any income, gains, losses, appreciation, or depreciation
attributable thereto.
(b) Distribution Accounts.
In any case where distribution of a terminated Participant's vested
Account is to be deferred, the Administrator shall establish a separate,
nonforfeitable account in the Fund to which the balance in his Employee Stock
Ownership Account in the Plan shall be transferred after such Participant incurs
a Break. Unless the Former Participant's distribution accounts are segregated
for investment purposes pursuant to section 9.4, they shall share in Investment
Adjustments.
(c) Other Accounts.
The Administrator shall establish such other separate accounts for each
Participant as may be necessary or desirable for the convenient administration
of the Fund.
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5.2 Establishment of Suspense Accounts.
The Administrator shall establish a separate Employee Stock Ownership
Suspense Account. There shall be credited to such account any Employee Stock
Ownership Contribution that may be made prior to the last day of the Plan Year,
as provided in Section 4.2. The Employee Stock Ownership Suspense Account shall
share proportionately as to time and amount in any Investment Adjustments. As of
the last day of each Plan Year, the balance of the Employee Stock Ownership
Suspense Account shall be added to the Employee Stock Ownership Contribution and
allocated to the Employee Stock Ownership Accounts of Participants as provided
in Section 5.5, except as provided herein. In the event that the Plan takes an
Exempt Loan, the Employer Securities purchased thereby shall be allocated as
Financed Shares to a separate Exempt Loan Suspense Account, from which
allocations shall be made in accordance with Section 8.5.
5.3 Allocation of Earnings, Losses and Expenses.
As of each Valuation Date, any increase or decrease in the net worth of
the aggregate Employee Stock Ownership Accounts held in the Fund attributable to
earnings, losses, expenses and unrealized appreciation or depreciation in each
such aggregate account, as determined by the Trustee pursuant to the Trust
Agreement, shall be credited to or deducted from the appropriate suspense
accounts and all Participants' Employee Stock Ownership Accounts (except
segregated distribution accounts described in Section 5.1(b) and the
"limitations account" described in Section 5.6(c)(3)) in the proportion that the
value of each such account (determined immediately prior to such allocation and
before crediting any Employee Stock Ownership Contribution and forfeitures for
the current Plan Year but after adjustment for any transfer to or from such
accounts and for the time such funds were in such accounts) bears to the value
of all Employee Stock Ownership Accounts.
5.4 Allocation of Forfeitures.
As of the last day of each Plan Year, all forfeitures attributable to
the Employee Stock Ownership Accounts which are then available for reallocation
shall be, as appropriate, added to the Employee Stock Ownership Contribution (if
any) for such year and allocated among the Participants' Employee Stock
Ownership Accounts, as appropriate, in the manner provided in Sections 5.5 and
5.6.
5.5 Allocation of Employee Stock Ownership Contribution.
As of the last day of each Plan Year for which the Employer shall make
an Employee Stock Ownership Contribution, the Administrator shall allocate the
Employee Stock Ownership Contribution (including reallocable forfeitures) for
such Plan Year to the Employee Stock Ownership Account of each Participant who
completed a Year of Vesting Service during that Plan Year, provided that he is
still employed by the Employer on the last day of the Plan Year. Such allocation
shall be made in the same proportion that each such Participant's Compensation
for such Plan Year bears to the total Compensation of all such Participants for
such Plan Year, subject to Section 5.6.
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Notwithstanding the foregoing, if a Participant attains his Normal Retirement
Date and terminates Service prior to the last day of the Plan Year but after
completing a Year of Vesting Service, he shall be entitled to an allocation
based on his Compensation earned prior to his termination and during the Plan
Year. Furthermore, if a Participant completes a Year of Vesting Service and is
on a Leave of Absence on the last day of the Plan Year because of pregnancy or
other medical reason, such a Participant shall be entitled to an allocation
based on his Compensation earned during such Plan Year.
5.6 Limitation on Annual Additions.
(a) Notwithstanding any provisions of this Plan to the contrary, the
total Annual Additions credited to a Participant's Account under this Plan (and
accounts under any other defined contribution plan maintained by the Employer or
a Related Employer) for any Limitation Year shall not exceed the lesser of:
(1) 25% of the Participant's compensation (as defined below) for such
Limitation Year; or
(2) $30,000 (or, if greater, one-fourth of the defined benefit dollar
limitation set forth in Section 415(b)(1)(A) of the Code). Whenever
otherwise allowed by law, the maximum amount of $30,000 shall be
automatically adjusted annually for cost-of-living increases in accordance
with Section 415(d) of the Code, and the highest such increase effective at
any time during the Limitation Year shall be effective for the entire
Limitation Year, without any amendment to this Plan.
(b) Solely for the purpose of this Section 5.6, the term "compensation"
is defined as wages, salaries, and fees for professional services, pre-tax
elective deferrals and salary reduction contributions under a plan described in
Section 401(k) or 125 of the Code, and other amounts received (without regard to
whether or not an amount is paid in cash) for personal services actually
rendered in the course of employment with the Employer or a Related Employer, to
the extent that the amounts are includable in gross income (including, but not
limited to, commissions paid to salesmen, compensation for services on the basis
of a percentage of profits, commissions on insurance premiums, tips, bonuses,
fringe benefits, and reimbursements or other expense allowances under a
nonaccountable plan (as described in Treas. Regs. Section 1.62-2(c)), and
excluding the following:
(1) Employer contributions by the Employer or a Related Employer to a
plan of deferred compensation (other than elective deferrals under a plan
described in Section 401(k) of the Code) which are not includable in the
Employee's gross income for the taxable year in which contributed, or
employer contributions by the Employer or a Related Employer under a
simplified employee pension plan to the extent such contributions are
deductible by the Employee, or any distributions from a plan of deferred
compensation;
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(2) Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the Employee either
becomes freely transferable or is no longer subject to a substantial risk
of forfeiture;
(3) Amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option; and
(4) Other amounts which received special tax benefits (other than
pre-tax salary reduction contributions under a plan described in Section
125 of the Code), or contributions made by the employer (whether or not
under a salary reduction agreement) towards the purchase of an annuity
contract described in section 403(b) of the Code (whether or not the
contributions are actually excludable from the gross income of the
Employee).
(c) In the event that the limitations on Annual Additions described in
Section 5.6(a) above are exceeded with respect to any Participant in any
Limitation Year, then the contributions allocable to the Participant for such
Limitation Year shall be reduced to the minimum extent required by such
limitations, in the following order of priority:
(1) The Administrator shall determine to what extent the Annual
Additions to any Participant's Employee Stock Ownership Account must be
reduced in each Limitation Year. The Administrator shall reduce the Annual
Additions to all other qualified, tax-exempt retirement plans maintained by
the Employer or a Related Employer in accordance with the terms contained
therein for required reductions or reallocations mandated by Section 415 of
the Code before reducing any Annual Additions in this Plan.
(2) If any further reductions in Annual Additions are necessary, then
the Employee Stock Ownership Contribution and forfeitures allocated during
such Limitation Year to the Participant's Employee Stock Ownership Account
shall be reduced. The amount of any such reductions in the Employee Stock
Ownership Contribution and forfeitures shall be reallocated to all other
Participants in the same manner as set forth under Sections 5.4 and 5.5.
(3) Any amounts which cannot be reallocated to other Participants in a
current Limitation Year in accordance with Section 5.6(c)(2) above because
of the limitations contained in Sections 5.6(a) and (d) shall be credited
to an account designated as the "limitations account" and carried forward
to the next and subsequent Limitation Years until it can be reallocated to
all Participants as set forth in Sections 5.4 and 5.5, as appropriate. No
Investment Adjustments shall be allocated to this limitations account. In
the next and subsequent Limitation Years, all amounts in the limitations
account must be allocated in the manner described in Sections 5.4 and 5.5,
as appropriate, before any Employee Stock Ownership Contribution may be
made to this Plan for that Limitation Year.
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(4) In the event this Plan is voluntarily terminated by the Employer
under Section 13.5, any amounts credited to the limitations account
described in Section 5.6(c)(3) above which have not be reallocated as set
forth herein shall be distributed to the Participants who are still
employed by the Employer on the date of termination, in the proportion that
each Participant's Compensation bears to the Compensation of all
Participants.
(d) The Annual Additions credited to a Participant's accounts for each
Limitation Year are further limited so that in the case of an Employee who is a
Participant in both this Plan and any qualified defined benefit plan
(hereinafter referred to as a "pension plan") of the Employer or Related
Employer, the sum of (1) and (2) below will not exceed 1.0:
(1) (A) The projected annual normal retirement benefit of a
Participant under the pension plan, divided by
(B)The lesser of:
(i) The product of 1.25 multiplied by the dollar limitation in
effect under Section 415(b)(1)(A) of the Code for such Limitation
Year, or
(ii) The product of 1.4 multiplied by the amount of compensation
which may be taken into account under Section 415(b)(1)(B) of the Code
for the Participant for such Limitation Year; plus
(2) (A) The sum of Annual Additions credited to the Participant under
this Plan for all Limitation Years, divided by:
(B)The sum of the lesser of the following amounts determined for such
Limitation Year and for each prior year of service with the Employer or a
Related Employer:
(i) The product of 1.25 multiplied by the dollar limitation in
effect under Section 415(b)(1)(A) of the Code for such Limitation
Year, or
(ii) The product of 1.4 multiplied by the amount of compensation
which may be taken into account under Section 415(b)(1)(B) of the Code
for the Participant for such Limitation Year.
The Administrator may, in calculating the defined contribution plan
fraction described in Section 5.6(d)(2), elect to use the transitional rule
pursuant to Section 415(e)(7) of the Code, if applicable. If the sum of the
fractions produced above will exceed 1.0, even after the use of the "fresh
start" rule contained in Section 235 of the Tax Equity and Fiscal Responsibility
Act of 1982 ("TEFRA"), if applicable, then the same provisions as stated in
Section 5.6(c) above shall apply. If,
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even after the reductions provided for in Section 5.6(c), the sum of the
fractions still exceeds 1.0, then the benefits of the Participant provided under
the pension plan shall be reduced to the extent necessary, in accordance with
Treasury Regulations issued under the Code. Solely for the purposes of this
Section 5.6(d), the term "years of service" shall mean all years of service
defined by Treasury Regulations issued under Section 415 of the Code.
Notwithstanding the foregoing, the provisions of this Section 5.6(d) shall
expire with respect to all Limitation Years beginning after December 31, 1999.
5.7 Erroneous Allocations.
No Participant shall be entitled to any Annual Additions or other
allocations to his Account in excess of those permitted under Sections 5.3, 5.4,
5.5, and 5.6. If it is determined at anytime that the Administrator and/or
Trustee have erred in accepting and allocating any contributions or forfeitures
under this Plan, or in allocating Investment Adjustments, or in excluding or
including any person as a Participant, then the Administrator, in a uniform and
nondiscriminatory manner, shall determine the manner in which such error shall
be corrected and shall promptly advise the Trustee in writing of such error and
of the method for correcting such error. The accounts of any or all Participants
may be revised, if necessary, in order to correct such error. To the extent
applicable, such correction shall be made in accordance with the provisions of
IRS Revenue Procedure 98-22 (or any amendment or successor thereto).
5.8 Value of Participant's Account.
At any time, the value of a Participant's Account shall consist of the
aggregate value of his Employee Stock Ownership Account and his distribution
account, if any, determined as of the next- preceding Valuation Date. The
Administrator shall maintain adequate records of the cost basis of Employer
Securities allocated to each Participant's Employee Stock Ownership Account.
5.9 Investment of Account Balances.
The Employee Stock Ownership Accounts shall be invested primarily in
Employer Securities. Employer Securities shall constitute at least 51% of the
assets of all Employee Stock Ownership Accounts. All sales of Employer
Securities by the Trustee attributable to the Employee Stock Ownership Accounts
of all Participants shall be charged pro rata to the Employee Stock Ownership
Accounts of all Participants.
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ARTICLE VI
RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY
6.1 Normal Retirement.
A Participant who reaches his Normal Retirement Date and who shall
retire at that time shall thereupon be entitled to retirement benefits based on
the value of his Account, payable pursuant to the provisions of Section 9.1. A
Participant who remains in Service after his Normal Retirement Date shall not be
entitled to any retirement benefits until his actual termination of Service
thereafter (except as provided in Section 9.3(g)), and he shall meanwhile
continue to participate in this Plan.
6.2 Early Retirement.
A Participant who reaches his Early Retirement Date may retire at such
time (or, at his election, as of the first day of any month thereafter prior to
his Normal Retirement Date) and shall thereupon be entitled to retirement
benefits based on the value of his Account, payable pursuant to the provisions
of Section 9.1.
6.3 Disability Retirement.
In the event a Participant incurs a Disability, he may retire on his
Disability Retirement Date and shall thereupon be entitled to retirement
benefits based on the value of his Account, payable pursuant to the provisions
of Section 9.1.
6.4 Death Benefits.
(a) Upon the death of a Participant before his Retirement or other
termination of Service, the value of his Account shall be payable pursuant to
the provisions of Section 9.1. The Administrator shall direct the Trustee to
distribute his Account to any surviving Beneficiary designated by the
Participant or, if none, to such persons specified in Section 6.5(b).
(b) Upon the death of a Former Participant, the Administrator shall
direct the Trustee to distribute any undistributed balance of his Account to any
surviving Beneficiary designated by him or, if none, to such persons specified
in Section 6.5(b).
(c) The Administrator may require such proper proof of death and such
evidence of the right of any person to receive the balance credited to the
Account of a deceased Participant or Former Participant as the Administrator may
deem desirable. The Administrator's determination of death and of the right of
any person to receive payment shall be conclusive.
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6.5 Designation of Beneficiary and Manner of Payment.
(a) Each Participant shall have the right to designate a Beneficiary to
receive the sum or sums to which he may be entitled upon his death. The
Participant may also designate the manner in which any death benefits under this
Plan shall be payable to his Beneficiary, provided that such designation is in
accordance with Section 9.5. Such designation of Beneficiary and manner of
payment shall be in writing and delivered to the Administrator, and shall be
effective when received by the Administrator while the Participant is alive. The
Participant shall have the right to change such designation by notice in writing
to the Administrator while the Participant is alive. Such change of Beneficiary
or the manner of payment shall become effective upon its receipt by the
Administrator while the Participant is alive. Any such change shall be deemed to
revoke all prior designations.
(b) If a Participant shall fail to designate validly a Beneficiary, or
if no designated Beneficiary survives the Participant, the balance credited to
his Account shall be paid to the person or persons in the first of the following
classes of successive preference Beneficiaries surviving at the death of the
Participant: the Participant's (1) widow or widower, (2) natural-born or adopted
children, (3) natural-born or adoptive parents, and (4) estate. The
Administrator shall determine which Beneficiary, if any, shall have been validly
designated or entitled to receive the balance credited to the Participant's
Account in accordance with the foregoing order of preference, and its decision
shall be binding and conclusive on all persons.
(c) Notwithstanding the foregoing, if a Participant is married on the
date of his death, the sum or sums to which he may be entitled under this Plan
upon his death shall be paid to his spouse, unless the Participant's spouse
shall have consented to the election of another Beneficiary. Such a spousal
consent shall be in writing and shall be witnessed either by a representative of
the Administrator or by a notary public. Any designation by an unmarried
Participant shall be rendered ineffective by any subsequent marriage, and any
consent of a spouse shall be effective only as to that spouse. If it is
established to the satisfaction of the Administrator that spousal consent cannot
be obtained because there is no spouse, because the spouse cannot be located, or
other reasons prescribed by governmental regulations, the consent of the spouse
may be waived, and the Participant may designate a Beneficiary or Beneficiaries
other than his spouse.
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ARTICLE VII
VESTING AND FORFEITURES
7.1 Vesting on Death, Disability and Normal Retirement.
Unless his participation in this Plan shall have terminated prior
thereto, upon a Participant's death, Disability or Normal Retirement Date
(whether or not he actually retires at that time) while he is still employed by
the Employer, the Participant's entire Account shall be fully vested and
nonforfeitable.
7.2 Vesting on Termination of Participation.
Upon termination of his participation in this Plan for any reason other
than death, Disability, or Normal Retirement, a Participant shall be vested in a
percentage of his Employee Stock Ownership Account, such vested percentage to be
determined under the following table, based on the Years of Vesting Service
(including Years of Vesting Service prior to the Effective Date) credited to him
at the time of his termination of participation:
Years of Vesting Service Percentage Vested
------------------------ -----------------
Less than 3 0%
3 but less than 4 20%
4 but less than 5 40%
5 but less than 6 60%
6 but less than 7 80%
7 or more 100%
Any portion of the Participant's Employee Stock Ownership Account which
is not vested at the time he incurs a Break shall thereupon be forfeited and
disposed of pursuant to Section 7.3. Distribution of the vested portion of a
terminated Participant's interest in the Plan shall be payable in any manner
permitted under Section 9.1.
7.3 Disposition of Forfeitures.
(a) In the event a Participant incurs a Break and subsequently resumes
both his Service and his participation in the Plan prior to incurring at least 5
Breaks, the forfeitable portion of his Employee Stock Ownership Account shall be
reinstated to the credit of the Participant as of the date he resumes
participation.
(b) In the event a Participant terminates Service and subsequently
incurs a Break and receives a distribution, or in the event a Participant does
not terminate Service, but incurs at least 5 Breaks, or in the event that a
Participant terminates Service and incurs at least 5 Breaks
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but has not received a distribution, then the forfeitable portion of his
Employee Stock Ownership Account, including Investment Adjustments, shall be
reallocated to other Participants, pursuant to Section 5.4, as of the date the
Participant incurs such Break or Breaks, as the case may be.
(c) In the event a former Participant who had received a distribution
from the Plan is rehired, he shall repay the amount of his distribution before
the earlier of 5 years after the date of his rehire by the Employer, or the
close of the first period of 5 consecutive Breaks commencing after the
withdrawal, in order for any forfeited amounts to be restored to him.
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ARTICLE VIII
EMPLOYEE STOCK OWNERSHIP PROVISIONS
8.1 Right to Demand Employer Securities.
A Participant entitled to a distribution from his Account shall be
entitled to demand that his interest in the Account be distributed to him in the
form of Employer Securities, all subject to Section 9.9. The Administrator shall
notify the Participant of his right to demand distribution of his vested Account
balance entirely in whole shares of Employer Securities (with the value of any
fractional share paid in cash). However, if the charter or by-laws of the
Employer restrict ownership of substantially all of the outstanding Employer
Securities to Employees and the Trust, then the distribution of a Participant's
vested Account shall be made entirely in the form of cash or other property, and
the Participant is not entitled to a distribution in the form of Employer
Securities.
8.2 Voting Rights.
Each Participant with an Employee Stock Ownership Account shall be
entitled to direct the Trustee as to the manner in which the Employer Securities
in such account are to be voted. Employer Securities held in the Employee Stock
Ownership Suspense Account or the Exempt Loan Suspense Account shall be voted by
the Trustee on each issue with respect to which shareholders are entitled to
vote in the manner directed by the majority of the Participants who directed the
Trustee as to the manner of voting their shares in the Employee Stock Ownership
Accounts with respect to such issue. Prior to the initial allocation of shares,
the Trustee shall be entitled to vote the shares in the Exempt Loan Suspense
Account without prior direction from the Participants or the Administrator. In
the event that a Participant fails to give timely voting instructions to the
Trustee with respect to the voting of Employer Securities that are allocated to
his Employee Stock Ownership Account, the Trustee shall vote such shares in such
manner as directed by the Administrator.
8.3 Nondiscrimination in Employee Stock Ownership Contribution.
In the event that the amount of the Employee Stock Ownership
Contribution that would be required in any Plan Year to make the scheduled
payments on an Exempt Loan would exceed the amount that would otherwise be
deductible by the Employer for such Plan Year under Code Section 404, then no
more than one-third of the Employee Stock Ownership Contribution for the Plan
Year, which is also the Employer's taxable year, shall be allocated to the group
of Employees who:
(a) Was at any time during the Plan Year or the preceding Plan Year a
5 percent owner of the Employer; or
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(b) Received compensation from the Employer for the preceding Plan
Year in excess of $80,000, as adjusted under Code Section 414(q), and, if
the Employer so elects, was in the "top-paid group" of Employees (as
defined below) for such year.
An Employee shall be deemed a member of the "top-paid group" of Employees for a
given Plan Year if such Employee is in the group of the top 20% of the Employees
of the Employer when ranked on the basis of compensation.
8.4 Dividends.
Dividends paid with respect to Employer Securities credited to a
Participant's Employee Stock Ownership Account as of the record date for the
dividend payment may be allocated to the Participant's Employee Stock Ownership
Account or paid in cash to the Participant, pursuant to the direction of the
Administrator. If the Administrator shall direct that the aforesaid dividends
shall be paid directly to Participants, the quarterly dividends paid with
respect to such Employer Securities shall be paid to the Plan, from which
dividend distributions in cash shall be made to the Participants with respect to
the Employer Securities in their Employee Stock Ownership Accounts within 90
days of the close of the Plan Year in which the dividends were paid. Dividends
on Employer Securities obtained pursuant to an Exempt Loan and still held in the
Exempt Loan Suspense Account may be used to make payments on an Exempt Loan, as
described in Section 8.5.
8.5 Exempt Loans.
(a) The Sponsor may direct the Trustee to obtain Exempt Loans. The
Exempt Loan may take the form of (i) a loan from a bank or other commercial
lender to purchase Employer Securities (ii) a loan from the Employer to the
Plan; or (iii) an installment sale of Employer Securities to the Plan. The
proceeds of any such Exempt Loan shall be used, within a reasonable time after
the Exempt Loan is obtained, only to purchase Employer Securities, repay the
Exempt Loan, or repay any prior Exempt Loan. Any such Exempt Loan shall provide
for no more than a reasonable rate of interest and shall be without recourse
against the Plan. The number of years to maturity under the Exempt Loan must be
definitely ascertainable at all times. The only assets of the Plan that may be
given as collateral for an Exempt Loan are Financed Shares acquired with the
proceeds of the Exempt Loan and Financed Shares that were used as collateral for
a prior Exempt Loan repaid with the proceeds of the current Exempt Loan. Such
Financed Shares so pledged shall be placed in an Exempt Loan Suspense Account.
No person or institution entitled to payment under an Exempt Loan shall have
recourse against Trust assets other than the Financed Shares, the Employer Stock
Ownership Contribution (other than contributions of Employer Securities) that is
available under the Plan to meet obligations under the Exempt Loan, and earnings
attributable to such Financed Shares and the investment of such contribution.
Any Employee Stock Ownership Contribution paid during the Plan Year in which an
Exempt Loan is made (whether before or after the date the proceeds of the Exempt
Loan are received), any Employee Stock Ownership Contribution paid thereafter
until the Exempt Loan has
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been repaid in full, and all earnings from investment of such Employee Stock
Ownership Contribution, without regard to whether any such Employee Stock
Ownership Contribution and earnings have been allocated to Participants'
Employee Stock Ownership Accounts, shall be available to meet obligations under
the Exempt Loan as such obligations accrue, or prior to the time such
obligations accrue, unless otherwise provided by the Employer at the time any
such contribution is made. Any pledge of Employer Securities shall provide for
the release of Financed Shares upon the payment of any portion of the Exempt
Loan.
(b) For each Plan Year during the duration of the Exempt Loan, the
number of Financed Shares released from such pledge shall equal the number of
Financed Shares held immediately before release for the current Plan Year
multiplied by a fraction. The numerator of the fraction is the sum of principal
and interest paid in such Plan Year. The denominator of the fraction is the sum
of the numerator plus the principal and interest to be paid for all future
years. Such years will be determined without taking into account any possible
extension or renewal periods. If interest on any Exempt Loan is variable, the
interest to be paid in future years under the Exempt Loan shall be computed by
using the interest rate applicable as of the end of the Plan Year.
(c) Notwithstanding the foregoing, the Trustee may obtain an Exempt
Loan pursuant to the terms of which the number of Financed Shares to be released
from encumbrance shall be determined with reference to principal payments only.
In the event that such an Exempt Loan is obtained, annual payments of principal
and interest shall be at a cumulative rate that is not less rapid at any time
than level payments of such amounts for not more than 10 years. The amount of
interest in any such annual loan repayment shall be disregarded only to the
extent that it would be determined to be interest under standard loan
amortization tables. The requirement set forth in the preceding sentence shall
not be applicable from the time that, by reason of a renewal, extension, or
refinancing, the sum of the expired duration of the Exempt Loan, the renewal
period, the extension period, and the duration of a new Exempt Loan exceeds 10
years.
8.6 Exempt Loan Payments.
(a) Payments of principal and interest on any Exempt Loan during a Plan
Year shall be made by the Trustee (as directed by the Administrator) only from
(1) the Employee Stock Ownership Contribution to the Trust made to meet the
Plan's obligation under an Exempt Loan (other than contributions of Employer
Securities) and from any earnings attributable to Financed Shares and
investments of such contributions (both received during or prior to the Plan
Year); (2) the proceeds of a subsequent Exempt Loan made to repay a prior Exempt
Loan; and (3) the proceeds of the sale of any Financed Shares. Such contribution
and earnings shall be accounted for separately by the Plan until the Exempt Loan
is repaid.
(b) Employer Securities released from the Exempt Loan Suspense Account
by reason of the payment of principal or interest on an Exempt Loan from amounts
allocated to
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Participants' Employee Stock Ownership Accounts shall immediately upon payment
be allocated as set forth in Section 5.5.
(c) The Employer shall contribute to the Trust sufficient amounts to
enable the Trust to pay principal and interest on any such Exempt Loans as they
are due, provided, however, that no such contribution shall exceed the
limitations in Section 5.6. In the event that such contributions by reason of
the limitations in Section 5.6 are insufficient to enable the Trust to pay
principal and interest on such Exempt Loan as it is due, then upon the Trustee's
request the Employer shall:
(1) Make an Exempt Loan to the Trust in sufficient amounts to meet
such principal and interest payments. Such new Exempt Loan shall be
subordinated to the prior Exempt Loan. Employer Securities released from
the pledge of the prior Exempt Loan shall be pledged as collateral to
secure the new Exempt Loan. Such Employer Securities will be released from
this new pledge and allocated to the Employee Stock Ownership Accounts of
the Participants in accordance with the applicable provisions of the Plan;
(2) Purchase any Financed Shares in an amount necessary to provide the
Trustee with sufficient funds to meet the principal and interest
repayments. Any such sale by the Plan shall meet the requirements of
Section 408(e) of the Act; or
(3) Any combination of the foregoing.
However, the Employer shall not, pursuant to the provisions of this
subsection, do, fail to do or cause to be done any act or thing which would
result in a disqualification of the Plan as an employee stock ownership plan
under Section 4975(e)(7) of the Code.
(d) Except as provided in Section 8.1 above and notwithstanding any
amendment to or termination of the Plan which causes it to cease to qualify as
an employee stock ownership plan within the meaning of Section 4975(e)(7) of the
Code, or any repayment of an Exempt Loan, no shares of Employer Securities
acquired with the proceeds of an Exempt Loan obtained by the Trust to purchase
Employer Securities may be subject to a put, call or other option, or buy-sell
or similar arrangement, while such shares are held by the Plan or when such
shares are distributed from the Plan.
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8.7 Put Option.
In the event that the Employer Securities distributed to a Participant
are not readily tradable on an established market, the Participant shall be
entitled to require that the Employer repurchase the Employer Securities under a
fair valuation formula, as provided by governmental regulations. The Participant
or Beneficiary shall be entitled to exercise the put option described in the
preceding sentence for a period of not more than 60 days following the date of
distribution of Employer Securities to him. If the put option is not exercised
within such 60-day period, the Participant or Beneficiary may exercise the put
option during an additional period of not more than 60 days after the beginning
of the first day of the first Plan Year following the Plan Year in which the
first put option period occurred, all as provided in regulations promulgated by
the Secretary of the Treasury.
If a Participant exercises the foregoing put option with respect to
Employer Securities that were distributed as part of a total distribution
pursuant to which a Participant's Employee Stock Ownership Account is
distributed to him in a single taxable year, the Employer or the Plan may elect
to pay the purchase price of the Employer Securities over a period not to exceed
5 years. Such payments shall be made in substantially equal installments not
less frequently than annually over a period beginning not later than 30 days
after the exercise of the put option. Reasonable interest shall be paid to the
Participant with respect to the unpaid balance of the purchase price, and
adequate security shall be provided with respect thereto. In the event that a
Participant exercises a put option with respect to Employer Securities that are
distributed as part of an installment distribution, if permissible under Section
9.5, the amount to be paid for such securities shall be paid not later than 30
days after the exercise of the put option.
8.8 Diversification Requirements.
Each Participant who has completed at least 10 years of participation
in the Plan and has attained age 55 may elect within 90 days after the close of
each Plan Year during his "qualified election period" to direct the Plan as to
the investment of at least 25 percent of his Employee Stock Ownership Account
(to the extent such percentage exceeds the amount to which a prior election
under this Section 8.8 had been made). For purposes of this Section 8.8, the
term "qualified election period" shall mean the 5-Plan-Year period beginning
with the Plan Year after the Plan Year in which the Participant attains age 55
(or, if later, beginning with the Plan Year after the first Plan Year in which
the Employee first completes at least 10 years of participation in the Plan). In
the case of an Employee who has attained age 60 and completed 10 years of
participation in the prior Plan Year and in the case of the election year in
which any other Participant who has met the minimum age and service requirements
for diversification can make his last election hereunder, he shall be entitled
to direct the Plan as to the investment of at least 50 percent of his Employee
Stock Ownership Account (to the extent such percentage exceeds the amount to
which a prior election under this Section 8.8 had been made). The Plan shall
make available at least 3 investment options (chosen by the Administrator in
accordance with regulations prescribed by the Department of Treasury) to each
Participant making an election
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hereunder. The Plan shall be deemed to have met the requirements of this Section
if the portion of the Participant's Employee Stock Ownership Account covered by
the election hereunder is distributed to the Participant or his designated
Beneficiary within 90 days after the period during which the election may be
made. In the absence of such a distribution, the Trustee shall implement the
Participant's election within 90 days following the expiration of the qualified
election period. Notwithstanding the foregoing, if the fair market value of the
Employer Securities allocated to the Employee Stock Ownership Account of a
Participant otherwise entitled to diversify hereunder is $500 or less as of the
Valuation Date immediately preceding the first day of any election period, then
such Participant shall not be entitled to an election under this Section 8.8 for
that qualified election period.
8.9 Independent Appraiser.
An independent appraiser meeting the requirements of the regulations
promulgated under Code Section 170(a)(1) shall value the Employer Securities in
those Plan Years when such securities are not readily tradable on an established
securities market.
8.10 Nonterminable Rights.
The provisions of this Article VIII shall continue to be applicable to
Employer Securities held by the Trustee, whether or not allocated to
Participants' and Former Participants' Accounts, even if the Plan ceases to be
an employee stock ownership plan, as defined in Section 4975(e)(7) of the Code.
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ARTICLE IX
PAYMENTS AND DISTRIBUTIONS
9.1 Payments on Termination of Service - In General.
All benefits provided under this Plan shall be funded by the value of a
Participant's vested Account in the Plan. As soon as practicable after a
Participant's Retirement, Disability, death or other termination of Service, the
Administrator shall ascertain the value of his vested Account, as provided in
Article V, and the Administrator shall hold or dispose of the same in accordance
with the following provisions of this Article IX.
9.2 Commencement of Payments.
(a) Distributions upon Retirement, Disability or Death. Upon a
Participant's Retirement, Disability or death, payment of benefits under this
Plan shall, unless the Participant otherwise elects (in accordance with Section
9.3), commence as soon as practicable after the Valuation Date next following
the date of the Participant's Retirement, Disability or death.
(b) Distribution following Termination of Service. Unless a Participant
elects otherwise, if a Participant terminates Service prior to Retirement,
Disability or death, he shall be accorded an opportunity to commence receipt of
benefits as soon as practicable after the Valuation Date next following the date
of his termination of Service. A Participant who terminates Service with a
vested Account balance shall be entitled to receive from the Administrator a
statement of his benefits. In the event that a Participant elects not to
commence receipt of distribution in accordance with this Section 9.2(b) after
the Participant incurs a Break, the Administrator shall transfer his vested
Account balance to a distribution account. If a Participant's vested Account
balance does not exceed (or at the time of any prior distribution did not
exceed) $5,000, the Plan Administrator shall distribute the vested portion of
his Account balance as soon as administratively feasible without the consent of
the Participant or his spouse.
(c) Distribution of Accounts Greater Than $5,000. If the value of a
Participant's vested Account balance exceeds (or at the time of any prior
distribution exceeded) $5,000, and the Account balance is immediately
distributable, the Participant must consent to any distribution of such Account
balance. The Plan Administrator shall notify the Participant of the right to
defer any distribution until the Participant's Account balance is no longer
immediately distributable. The consent of the Participant shall not be required
to the extent that a distribution is required to satisfy Code Section 401(a)(9)
or Code Section 415.
9.3 Mandatory Commencement of Benefits.
(a) Unless a Participant elects otherwise, in writing, distribution of
benefits will begin no later than the 60th day after the latest to occur of the
close of the Plan Year in which (i)
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the Participant attains age 65, (ii) the tenth anniversary of the Plan Year in
which the Participant commenced participation, or (iii) the Participant
terminates Service with the Employer and all Related Employers.
(b) In the event that the Plan shall be subsequently amended to provide
for a form of distribution other than a lump sum, as of the first distribution
calendar year, distributions, if not made in a lump sum, may be made only over
one of the following periods (or a combination thereof):
(i) the life of the Participant,
(ii) the life of the Participant and the designated Beneficiary,
(iii) a period certain not extending beyond the life expectancy of the
Participant, or
(iv) a period certain not extending beyond the joint and last survivor
expectancy of the Participant and a designated Beneficiary.
(c) In the event that the Plan shall be subsequently amended to provide
for a form of distribution other than a lump sum, if the Participant's interest
is to be distributed in other than a lump sum, the following minimum
distribution rules shall apply on or after the required beginning date:
(i) If a Participant's benefit is to be distributed over (1) a period
not extending beyond the life expectancy of the Participant or the joint
life and last survivor expectancy of the Participant and the Participant's
designated Beneficiary or (2) a period not extending beyond the life
expectancy of the designated Beneficiary, the amount required to be
distributed for each calendar year, beginning with distributions for the
first distribution calendar year, must at least equal the quotient obtained
by dividing the Participant's benefit by the applicable life expectancy.
(ii) For calendar years beginning after December 31, 1988, the amount
to be distributed each year, beginning with distributions for the first
distribution calendar year, shall not be less than the quotient obtained by
dividing the Participant's Account balance by the lesser of (1) the
applicable life expectancy, or (2) if the Participant's spouse is not the
designated Beneficiary, the applicable divisor determined from the table
set forth in Q&A-4 of section 1.401(a)(9)-2 of the Proposed Regulations.
Distributions after the death of the Participant shall be distributed using
the applicable life expectancy in subsection (iii) of Section 9.3(b) above
as the relevant divisor without regard to Proposed Regulations section
1.401(a)(9)-2.
(iii) The minimum distribution required for the Participant's first
distribution calendar year must be made on or before the Participant's
required beginning date. The minimum
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distribution for other calendar years, including the minimum distribution
for the distribution calendar year in which the Participant's required
beginning date occurs, must be made on or before December 31 of the
distribution calendar year.
(d) If a Participant dies after a distribution has commenced in
accordance with Section 8.3(b) but before his entire interest has been
distributed to him, the remaining portion of such interest shall be distributed
to his Beneficiary at least as rapidly as under the method of distribution in
effect as of the date of his death.
(e) If a Participant shall die before the distribution of his Account
balance has begun, the entire Account balance shall be distributed by December
31 of the calendar year containing the fifth anniversary of the death of the
Participant, except in the following events:
(i) If any portion of the Participant's Account balance is payable to
(or for the benefit of) a designated Beneficiary over a period not
extending beyond the life expectancy of such Beneficiary and such
distributions begin not later than December 31 of the calendar year
immediately following the calendar year in which the Participant died; or
(ii) If any portion of the Participant's Account balance is payable to
(or for the benefit of) the Participant's spouse over a period not
extending beyond the life expectancy of such spouse and such distributions
begin no later than December 31 of the calendar year in which the
Participant would have attained age 70-1/2.
If the Participant has not made a distribution election by the time of
his death, the Participant's designated Beneficiary shall elect the method of
distribution no later than the earlier of (1) December 31 of the calendar year
in which distributions would be required to begin under this Article or (2)
December 31 of the calendar year which contains the fifth anniversary of the
date of death of the Participant. If the Participant has no designated
Beneficiary, or if the designated Beneficiary does not elect a method of
distribution, distribution of the Participant's entire interest shall be
completed by December 31 of the calendar year containing the fifth anniversary
of the Participant's death.
(f) For purposes of this Article, the life expectancy of a Participant
and his spouse may be redetermined but not more frequently than annually. The
life expectancy (or joint and last survivor expectancy) shall be calculated
using the attained age of the Participant (or designated Beneficiary) as of the
Participant's (or designated Beneficiary's) birthday in the applicable calendar
year reduced by one for each calendar year which has elapsed since the date life
expectancy was first calculated. If life expectancy is being recalculated, the
applicable life expectancy shall be the life expectancy as so recalculated. The
applicable calendar year shall be the first distribution calendar year, and if
life expectancy is being recalculated, such succeeding calendar year. Unless
otherwise elected by the Participant (or his spouse, if applicable) by the time
distributions are required to begin, life expectancies shall be recalculated
annually. Any election not to recalculate
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shall be irrevocable and shall apply to all subsequent years. The life
expectancy of a nonspouse Beneficiary may not be recalculated.
(g) For purposes of Section 9.3(b) and 9.3(e), any amount paid to a
child shall be treated as if it had been paid to a surviving spouse if such
amount will become payable to the surviving spouse upon such child reaching
majority (or other designated event permitted under regulations).
(h) For distributions beginning before the Participant's death, the
first distribution calendar year is the calendar year immediately preceding the
calendar year which contains the Participant's required beginning date. For
distributions beginning after the Participant's death, the first distribution
calendar year is the calendar year in which distributions are required to begin
pursuant to this Article.
9.4 Required Beginning Dates.
(a) General Rule. The required beginning date of a Participant who is a
5-percent owner of the Employer is the first day of April of the calendar year
following the calendar year in which the Participant attains age 70-1/2. The
required beginning date of a Participant who is not a 5-percent owner shall be
April 1 of the calendar year following the later of either: (i) the calendar
year in which the Participant attains age 70-1/2, or (ii) the calendar year in
which the Participant retires.
(b) 5-percent owner. A Participant is treated as a 5-percent owner for
purposes of this section if such Participant is a 5-percent owner as defined in
section 416(i) of the Code (determined in accordance with section 416 but
without regard to whether the plan is top-heavy) at any time during the Plan
Year ending with or within the calendar year in which such owner attains age
66-1/2 or any subsequent Plan Year. Once distributions have begun to a 5-percent
owner under this section, they must continue to be distributed, even if the
Participant ceases to be a 5-percent owner in a subsequent year.
9.5 Form of Payment.
Each Participant's vested Account balance shall be distributed in a
lump sum payment. Notwithstanding the preceding sentence, but subject to Section
9.3, the Administrator may not distribute a [lump sum] without the Participant's
consent when the present value of a Participant's total Account balance is in
excess of $5,000. This form of payment shall be the normal form of distribution.
Furthermore, however, in the event that the Administrator must commence
distributions, as required by Section 9.4 herein, with respect to an Employee
who has attained age 70-1/2 and is still employed by the Employer, if the
Employee does not elect a lump sum distribution, payments shall be made in
installments in such amounts as shall satisfy the minimum distribution rules of
Section 9.3.
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9.6 Payments Upon Termination of Plan.
Upon termination of this Plan pursuant to Sections 13.2, 13.4, 13.5 or
13.6, the Administrator shall continue to perform its duties and the Trustee
shall make all payments upon the following terms, conditions and provisions: The
Account balance of each affected Participant and Former Participant shall
immediately become fully vested and nonforfeitable; the Account balance of all
Participants and Former Participants shall be determined within 60 days after
such termination, and the Administrator shall have the same powers to direct the
Trustee in making payments as contained in Sections 9.1 and 13.5.
9.7 Distributions Pursuant to Qualified Domestic Relations Orders.
Upon receipt of a domestic relations order, the Administrator shall
promptly notify the Participant and any alternate payee of receipt of the order
and the Plan's procedure for determining whether the order is a Qualified
Domestic Relations Order. While the issue of whether a domestic relations order
is a Qualified Domestic Relations Order is being determined, if the benefits
would otherwise be paid, the Administrator shall segregate in a separate account
in the Plan the amounts that would be payable to the alternate payee during such
period if the order were a Qualified Domestic Relations Order. If within 18
months the order is determined to be a Qualified Domestic Relations Order, the
amounts so segregated, along with the interest or investment earnings
attributable thereto, shall be paid to the alternate payee. Alternatively, if
within 18 months, it is determined that the order is not a Qualified Domestic
Relations Order or if the issue is still unresolved, the amounts segregated
under this Section 9.7, with the earnings attributable thereto, shall be paid to
the Participant or Beneficiary who would have been entitled to such amounts if
there had been no order. The determination as to whether the order is qualified
shall be applied prospectively. Thus, if the Administrator determines that the
order is a Qualified Domestic Relations Order after the 18-month period, the
Plan shall not be liable for payments to the alternative payee for the period
before the order is determined to be a Qualified Domestic Relations Order.
9.8 Cash-Out Distributions.
If a Participant receives a distribution of his entire vested Account
balance because of the termination of his participation in the Plan, the Plan
shall disregard a Participant's Service with respect to which such cash-out
distribution shall have been made, in computing his Account balance in the event
that a Former Participant shall again become an Employee and become eligible to
participate in the Plan. Such a distribution shall be deemed to be made on
termination of participation in the Plan if it is made not later than the close
of the second Plan Year following the Plan Year in which such termination
occurs. The forfeitable portion of a Participant's Account balance shall be
restored upon repayment to the Plan by such Former Participant of the full
amount of the cash-out distribution, provided that the Former Participant again
becomes an Employee. Such repayment must be made by the Employee not later than
the end of the 5-year period beginning with the date of the distribution.
Forfeitures required to be restored by virtue of
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such repayment shall be restored from the following sources in the following
order of preference: (i) current forfeitures; (ii) an additional Employee Stock
Ownership Contribution, as appropriate, and as subject to Section 5.6; and (iii)
investment earnings of the Fund. In the event that a Participant's Account
balance is totally forfeitable, a Participant shall be deemed to have received a
distribution of zero upon his termination of Service. In the event of a return
to Service within 5 years of the date of his deemed distribution, the
Participant shall be deemed to have repaid his distribution in accordance with
the rules of this Section 9.8.
9.9 ESOP Distribution Rules.
Notwithstanding any provision of this Article IX to the contrary, the
distribution of a Participant's Employee Stock Ownership Account (unless the
Participant elects otherwise in writing) shall commence as soon as
administratively feasible as of the first Valuation Date coincident with or next
following his death, Disability or termination of Service, but not later than 1
year after the close of the Plan Year in which the Participant separates from
Service by reason of the attainment of his Normal Retirement Date, Disability,
death or separation from Service. In addition, all distributions hereunder
shall, to the extent that the Participant's Account is invested in Employer
Securities, be made in the form of Employer Securities or cash, or a combination
of Employer Securities and cash, in the discretion of the Administrator, subject
to the Participant's right to demand Employer Securities in accordance with
Section 8.1. Fractional shares, however, may be distributed in the form of cash.
9.10 Direct Rollover.
(a) Notwithstanding any provision of the Plan to the contrary that
would otherwise limit a distributee's election under this Article IX, a
distributee may elect, at the time and in the manner prescribed by the
Administrator, to have any portion of an "eligible rollover distribution" paid
directly to an "eligible retirement plan" specified by the distributee in a
"direct rollover."
(b) For purposes of this Section 9.10, an "eligible rollover
distribution" is any distribution of all or any portion of the balance to the
credit of the distributee, except that an "eligible rollover distribution" does
not include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life expectancies)
of the distributee and the distributee's designated Beneficiary, or for a
specified period of ten years or more; any distribution to the extent such
distribution is required under section 401(a)(9) of the Code; and the portion of
any distribution that is not includable in gross income (determined without
regard to the exclusion for net unrealized appreciation with respect to Employer
Securities).
(c) For purposes of this Section 9.10, an "eligible retirement plan" is
an individual retirement account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b) of the Code, an
annuity plan described in section 403(a) of the Code, or a qualified trust
described in section 401(a) of the Code, that accepts the distributee's eligible
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rollover distribution. However, in the case of an "eligible rollover
distribution" to the surviving spouse, an "eligible retirement plan" is an
individual retirement account or individual retirement annuity.
(d) For purposes of this Section 9.10, a distributee includes a
Participant or Former Participant. In addition, the Participant's or Former
Participant's surviving spouse and the Participant's or Former Participant's
spouse or former spouse who is the alternate payee under a Qualified Domestic
Relations Order are "distributees" with regard to the interest of the spouse or
former spouse.
(e) For purposes of this Section 9.10, a "direct rollover" is a payment
by the Plan to the "eligible retirement plan" specified by the distributee.
9.11 Waiver of 30-day Notice.
If a distribution is one to which Sections 401(a)(11) and 417 of the
Code do not apply, such distribution may commence less than 30 days after the
notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is
given, provided that: (1) the Administrator clearly informs the Participant that
the Participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution (and,
if applicable, a particular distribution option), and (2) the Participant, after
receiving the notice, affirmatively elects a distribution.
9.12 Re-employed Veterans.
Notwithstanding anything to the contrary set forth in the Plan, if an
Employee has been rehired by the Employer and is eligible for the benefits
provided by the Uniformed Services Employment and Reemployment Rights Act by
virtue of his prior military service and by virtue of his having met all the
requirements of that act for being accorded the benefits provided thereunder, he
shall not be deemed to have incurred a Break because of his period of military
service. Such Employee's military service shall be treated as Service hereunder
for eligibility, vesting and benefit accrual purposes. Such Employee shall be
entitled to all Employer contributions to which he otherwise would have been
entitled had he been employed by the Employer during the period of his military
service. In computing contribution amounts dependent upon or limited by the
amount of compensation the Employee earned or would have earned, the Employee
shall be treated as receiving compensation from the Employer during the period
of military service equal to the compensation that the Employee otherwise would
have received from the Employer during that period, or, if the compensation the
Employee otherwise would have received is not reasonably certain, the Employee's
average compensation from the Employer during the period immediately preceding
the period of military service. Such Employee shall not, however, be credited
with any earnings on any such additional Employer contributions described in
this Section before the contribution is actually made. Furthermore, no
forfeitures shall be allocated to such Employee's Employee Stock Ownership
Account hereunder for the period of
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military service. The rules governing the limitations on all such contributions
that may be required hereunder shall be governed by Section 414(u) of the Code
and any regulations promulgated thereunder.
9.13 Share Legend.
Employer Securities held or distributed by the Trustee may include such
legend restrictions on transferability as the Employer may reasonably require in
order to assure compliance with applicable Federal and State securities and
other laws.
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ARTICLE X
PROVISIONS RELATING TO TOP-HEAVY PLANS
10.1 Top-Heavy Rules to Control.
Anything contained in this Plan to the contrary notwithstanding, if for
any Plan Year the Plan is a top-heavy plan, as determined pursuant to Section
416 of the Code, then the Plan must meet the requirements of this Article X for
such Plan Year.
10.2 Top-Heavy Plan Definitions.
Unless a different meaning is plainly implied by the context, the
following terms as used in this Article X shall have the following meanings:
(a) "Accrued Benefit" shall mean the account balances or accrued
benefits of an Employee, calculated pursuant to Section 10.3.
(b) "Determination Date" shall mean, with respect to any particular
Plan Year of this Plan, the last day of the preceding Plan Year (or, in the
case of the first Plan Year of the Plan, the last day of the first Plan
Year). In addition, the term "Determination Date" shall mean, with respect
to any particular plan year of any plan (other than this Plan) in a
Required Aggregation Group or a Permissive Aggregation Group, the last day
of the plan year of such plan which falls within the same calendar year as
the Determination Date for this Plan.
(c) "Employer" shall mean the Employer (as defined in Section 1.1(q))
and any entity which is (1) a member of a controlled group including such
Employer, while it is a member of such controlled group (within the meaning
of Section 414(b) of the Code), (2) in a group of trades or businesses
under common control with such Employer, while it is under common control
(within the meaning of Section 414(c) of the Code), and (3) a member of an
affiliated service group including such Employer, while it is a member of
such affiliated service group (within the meaning of Section 414(m) of the
Code).
(d) "Key Employee" shall mean any Employee or former Employee (or any
Beneficiary of such Employee or former Employee, as the case may be) who,
at any time during the Plan Year or during the 4 immediately preceding Plan
Years, is one of the following:
(1) An officer of the Employer who has compensation greater than
50% of the amount in effect under Code 415(b)(1)(A) for the Plan Year;
provided, however, that no more than 50 Employees (or, if lesser, the
greater of 3 or 10% of the Employees) shall be deemed officers;
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(2) One of the 10 Employees having annual compensation (as
defined in Section 415 of the Code) in excess of the limitation in
effect under Section 415(c)(1)(A) of the Code, and owning (or
considered as owning, within the meaning of Section 318 of the Code)
the largest interests in the Employer;
(3) Any Employee owning (or considered as owning, within the
meaning of Section 318 of the Code) more than 5% of the outstanding
stock of the Employer or stock possessing more than 5% of the total
combined voting power of all stock of the Employer; or
(4) Any Employee having annual compensation (as defined in
Section 415 of the Code) of more than $150,000 and who would be
described in Section 10.2(d)(3) if "1%" were substituted for "5%"
wherever the latter percentage appears.
For purposes of applying Section 318 of the Code to the provisions of
this Section 10.2(d), Section 318(a)(2)(C) of the Code shall be applied by
substituting "5%" for "50%" wherever the latter percentage appears. In addition,
for purposes of this Section 10.2(d), the provisions of Section 414(b), (c) and
(m) shall not apply in determining ownership interests in the Employer. However,
for purposes of determining whether an individual has compensation in excess of
$150,000, or whether an individual is a Key Employee under Section 10.2(d)(1)
and (2), compensation from each entity required to be aggregated under Sections
414(b), (c) and (m) of the Code shall be taken into account. Notwithstanding
anything contained herein to the contrary, all determinations as to whether a
person is or is not a Key Employee shall be resolved by reference to Section 416
of the Code and any rules and regulations promulgated thereunder.
(e) "Non-Key Employee" shall mean any Employee or former Employee (or
any Beneficiary of such Employee or former Employee, as the case may be)
who is not considered to be a Key Employee with respect to this Plan.
(f) "Permissive Aggregation Group" shall mean all plans in the
Required Aggregation Group and any other plans maintained by the Employer
which satisfy Sections 401(a)(4) and 410 of the Code when considered
together with the Required Aggregation Group.
(g) "Required Aggregation Group" shall mean each plan (including any
terminated plan) of the Employer in which a Key Employee is (or in the case
of a terminated plan, had been) a Participant in the Plan Year containing
the Determination Date or any of the 4 preceding Plan Years, and each other
plan of the Employer which enables any plan of the Employer in which a Key
Employee is a Participant to meet the requirements of Sections 401(a)(4)
and 410 of the Code.
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10.3 Calculation of Accrued Benefits.
(a) An Employee's Accrued Benefit shall be equal to:
(1) With respect to this Plan or any other defined contribution plan
(other than a defined contribution pension plan) in a Required Aggregation
Group or a Permissive Aggregation Group, the Employee's account balances
under the respective plan, determined as of the most recent plan valuation
date within a 12-month period ending on the Determination Date, including
contributions actually made after the valuation date but before the
Determination Date (and, in the first plan year of a plan, also including
any contributions made after the Determination Date which are allocated as
of a date in the first plan year).
(2) With respect to any defined contribution pension plan in a
Required Aggregation Group or a Permissive Aggregation Group, the
Employee's account balances under the plan, determined as of the most
recent plan valuation date within a 12-month period ending on the
Determination Date, including contributions which have not actually been
made, but which are due to be made as of the Determination Date.
(3) With respect to any defined benefit plan in a Required Aggregation
Group or a Permissive Aggregation Group, the present value of the
Employee's accrued benefits under the plan, determined as of the most
recent plan valuation date within a 12-month period ending on the
Determination Date, pursuant to the actuarial assumptions used by such
plan, and calculated as if the Employee terminated Service under such plan
as of the valuation date (except that, in the first plan year of a plan, a
current Participant's estimated Accrued Benefit as of the Determination
Date shall be taken into account).
(4) If any individual has not performed services for the Employer
maintaining the Plan at any time during the 5-year period ending on the
Determination Date, any Accrued Benefit for such individual shall not be
taken into account.
(b) The Accrued Benefit of any Employee shall be further adjusted as
follows:
(1) The Accrued Benefit shall be calculated to include all amounts
attributable to both Employer and Employee contributions, but shall exclude
amounts attributable to voluntary deductible Employee contributions, if
any.
(2) The Accrued Benefit shall be increased by the aggregate
distributions made with respect to an Employee under the plan or plans, as
the case may be, during the 5-year period ending on the Determination Date.
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(3) Rollover and direct plan-to-plan transfers shall be taken into
account as follows:
(A) If the transfer is initiated by the Employee and made from a
plan maintained by one employer to a plan maintained by another
unrelated employer, the transferring plan shall continue to count the
amount transferred; the receiving plan shall not count the amount
transferred.
(B) If the transfer is not initiated by the Employee or is made
between plans maintained by related employers, the transferring plan
shall no longer count the amount transferred; the receiving plan shall
count the amount transferred.
(c) If any individual has not performed services for the Employer at
any time during the 5-year period ending on the Determination Date, any Accrued
Benefit for such individual (and the account of such individual) shall not be
taken into account.
10.4 Determination of Top-Heavy Status.
This Plan shall be considered to be a top-heavy plan for any Plan Year
if, as of the Determination Date, the value of the Accrued Benefits of Key
Employees exceeds 60% of the value of the Accrued Benefits of all eligible
Employees under the Plan. Notwithstanding the foregoing, if the Employer
maintains any other qualified plan, the determination of whether this Plan is
top-heavy shall be made after aggregating all other plans of the Employer in the
Required Aggregation Group and, if desired by the Employer as a means of
avoiding top-heavy status, after aggregating any other plan of the Employer in
the Permissive Aggregation Group. If the required Aggregation Group is
top-heavy, then each plan contained in such group shall be deemed to be
top-heavy, notwithstanding that any particular plan in such group would not
otherwise be deemed to be top-heavy. Conversely, if the Permissive Aggregation
Group is not top-heavy, then no plan contained in such group shall be deemed to
be top-heavy, notwithstanding that any particular plan in such group would
otherwise be deemed to be top-heavy. In no event shall a plan included in a
top-heavy Permissive Aggregation Group be deemed a top-heavy plan unless such
plan is also included in a top-heavy Required Aggregation Group.
10.5 Determination of Super Top-Heavy Status.
The Plan shall be considered to be a super top-heavy plan if, as of the
Determination Date, the Plan would meet the test specified in Section 10.4 above
for classification as a top-heavy plan, except that "90%" shall be substituted
for "60%" whenever the latter percentage appears.
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10.6 Minimum Contribution.
(a) For any Plan Year in which the Plan is top-heavy, each Non-Key
Employee who has met the age and service requirements, if any, contained in the
Plan, shall be entitled to a minimum contribution (which may include forfeitures
otherwise allocable) equal to a percentage of such Non-Key Employee's
compensation (as defined in Section 415 of the Code) as follows:
(1) If the Non-Key Employee is not covered by a defined benefit plan
maintained by the Employer, then the minimum contribution under this Plan
shall be 3% of such Non-Key Employee's compensation.
(2) If the Non-Key Employee is covered by a defined benefit plan
maintained by the Employer, then the minimum contribution under this Plan
shall be 5% of such Non-Key Employee's compensation.
(b) Notwithstanding the foregoing, the minimum contribution otherwise
allocable to a Non-Key Employee under this Plan shall be reduced in the
following circumstances:
(1) The percentage minimum contribution required under this Plan shall
in no event exceed the percentage contribution made for the Key Employee
for whom such percentage is the highest for the Plan Year after taking into
account contributions under other defined contribution plans in this Plan's
Required Aggregation Group; provided, however, that this Section 10.7(b)(1)
shall not apply if this Plan is included in a Required Aggregation Group
and this Plan enables a defined benefit plan in such Required Aggregation
Group to meet the requirements of Section 401(a)(4) or 410 of the Code.
(2) No minimum contribution shall be required (or the minimum
contribution shall be reduced, as the case may be) for a Non-Key Employee
under this Plan for any Plan Year if the Employer maintains another
qualified plan under which a minimum benefit or contribution is being
accrued or made on account of such Plan Year, in whole or in part, on
behalf of the Non-Key Employee, in accordance with Section 416(c) of the
Code.
(c) For purposes of this Section 10.6, there shall be disregarded (1)
any Employer contributions attributable to a salary reduction or similar
arrangement, or (2) any Employer contributions to or any benefits under Chapter
21 of the Code (relating to the Federal Insurance Contributions Act), Title II
of the Social Security Act, or any other federal or state law.
(d) For purposes of this Section 10.6, minimum contributions shall be
required to be made on behalf of only those Non-Key Employees, as described in
Section 10.7(a), who have not terminated Service as of the last day of the Plan
Year. If a Non-Key Employee is otherwise entitled to receive a minimum
contribution pursuant to this Section 10.6(d), the fact that such
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Non-Key Employee failed to complete 1,000 Hours of Service or failed to make any
mandatory or elective contributions under this Plan, if any are so required,
shall not preclude him from receiving such minimum contribution.
10.7 Vesting.
(a) For any Plan Year in which the Plan is a top-heavy plan, a
Participant's Accrued Benefit derived from Employer contributions (not including
contributions made pursuant to Code Section 401(k), if any) shall continue to
vest according to the following schedule:
Years of Service Completed Percentage Vested
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
(b) For purposes of Section 10.7(a), the term "year of service" shall
have the same meaning as Year of Vesting Service, as set forth in Section
1.1(ss), and as modified by Section 3.2.
(c) If for any Plan Year the Plan becomes top-heavy and the vesting
schedule set forth in Section 10.7(a) becomes effective, then, even if the Plan
ceases to be top-heavy in any subsequent Plan Year, the vesting schedule set
forth in Section 10.7(a) shall remain applicable with respect to any Participant
who has completed 3 or more Years of Service.
10.8 Maximum Benefit Limitation.
For any Plan Year in which the Plan is a top-heavy plan, Section
5.6(d)(1)(B)(i) and Section 5.6(d)(2)(B)(i) shall be read by substituting "1.0"
for "1.25" wherever the latter figure appears; provided, however, that such
substitution shall not have the effect of reducing any benefit accrued under a
defined benefit plan prior to the first day of the Plan Year in which this
Section 10.8 becomes applicable.
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ARTICLE XI
ADMINISTRATION
11.1 Appointment of Administrator.
This Plan shall be administered by a committee consisting of up to 5
persons, whether or not Employees or Participants, who shall be appointed from
time to time by the Board of Directors to serve at its pleasure. The Sponsor may
require that each person appointed as an Administrator shall signify his
acceptance by filing an acceptance with the Sponsor. The term "Administrator" as
used in this Plan shall refer to the members of the committee, either
individually or collectively, as appropriate. The authority to control and
manage the operation and administration of the Plan is vested in the
Administrator appointed by the Board of Directors. The Administrator shall have
the rights, duties and obligations of an "administrator," as that term is
defined in section 3(16)(A) of the Act, and of a "plan administrator," as that
term is defined in Section 414(g) of the Code. In the event that the Sponsor
shall elect not to appoint any individuals to constitute a committee to
administer the Plan, the Sponsor shall serve as the Administrator hereunder.
11.2 Resignation or Removal of Administrator.
An Administrator shall have the right to resign at any time by giving
notice in writing, mailed or delivered to the Sponsor and to the Trustee. Any
Administrator who was an employee of the Employer at the time of his appointment
shall be deemed to have resigned as an Administrator upon his termination of
Service. The Board of Directors may, in its discretion, remove any Administrator
with or without cause, by giving notice in writing, mailed or delivered to the
Administrator and to the Trustee.
11.3 Appointment of Successors: Terms of Office, Etc.
Upon the death, resignation or removal of an Administrator, the Sponsor
may appoint, by Board of Directors' resolution, a successor or successors.
Notice of termination of an Administrator and notice of appointment of a
successor shall be made by the Sponsor in writing, with copies mailed or
delivered to the Trustee, and the successor shall have all the rights and
privileges and all of the duties and obligations of the predecessor.
11.4 Powers and Duties of Administrator.
The Administrator shall have the following duties and responsibilities
in connection with the administration of this Plan:
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(a) To promulgate and enforce such rules, regulations and procedures
as shall be proper for the efficient administration of the Plan, such
rules, regulations and procedures to apply uniformly to all Employees,
Participants and Beneficiaries;
(b) To exercise discretion in determining all questions arising in the
administration, interpretation and application of the Plan, including
questions of eligibility and of the status and rights of Participants,
Beneficiaries and any other persons hereunder;
(c) To decide any dispute arising hereunder strictly in accordance
with the terms of the Plan; provided, however, that no Administrator shall
participate in any matter involving any questions relating solely to his
own participation or benefits under this Plan;
(d) To advise the Employer and the Trustee regarding the known future
needs for funds to be available for distribution in order that the Trustee
may establish investments accordingly;
(e) To correct defects, supply omissions and reconcile inconsistencies
to the extent necessary to effectuate the Plan;
(f) To advise the Employer of the maximum deductible contribution to
the Plan for each fiscal year;
(g) To direct the Trustee concerning all payments which shall be made
out of the Fund pursuant to the provisions of this Plan;
(h) To advise the Trustee on all terminations of Service by
Participants, unless the Employer has so notified the Trustee;
(i) To confer with the Trustee on the settling of any claims against
the Fund;
(j) To make recommendations to the Board of Directors with respect to
proposed amendments to the Plan and the Trust Agreement;
(k) To file all reports with government agencies, Employees and other
parties as may be required by law, whether such reports are initially the
obligation of the Employer, the Plan or the Trustee; and
(l) To have all such other powers as may be necessary to discharge its
duties hereunder.
Reasonable discretion is granted to the Administrator to interpret the
Plan and to determine the benefits, rights and privileges of Participants,
Beneficiaries or other persons affected by this Plan. The Administrator shall
exercise reasonable discretion under the terms of this Plan
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and shall administer the Plan strictly in accordance with its terms, such
administration to be exercised uniformly so that all persons similarly situated
shall be similarly treated.
11.5 Action by Administrator.
The Administrator may elect a Chairman and Secretary from among its
members and may adopt rules for the conduct of its business. A majority of the
members then serving shall constitute a quorum for the transaction of business.
All resolutions or other action taken by the Administrator shall be by vote of a
majority of those present at such meeting and entitled to vote. Resolutions may
be adopted or other action taken without a meeting upon written consent signed
by at least a majority of the members. All documents, instruments, orders,
requests, directions, instructions and other papers shall be executed on behalf
of the Administrator by either the Chairman or the Secretary of the
Administrator, if any, or by any member or agent of the Administrator duly
authorized to act on the Administrator's behalf.
11.6 Participation by Administrator.
No member of the committee constituting the Administrator shall be
precluded from becoming a Participant in the Plan if he would be otherwise
eligible, but he shall not be entitled to vote or act upon matters or to sign
any documents relating specifically to his own participation under the Plan,
except when such matters or documents relate to benefits generally. If this
disqualification results in the lack of a quorum, then the Board of Directors
shall appoint a sufficient number of temporary members of the committee
constituting the Administrator who shall serve for the sole purpose of
determining such a question.
11.7 Agents.
The Administrator may employ agents and provide for such clerical,
legal, actuarial, accounting, medical, advisory or other services as it deems
necessary to perform its duties under this Plan. The cost of such services and
all other expenses incurred by the Administrator in connection with the
administration of the Plan shall be paid from the Fund, unless paid by the
Employer.
11.8 Allocation of Duties.
The duties, powers and responsibilities reserved to the Administrator
may be allocated among its members so long as such allocation is pursuant to
written procedures adopted by the Administrator, in which case, except as may be
required by the Act, no Administrator shall have any liability, with respect to
any duties, powers or responsibilities not allocated to him, for the acts of
omissions of any other Administrator.
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11.9 Delegation of Duties.
The Administrator may delegate any of its duties to any Employees of
the Employer, to the Trustee with its consent, or to any other person or firm,
provided that the Administrator shall prudently choose such agents and rely in
good faith on their actions.
11.10 Administrator's Action Conclusive.
Any action on matters within the authority of the Administrator shall
be final and conclusive except as provided in Article XII.
11.11 Compensation and Expenses of Administrator.
No Administrator who is receiving compensation from the Employer as a
full-time employee, as a director or agent, shall be entitled to receive any
compensation or fee for his services hereunder. Any other Administrator shall be
entitled to receive such reasonable compensation for his services as an
Administrator hereunder as may be mutually agreed upon between the Employer and
such Administrator. Any such compensation shall be paid from the Fund, unless
paid by the Employer. Each Administrator shall be entitled to reimbursement by
the Employer for any reasonable and necessary expenditures incurred in the
discharge of his duties.
11.12 Records and Reports.
The Administrator shall maintain adequate records of its actions and
proceedings in administering this Plan and shall file all reports and take all
other actions as it deems appropriate in order to comply with the Act, the Code
and governmental regulations issued thereunder.
11.13 Reports of Fund Open to Participants.
The Administrator shall keep on file, in such form as it shall deem
convenient and proper, all annual reports of the Fund received by the
Administrator from the Trustee, and a statement of each Participant's interest
in the Fund as from time to time determined. The annual reports of the Fund and
the statement of his Account balance, as well as a complete copy of the Plan and
the Trust Agreement and copies of annual reports to the Internal Revenue
Service, shall be made available by the Administrator to the Employer for
examination by each Participant during reasonable hours at the office of the
Employer, provided, however, that the statement of a Participant's Account
balance shall not be made available for examination by any other Participant.
11.14 Named Fiduciary.
The Administrator is the named fiduciary for purposes of Section 402 of
the Act and shall be the designated agent for receipt of service of process on
behalf of the Plan. It shall use the care and diligence in the performance of
its duties under this Plan that are required of
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<PAGE>
fiduciaries under the Act. Nothing in this Plan shall preclude the Employer from
purchasing liability insurance to protect the Administrator with respect to its
duties under this Plan.
11.15 Information from Employer.
The Employer shall promptly furnish all necessary information to the
Administrator to permit it to perform its duties under this Plan. The
Administrator shall be entitled to rely upon the accuracy and completeness of
all information furnished to it by the Employer, unless it knows or should have
known that such information is erroneous.
11.16 Reservation of Rights by Employer.
Where rights are reserved in this Plan to the Employer, such rights
shall be exercised only by action of the Board of Directors, except where the
Board of Directors, by written resolution, delegates any such rights to one or
more officers of the Employer or to the Administrator. Subject to the rights
reserved to the Board of Directors acting on behalf of the Employer as set forth
in this Plan, no member of the Board of Directors shall have any duties or
responsibilities under this Plan, except to the extent he shall be acting in the
capacity of an Administrator or Trustee.
11.17 Liability and Indemnification.
(a) To the extent not prohibited by the Act, the Administrator shall
not be responsible in any way for any action or omission of the Employer, the
Trustee or any other person in the performance of their duties and obligations
set forth in this Plan and in the Trust Agreement. To the extent not prohibited
by the Act, the Administrator shall also not be responsible for any act or
omission of any of its agents, or with respect to reliance upon advice of its
counsel (whether or not such counsel is also counsel to the Employer or the
Trustee), provided that such agents or counsel were prudently chosen by the
Administrator and that the Administrator relied in good faith upon the action of
such agent or the advice of such counsel.
(b) The Administrator shall not be relieved from responsibility or
liability for any responsibility, obligation or duty imposed upon it under this
Plan or under the Act. Except for its own gross negligence, willful misconduct
or willful breach of the terms of this Plan, the Administrator shall be
indemnified and held harmless by the Employer against liability or losses
occurring by reason of any act or omission of the Administrator to the extent
that such indemnification does not violate the Act or any other federal or state
laws.
11.18 Service as Trustee and Administrator.
Nothing in this Plan shall prevent one or more Trustees from serving as
Administrator under this Plan.
-51-
<PAGE>
ARTICLE XII
CLAIMS PROCEDURE
12.1 Notice of Denial.
If a Participant or his Beneficiary is denied any benefits under this
Plan, either in whole or in part, the Administrator shall advise the claimant in
writing of the amount of his benefit, if any, and the specific reasons for the
denial. The Administrator shall also furnish the claimant at that time with a
written notice containing:
(a) A specific reference to pertinent Plan provisions;
(b) A description of any additional material or information necessary
for the claimant to perfect his claim, if possible, and an explanation of
why such material or information is needed; and
(c) An explanation of the Plan's claim review procedure.
12.2 Right to Reconsideration.
Within 60 days of receipt of the information described in 12.1 above,
the claimant shall, if he desires further review, file a written request for
reconsideration with the Administrator.
12.3 Review of Documents.
So long as the claimant's request for review is pending (including the
60-day period described in Section 12.2 above), the claimant or his duly
authorized representative may review pertinent Plan documents and the Trust
Agreement (and any pertinent related documents) and may submit issues and
comments in writing to the Administrator.
12.4 Decision by Administrator.
A final and binding decision shall be made by the Administrator within
60 days of the filing by the claimant of his request for reconsideration;
provided, however, that if the Administrator feels that a hearing with the
claimant or his representative present is necessary or desirable, this period
shall be extended an additional 60 days.
12.5 Notice by Administrator.
The Administrator's decision shall be conveyed to the claimant in
writing and shall include specific reasons for the decision, written in a manner
calculated to be understood by the
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<PAGE>
claimant, with specific references to the pertinent Plan provisions on which the
decision is based. The Administrator's decision shall be binding and conclusive
with respect to all persons interested therein unless the Administrator has no
reasonable basis for its decision.
-53-
<PAGE>
ARTICLE XIII
AMENDMENTS, TERMINATION AND MERGER
13.1 Amendments.
The Sponsor reserves the right at any time and from time to time, for
any reason and retroactively if deemed necessary or appropriate by it, to the
extent permissible under law, to conform with governmental regulations or other
policies, to amend in whole or in part any or all of the provisions of this
Plan, provided that:
(a) No amendment shall make it possible for any part of the Fund to be
used for, or diverted to, purposes other than for the exclusive benefit of
Participants or their Beneficiaries under the Trust Agreement, except to
the extent provided in Section 4.4;
(b) No amendment may, directly or indirectly, reduce the vested
portion of any Participant's Account balance as of the effective date of
the amendment or change the vesting schedule with respect to the future
accrual of Employer contributions for any Participants unless each
Participant with 3 or more Years of Vesting Service is permitted to elect
to have the vesting schedule in effect before the amendment used to
determine his vested benefit;
(c) No amendment may eliminate an optional form of benefit; and.
(d) No amendment may increase the duties of the Trustee without its
consent.
Amendments may be made in the form of Board of Directors' resolutions
or separate written document. Copies of all amendments shall be delivered to the
Trustee.
13.2 Consolidation, Merger or Other Transactions of Employer.
Nothing in this Plan shall prevent the consolidation, merger,
reorganization or liquidation of the Employer, or prevent the sale by the
Employer of any or all of its property. Any successor corporation or other
entity formed and resulting from any such transaction shall have the right to
become a party to this Plan by adopting the same by resolution and by appointing
a new Trustee as though the Trustee had resigned in accordance with the Trust
Agreement, and by executing a proper supplemental agreement with the Trustee.
If, within 180 days from the effective date of such transaction, such new entity
does not become a party to this Plan as above provided, this Plan shall
automatically be terminated with respect to such entity, and the Trustee shall
make payments to the persons entitled thereto in accordance with Section 9.5.
-54-
<PAGE>
13.3 Consolidation or Merger of Trust.
In the event of any merger or consolidation of the Fund with, or
transfer in whole or in part of the assets and liabilities of the Fund to,
another trust fund held under any other plan of deferred compensation maintained
or to be established for the benefit of all or some of the Participants of this
Plan, the assets of the Fund applicable to such Participants shall be
transferred to the other trust fund only if:
(a) Each Participant would receive a benefit under such successor
trust fund immediately after the merger, consolidation or transfer which is
equal to or greater than the benefit he would have been entitled to receive
immediately before the merger, consolidation or transfer (determined as if
this Plan and such transferee trust fund had then terminated);
(b) Resolutions of the Board of Directors, or of any new or successor
employer of the affected Participants, shall authorize such transfer of
assets, and, in the case of the new or successor employer of the affected
Participants, its resolutions shall include an assumption of liabilities
imposed under this Plan with respect to such Participants' inclusion in the
new employer's plan; and
(c) Such other plan and trust are qualified under Sections 401(a) and
501(a) of the Code.
13.4 Bankruptcy or Insolvency of Employer.
In the event of (a) the Employer's legal dissolution or liquidation by
any procedure other than a consolidation or merger, (b) the Employer's
receivership, insolvency, or cessation of its business as a going concern, or
(c) the commencement of any proceeding by or against the Employer under the
federal bankruptcy laws, or similar federal or state statute, or any federal or
state statute or rule providing for the relief of debtors, compensation of
creditors, arrangement, receivership, liquidation or any similar event which is
not dismissed within 30 days, this Plan shall terminate automatically with
respect to such entity on such date (provided, however, that if a proceeding is
brought against the Employer for reorganization under Chapter 11 of the United
States Bankruptcy Code or any similar federal or state statute, then this Plan
shall terminate automatically if and when said proceeding results in a
liquidation of the Employer, or the approval of any Plan providing therefor, or
the proceeding is converted to a case under Chapter 7 of the Bankruptcy Code or
any similar conversion to a liquidation proceeding under federal or state law
including, but not limited to, a receivership proceeding). In the event of any
such termination as provided in the foregoing sentence, the Trustee shall make
payments to the persons entitled thereto in accordance with Section 9.5 hereof.
-55-
<PAGE>
13.5 Voluntary Termination.
The Board of Directors reserves the right to terminate this Plan at any
time by giving to the Trustee and the Administrator notice in writing of such
desire to terminate. The Plan shall terminate upon the date of receipt of such
notice, the Account balances of all affected Participants and Former
Participants shall become fully vested and nonforfeitable, and the Trustee shall
make payments to each Participant or Beneficiary in accordance with Section 9.5.
Alternatively, the Sponsor, in its discretion, may determine to continue the
Trust Agreement and to continue the maintenance of the Fund, in which event
distributions shall be made upon the contingencies and in all the circumstances
under which such distributions would have been made, on a fully vested basis,
had there been no termination of the Plan. In addition, an entity other than the
Sponsor that is participating in this Plan may terminate its participation in
the Plan on a prospective basis by action of its board of directors. Upon such
termination of participation, Participants who are employees of such entity
shall be entitled to distributions from this Plan in accordance with Article IX
and this Article XIII.
13.6 Partial Termination of Plan or Permanent Discontinuance of Contributions.
In the event that a partial termination of the Plan shall be deemed to
have occurred, or if the Employer shall discontinue permanently its
contributions hereunder, the right of each affected Participant and Former
Participant in his Account balance shall be fully vested and nonforfeitable. The
Sponsor, in its discretion, shall decide whether to direct the Trustee to make
immediate distribution of such portion of the Fund assets to the persons
entitled thereto or to make distribution in the circumstances and contingencies
which would have controlled such distributions if there had been no partial
termination or permanent discontinuance of contributions.
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<PAGE>
ARTICLE XIV
MISCELLANEOUS
14.1 No Diversion of Funds.
It is the intention of the Employer that it shall be impossible for any
part of the corpus or income of the Fund to be used for, or diverted to,
purposes other than for the exclusive benefit of the Participants or their
Beneficiaries, except to the extent that a return of the Employer's contribution
is permitted under Section 4.4.
14.2 Liability Limited.
Neither the Employer nor the Administrator, nor any agents, employees,
officers, directors or shareholders of any of them, nor the Trustee, nor any
other person, shall have any liability or responsibility with respect to this
Plan, except as expressly provided herein.
14.3 Facility of Payment.
If the Administrator shall receive evidence satisfactory to it that a
Participant or Beneficiary entitled to receive any benefit under the Plan is, at
the time when such benefit becomes payable, a minor, or is physically or
mentally incompetent to receive such benefit and to give a valid release
therefor, and that another person or an institution is then maintaining or has
custody of such Participant or Beneficiary and that no guardian, committee or
other representative of the estate of such Participant or Beneficiary shall have
been duly appointed, the Administrator may direct the Trustee to make payment of
such benefit otherwise payable to such Participant or Beneficiary, to such other
person or institution, including a custodian under a Uniform Gifts to Minors
Act, or corresponding legislation (who shall be an adult, a guardian of the
minor or a trust company), and the release of such other person or institution
shall be a valid and complete discharge for the payment of such benefit.
14.4 Spendthrift Clause.
Except as permitted by the Act or the Code, including in the case of
certain judgments and settlements described in subparagraph (C) of Section
401(a)(13) of the Code, no benefits or other amounts payable under the Plan
shall be subject in any manner to anticipation, sale, transfer, assignment,
pledge, encumbrance, charge or alienation. If the Administrator determines that
any person entitled to any payments under the Plan has become insolvent or
bankrupt or has attempted to anticipate, sell, transfer, assign, pledge,
encumber, charge or otherwise in any manner alienate any benefit or other amount
payable to him under the Plan or that there is any danger of any levy or
attachment or other court process or encumbrance on the part of any creditor of
such person entitled to payments under the Plan against any benefit or other
accounts payable to such person, the Administrator may, at any time, in its
discretion, and in accordance
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<PAGE>
with applicable law, direct the Trustee to withhold any or all payments to such
person under the Plan and apply the same for the benefit of such person, in such
manner and in such proportion as the Administrator may deem proper.
14.5 Benefits Limited to Fund.
All contributions by the Employer to the Fund shall be voluntary, and
the Employer shall be under no legal liability to make any such contributions,
except as otherwise provided herein. The benefits of this Plan shall be provided
solely by the assets of the Fund, and no liability for the payment of benefits
under the Plan or for any loss of assets due to any action or inaction of the
Trustee shall be imposed upon the Employer.
14.6 Cooperation of Parties.
All parties to this Plan and any party claiming interest hereunder
agree to perform any and all acts and execute any and all documents and papers
which are necessary and desirable for carrying out this Plan or any of its
provisions.
14.7 Payments Due Missing Persons.
The Administrator shall direct the Trustee to make a reasonable effort
to locate all persons entitled to benefits under the Plan; however,
notwithstanding any provision in the Plan to the contrary, if, after a period of
5 years from the date such benefit shall be due, any such persons entitled to
benefits have not been located, their rights under the Plan shall stand
suspended. Before this provision becomes operative, the Trustee shall send a
certified letter to all such persons at their last known address advising them
that their interest in benefits under the Plan shall be suspended. Any such
suspended amounts shall be held by the Trustee for a period of 3 additional
years (or a total of 8 years from the time the benefits first became payable),
and thereafter such amounts shall be reallocated among current Participants in
the same manner that a current contribution would be allocated. However, if a
person subsequently makes a valid claim with respect to such reallocated amounts
and any earnings thereon, the Plan earnings or the Employer's contribution to be
allocated for the year in which the claim shall be paid shall be reduced by the
amount of such payment. Any such suspended amounts shall be handled in a manner
not inconsistent with regulations issued by the Internal Revenue Service and
Department of Labor.
14.8 Governing Law.
This Plan has been executed in the State of Ohio, and all questions
pertaining to its validity, construction and administration shall be determined
in accordance with the laws of that State, except to the extent superseded by
the Act.
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<PAGE>
14.9 Nonguarantee of Employment.
Nothing contained in this Plan shall be construed as a contract of
employment between the Employer and any Employee, or as a right of any Employee
to be continued in the employment of the Employer, or as a limitation of the
right of the Employer to discharge any of its Employees, with or without cause.
14.10 Counsel.
The Trustee and the Administrator may consult with legal counsel, who
may be counsel for the Employer and for the Administrator or the Trustee (as the
case may be), with respect to the meaning or construction of this Plan and the
Trust Agreement, their respective obligations or duties hereunder, or with
respect to any action or proceeding or any question of law, and they shall be
fully protected to the extent allowable by law with respect to any action taken
or omitted by them in good faith pursuant to the advice of legal counsel.
IN WITNESS WHEREOF, the Sponsor has caused these presents to be
executed by its duly authorized officers and its corporate seal to be affixed on
this _____ day of _______, 1998.
FIRST NILES FINANCIAL, INC.
ATTEST:
____________________________ By _____________________________________
George J. Swift, William L. Stephens,
Vice President and Secretary President and Chief Executive Officer
[Corporate Seal]
-59-
EXHIBIT 21
SUBSIDIARIES
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
(Upon the completion of Transaction)
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
First Niles Financial, Inc. Home Federal 100% Federal
Savings and Loan
Association of Niles
EXHIBIT 23.1
CONSENT OF SILVER, FREEDMAN & TAFF, L.L.P.
<PAGE>
Exhibit 23.1
CONSENT OF COUNSEL
We consent to the use of our opinion, to the incorporation by reference of
such opinion as an exhibit to the Form SB-2 and to the reference to our firm
under the headings "The Conversion -- Income Tax Consequences", "The Conversion
- -- Stock Contribution to Charitable Foundation -- Tax Considerations" and "Legal
and Tax Matters" in the Prospectus and proxy statement included in this Form
SB-2. In giving this consent, we do not admit that we are within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
/s/SILVER, FREEDMAN & TAFF, L.L.P.
----------------------------------
SILVER, FREEDMAN & TAFF, L.L.P.
Washington, D.C.
July 9, 1998
EXHIBIT 23.2
CONSENT OF ANNESS, GERLACH & WILLIAMS
<PAGE>
[ANNESS, GERLACH & WILLIAMS LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Registration Statement of First Niles
Financial, Inc. on Form SB-2, and Application for Conversion on Form AC, of our
report dated February 2, 1998 (except for Note M, as to which the date is July
6, 1998), included herein, on the consolidated financial statements of Home
Federal Savings and Loan Association of Niles as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997. We also
consent to the reference to us under the headings "Experts" and "Legal and Tax
Matters" in the Prospectus, which is part of this Registration Statement.
/s/ Anness, Gerlach & Williams
------------------------------
Youngstown, Ohio
July 8, 1998
EXHIBIT 23.3
CONSENT OF KELLER & COMPANY, INC.
<PAGE>
Exhibit 23.3
July 9, 1998
Re: Valuation Appraisal of First Niles Financial, Inc.
Home Federal Savings and Loan Association of Niles
Niles, Ohio
--------------------------------------------------
We hereby consent to the use of our firm's name, Keller & Company, Inc.
("Keller"), and the reference to our firm as experts in the Application for
Conversion on Form AC to be filed by Home Federal Savings and Loan Association
of Niles, Ohio, and any amendments thereto and references to our opinion
regarding subscription rights files as an exhibit to the applications referred
to hereafter: We also consent to the use of our firm's names on the Form SB-2 to
be filed by First Niles Financial, Inc. with the Securities and Exchange
Commission and any amendments thereto, and to the statements with respect to us
and the references to our Valuation Appraisal Report and in the said Form AC and
any amendments thereto and in the notice and Applications for Conversion filed
by Home Federal Savings and Loan Association of Niles.
Very truly yours,
KELLER & COMPANY, INC.
by: /s/ Michael R. Keller
--------------------------
Michael R. Keller
President
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 4-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 APR-30-1998
<CASH> 819 545
<INT-BEARING-DEPOSITS> 727 1,375
<FED-FUNDS-SOLD> 3,330 3,580
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 17,447 17,184
<INVESTMENTS-CARRYING> 12,359 12,589
<INVESTMENTS-MARKET> 12,335 12,576
<LOANS> 37,598 37,004
<ALLOWANCE> 854 853
<TOTAL-ASSETS> 72,497 72,539
<DEPOSITS> 57,854 57,765
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 1,080 1,092
<LONG-TERM> 400 400
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 13,163 13,282
<TOTAL-LIABILITIES-AND-EQUITY> 72,497 72,539
<INTEREST-LOAN> 2,959 1,016
<INTEREST-INVEST> 1,835 578
<INTEREST-OTHER> 208 77
<INTEREST-TOTAL> 5,002 1,671
<INTEREST-DEPOSIT> 2,433 812
<INTEREST-EXPENSE> 2,476 824
<INTEREST-INCOME-NET> 2,526 847
<LOAN-LOSSES> 700 20
<SECURITIES-GAINS> 0 461
<EXPENSE-OTHER> 1,380 890
<INCOME-PRETAX> 473 406
<INCOME-PRE-EXTRAORDINARY> 473 406
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 386 287
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 7.06 7.07
<LOANS-NON> 875 1,007
<LOANS-PAST> 787 689
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 1,555 1,632
<ALLOWANCE-OPEN> 301 854
<CHARGE-OFFS> 147 21
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 854 853
<ALLOWANCE-DOMESTIC> 854 853
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 146 322
</TABLE>
EXHIBIT 99.2
PROXY STATEMENT AND FORM OF PROXY TO BE
FURNISHED TO THE ASSOCIATION'S
ACCOUNT HOLDERS
<PAGE>
Exhibit 99.2
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NILES
55 North Main Street
Niles, Ohio 44446-5097
(330) 652-2539
NOTICE OF SPECIAL MEETING OF MEMBERS
Notice is hereby given that a Special Meeting of Members (the "Special
Meeting") of Home Federal Savings and Loan Association of Niles ("Home Federal"
or the "Association") will be held at the main office of the Association located
at 55 North Main Street, Niles, Ohio, on ________ __, 1998 at __:__ _.m., Niles,
Ohio time. The purpose of this Special Meeting is to consider and vote upon:
1. A plan to convert the Association from a federally chartered mutual
savings association to a federally chartered stock savings association,
including the adoption of a federal stock savings association charter
and bylaws, with the concurrent sale of all the Association's common
stock to First Niles Financial, Inc., a Delaware corporation (the
"Holding Company"), and sale by the Holding Company of shares of its
common stock;
2. The contribution of 30,000 shares of the Holding Company common stock to
The Home Federal Savings and Loan Association of Niles Foundation, Inc.
(the "Foundation"), a private charitable foundation dedicated to the
promotion of charitable purposes within the communities in which the
Association operates; and
such other business as may properly come before the Special Meeting or any
adjournment thereof. Management is not aware of any such other business.
The members who shall be entitled to notice of and to vote at the Special
Meeting and any adjournment thereof are depositors and borrowers of the
Association at the close of business on _______ __, 1998, who continue to be
depositors and borrowers of the Association as of the date of the Special
Meeting. In the event there are not sufficient votes for approval of the Plan of
Conversion at the time of the Special Meeting, the Special Meeting may be
adjourned from time to time in order to permit further solicitation of proxies.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ William L. Stephens
-------------------------------------
William L. Stephens
President and Chief Executive Officer
Niles, Ohio
________ __, 1998
- --------------------------------------------------------------------------------
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR APPROVAL OF THE PROPOSALS BY COMPLETING THE
ENCLOSED PROXY CARD AND RETURNING IT IN THE
ENCLOSED POSTAGE-PAID ENVELOPE AS SOON AS
POSSIBLE. YOUR VOTE IS VERY IMPORTANT.
- --------------------------------------------------------------------------------
<PAGE>
SUMMARY OF PROPOSED CONVERSION
This summary does not purport to be complete and is qualified in its
entirety by the more detailed information contained in the remainder of this
Proxy Statement and the accompanying Prospectus.
Under its present "mutual" form of organization, Home Federal has no
stockholders. Its deposit account holders and borrowers are members of the
Association and have voting rights in those capacities. In the unlikely event of
liquidation, the Association's deposit account holders would have the sole right
to receive any assets of the Association remaining after payment of its
liabilities (including the claims of all deposit account holders to the
withdrawal value of their deposits). Under the Plan of Conversion (the "Plan of
Conversion") to be voted on at the Special Meeting, the Association would be
converted into a federally chartered savings association organized in stock
form, and all of the Association's common stock would be sold concurrently to
the Holding Company (the "Conversion"). The Holding Company will offer and sell
its common stock (the "Common Stock") in an offering (the "Subscription
Offering") to (1) account holders with an account balance of $50 or more on
March 31, 1997 ("Eligible Account Holders"), (2) tax-qualified employee plans of
the Association and the Holding Company ("Tax-Qualified Employee Plans"),
provided however, that the Tax-Qualified Employee Plans shall have first
priority Subscription Rights to the extent that the total number of shares of
Common Stock sold in the Conversion exceeds the maximum of the appraisal range,
(3) account holders of the Association with an account balance of $50 or more as
of __________ __, 1998 ("Supplemental Eligible Account Holders"), (4) certain
other members of the Association as of ________ __, 1998 who are not Eligible
Account Holders or Supplemental Eligible Account Holders ("Other Members") and
(5) employees, officers and directors of the Association. It is anticipated that
Tax-Qualified Employee Plans will purchase 8% of the Common Stock sold in the
Conversion.
To the extent the Common Stock is not all sold to the persons in the
foregoing categories, the Holding Company may offer and sell the remainder of
the Common Stock in a direct community offering ("Direct Community Offering") or
public offering ("Public Offering") through Charles Webb & Company ("Webb"), a
division of Keefe, Bruyette & Woods, Inc., to selected persons to whom a
prospectus (the "Prospectus") is delivered. The Subscription Offering and the
Public Offering and/or Direct Community Offering are referred to collectively as
the "Offering." Voting and liquidation rights with respect to the Association
would thereafter be held by the Holding Company, except to the limited extent of
the liquidation account (the "Liquidation Account") that will be established for
the benefit of Eligible Account Holders and Supplemental Eligible Account
Holders of the Association, and voting and liquidation rights in the Holding
Company would be held only by those persons who become stockholders of the
Holding Company through purchase of shares of its Common Stock. See "Description
of the Plan of Conversion - Principal Effects of Conversion -- Liquidation
Rights of Depositor Members."
THE CONVERSION WILL NOT AFFECT THE BALANCE, INTEREST RATE OR FEDERAL
INSURANCE PROTECTION OF ANY SAVINGS DEPOSIT, AND NO PERSON WILL BE OBLIGATED TO
PURCHASE ANY STOCK IN THE CONVERSION.
Business Purposes for
Conversion Net Conversion proceeds are expected to increase the
capital of Home Federal, which will support the existing
and possible expansion of its financial services to the
public. The conversion to stock form and the use of a
holding company structure are also expected to enhance
its ability to expand through possible mergers and
acquisitions (although no such transactions are
contemplated at this time) and will facilitate its
future access to the capital markets. The Association
will continue to be subject to comprehensive regulation
and examination by the Office of Thrift Supervision,
Department of Treasury ("OTS") and the Federal Deposit
Insurance Corporation ("FDIC").
i
<PAGE>
Subscription
Offering As part of the Conversion, Common Stock is being offered
for sale in the Subscription Offering, in the priorities
summarized below, to the Association's (1) Eligible
Account Holders, (2) Tax-Qualified Employee Plans, (3)
Supplemental Eligible Account Holders, (4) Other
Members, and (5) employees, officers and directors. If
necessary, all shares of Common Stock not purchased in
the Subscription Offering, if any, may be offered in
connection with the Public Offering and/or Direct
Community Offering for sale to selected persons through
Webb.
Subscription Rights
of Eligible Account
Holders Each Eligible Account Holder has been given
non-transferable rights to subscribe for an amount equal
to the greater of $150,000 of Common Stock, one-tenth of
one percent of the total number of shares offered in the
Subscription Offering, or 15 times the product (rounded
down to the whole next number) obtained by multiplying
the total number of shares to be issued by a fraction of
which the numerator is the amount of qualifying deposits
of such subscriber and the denominator is the total
qualifying deposits of all account holders in this
category on the qualifying date.
Subscription Rights
of Tax-Qualified
Employee Plans The Association's Tax-Qualified Employee Plans have been
given non-transferable rights to subscribe, individually
and in the aggregate, for up to 10% of the total number
of shares sold in the Conversion after satisfaction of
subscriptions of Eligible Account Holders.
Notwithstanding the foregoing, to the extent orders for
shares exceed the maximum of the appraisal range,
Tax-Qualified Employee Plans shall be afforded a first
priority to purchase shares sold above the maximum of
the appraisal range. It is anticipated that
Tax-Qualified Employee Plans will purchase 8% of the
Common Stock sold in the Conversion.
Subscription Rights
of Supplemental
Eligible Account
Holders After satisfaction of subscriptions of Eligible Account
Holders and Tax- Qualified Employee Plans, each
Supplemental Eligible Account Holder (other than
directors and officers of the Association) has been
given non-transferable rights to subscribe for an amount
equal to the greater of $150,000 of Common Stock,
one-tenth of one percent of the total number of shares
offered in the Conversion, or 15 times the product
(rounded down to the whole next number) obtained by
multiplying the total number of shares to be issued by a
fraction of which the numerator is the amount of
qualifying deposits of such subscriber and the
denominator is the total qualifying deposits of all
account holders in this category on the qualifying date.
The subscription rights of each Supplemental Eligible
Account Holder shall be reduced to the extent of such
person's subscription rights as an Eligible Account
Holder.
Subscription Rights
of Other Members Each Other Member has been given non-transferable rights
to subscribe for an amount equal to the greater of
$150,000 of Common Stock or one-tenth of one percent of
the total number of shares offered in the Conversion
after satisfaction of the subscriptions of the
Association's Eligible Account Holders, Tax-Qualified
Employee Plans and Supplemental Eligible Account
Holders.
ii
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Subscription Rights
of Association
Personnel Each individual employee, officer and director of the
Association has been given the right to subscribe for an
amount equal to the greater of $150,000 of Common Stock
after satisfaction of the subscriptions of Eligible
Account Holders, Tax-Qualified Employee Plans,
Supplemental Eligible Account Holders and Other Members.
Total shares subscribed for by the employees, officers
and directors in this category may not exceed 24% of the
total shares offered in the Conversion.
Public Offering and/
or Direct Community
Offering Subject to prior rights of holders of subscription
rights, the Holding Company may also offer the Common
Stock for sale to selected persons through Webb in a
Public Offering and/or Direct Community Offering.
Purchase Limitations No person, together with associates, and persons acting
in concert, may purchase more than $300,000 of Common
Stock in the Conversion. The aggregate purchases of
directors and executive officers and their associates
may not exceed 34% of the total number of shares offered
in the Conversion. These purchase limitations do not
apply to the Association's Tax-Qualified Employee Plans.
Expiration Date of
the Subscription
Offering All subscriptions for Common Stock in connection with
the Subscription Offering must be received by noon,
Niles, Ohio Time on _____ __, 1998.
How to Subscribe
for Shares For information on how to subscribe for Common Stock
being offered in the Subscription Offering, please read
the Prospectus and the order form and instructions
accompanying this Proxy Statement. Subscriptions will
not become effective until the Plan of Conversion has
been approved by the Association's members and all of
the Common Stock offered in the Conversion has been
subscribed for or sold in the Offering or through such
other means as may be approved by the OTS.
Price of Common
Stock All sales of Common Stock in the Offering will be made
at the same price per share which is currently expected
to be $10.00 per share on the basis of an independent
appraisal of the pro forma market value of the
Association and the Holding Company upon Conversion. On
the basis of a preliminary appraisal by Keller &
Company, Inc. ("Keller"), which has been reviewed by the
OTS, a minimum of _________ and a maximum of _________
shares will be offered in the Conversion. See "The
Conversion - Stock Pricing and Number of Shares to be
Issued" in the Prospectus.
Tax Consequences The Association has received an opinion from its
special counsel, Silver, Freedman & Taff, L.L.P.,
stating that the Conversion is a nontaxable
reorganization under Section 368(a)(1)(F) of the
Internal Revenue Code. The Association has also received
an opinion from Anness, Gerlach & Williams ("Anness")
stating that the Conversion will not be a taxable
transaction for Ohio income tax purposes.
Required Vote Approval of the Plan of Conversion will require the
affirmative vote of a majority of all votes eligible to
be cast at the Special Meeting.
YOUR BOARD OF DIRECTORS URGES YOU TO VOTE FOR
THE PLAN OF CONVERSION
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SUMMARY OF PROPOSED STOCK CONTRIBUTION TO CHARITABLE FOUNDATION
This summary does not purport to be complete and is qualified in its
entirety by the more detailed information contained in the remainder of this
Proxy Statement and the accompanying Prospectus.
As a reflection of the Association's long-standing commitment to the local
community, in 1998 the Association established The Home Federal Savings and Loan
Association of Niles Foundation, Inc., a private charitable foundation organized
under the laws of the State of Delaware. The Foundation was established as a
means of supporting the needs of the local community while simultaneously
increasing the visibility and reputation of the Association. Under the Plan and
subject to member approval, the Holding Company will contribute to the
Foundation 30,000 shares of its Common Stock (the "Stock Contribution"). The
Stock Contribution will be either in the form of a direct contribution or a sale
of the shares for their aggregate par value ($.01 per share). The Holding
Company believes that the Stock Contribution will be fully tax-deductible at
$10.00 per share for both federal tax and state income tax purposes.
Purpose of
the Stock
Contribution The Holding Company and the Association believe that
the funding of the Foundation with Common Stock of the
Holding Company is a means of reinforcing the bond among
the Association and the communities in which the
Association operates, thereby enabling such communities
to share in the potential growth and success of the
Holding Company over the long-term. Although the Stock
Contribution will result in a reduction in the Holding
Company's conversion appraisal (but not in its pro forma
capital per share or earnings per share), the Board
believes that the Stock Contribution will enhance the
long term value of the Association's franchise by
increasing customer loyalty as well as the size of its
customer base. The Board believes that customer loyalty
and community support are critical for the success of
community oriented institutions such as the Association.
The Board believes that the Stock Contribution will
facilitate the support of charitable activities even
during periods when the Holding Company may not be in a
position to support such activities. (Similarly, the
Stock Contribution could enable the Foundation to offset
the impact of variations in contribution levels from the
Holding Company by accumulating funds during periods of
relatively large contributions and disbursing such funds
during periods of relatively small contributions.) In
addition, the Board believes that the Stock Contribution
will have a highly beneficial public relations impact.
Finally, the Board believes that the Stock Contribution
will facilitate the participation of non-Holding Company
personnel in charitable activities. The Board believes
that the Stock Contribution on the terms described
herein represents an opportunity to make a significant
charitable contribution which will benefit the Holding
Company and the Association at a time when they have
adequate capital, are not yet subject to possible
earnings pressure resulting from the Holding Company's
status as a public company and there is a need for
charitable funding in the Association's market area.
iv
<PAGE>
Structure of
the Foundation The Foundation is a private foundation under the
Internal Revenue Code of 1986, as amended (the "Code").
As a private foundation, the Foundation is required to
distribute annually in grants or donations at least 5%
of its net investment assets. The Foundation is
dedicated to the promotion of charitable purposes within
the communities in which the Association operates,
including, but not limited to, providing grants or
donations to community groups, cultural activities,
youth and elder care and other types of organizations or
projects. While the Foundation is authorized to engage
directly in charitable activities, in order to limit
overhead costs, it is currently anticipated that the
Foundation's primary activity will consist of making
grants to other charitable organizations. The authority
for the affairs of the Foundation is vested in the Board
of Trustees of the Foundation which is comprised of
_______________, ______________ and ___________. Such
persons excused themselves from voting on the Stock
Contribution. Under the terms of the Foundation's
certificate of incorporation, new trustees may be
selected only by the Foundation's Board of Trustees.
The Foundation's certificate of incorporation provides
that the earnings of the Foundation shall not result in
any private benefit for its members, trustees or
officers. In addition, it is anticipated that the
Foundation will adopt a conflicts of interest policy to
protect against inappropriate benefits for trustees or
officers. While these provisions would not prohibit the
payment of reasonable compensation for services
rendered, the members of the Board of Trustees do not
currently receive fees for service on the Board.
The Stock
Contribution If approved by members, the Stock Contribution will be
made within 12 months following the completion of the
Conversion. However, as discussed below, the Holding
Company will recognize the expense related to the Stock
Contribution in the quarter in which the Conversion is
completed. Once made, the Stock Contribution will not be
recoverable by the Company or the Association. The
Foundation may receive working capital from any
dividends that may be paid on the Company's Common Stock
in the future and, subject to applicable federal and
state laws, from loans collateralized by the Common
Stock or from the proceeds of the sale of any of the
Common Stock in the open market from time to time as may
be permitted to provide the Foundation with additional
liquidity. One of the conditions imposed on the gift of
Common Stock by the Holding Company is that the amount
of Common Stock that may be sold by the Foundation in
any one year shall not exceed 5% of the average market
value of the assets held by the Foundation, except where
the Board of Trustees of the Foundation, by
three-fourths vote, determines that the failure to sell
an amount of Common Stock greater than such amount would
result in a long-term reduction in the value of the
Foundation's assets and as such would jeopardize the
Foundation's capacity to carry out its charitable
purposes. The Stock Contribution is also subject to
certain conditions imposed by the OTS in connection with
its approval of the Conversion.
v
<PAGE>
The Stock Contribution is subject to the approval of a
majority of the total outstanding votes of the
Association's members eligible to be cast at the Special
Meeting. The Stock Contribution will be considered as a
separate matter from the vote to approve the Plan of
Conversion. If the Association's members approve the
Plan of Conversion, but not the Stock Contribution, the
Association intends to complete the Conversion without
the Stock Contribution.
Regulatory
Conditions Imposed
on the Foundation The Stock Contribution is subject to the following
conditions imposed by the OTS: (i) the Foundation will
be subject to examination by the OTS, at the
Foundation's own expense; (ii) the Foundation must
comply with supervisory directives imposed by the OTS;
(iii) the Foundation will provide annual reports to the
OTS describing grants made and grant recipients; (iv)
the Foundation will operate in accordance with written
policies adopted by the board of directors, including a
conflict of interest policy; (v) the Foundation will not
engage in self-dealing and will comply with all laws
necessary to maintain its tax-exempt status; and (vi)
any shares of Common Stock of the Holding Company held
by the Foundation must be voted in the same ratio as all
other shares of the Holding Company's Common Stock on
all proposals considered by stockholders of the Holding
Company; provided, however, that the OTS will waive this
voting restriction under certain circumstances if
compliance with the voting restriction would: (a) cause
a violation of the law of the State of Delaware and the
OTS determines the federal law does not preempt the
application of the laws of the State of Delaware to the
Foundation; (b) cause the Foundation to lose its
tax-exempt status or otherwise have a material and
adverse tax consequence on the Foundation; or (c) cause
the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the OTS to waive
such voting restriction, the Holding Company's or the
Foundation's legal counsel must render an opinion
satisfactory to OTS that compliance with the voting
restriction would have the effect described in clauses
(a), (b) or (c) above. Under those circumstances, the
OTS will grant a waiver of the voting restriction upon
submission of such opinion(s) by the Holding Company or
the Foundation.
YOUR BOARD OF DIRECTORS URGES YOU TO VOTE FOR THE STOCK CONTRIBUTION
vi
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NILES
PROXY STATEMENT
SPECIAL MEETING OF MEMBERS TO BE HELD ON ________ __, 1998
PURPOSE OF MEETING
This Proxy Statement is being furnished to you in connection with the
solicitation on behalf of the Board of Directors of Home Federal Savings and
Loan Association of Niles ("Home Federal" or the "Association") of the proxies
to be voted at the Special Meeting of Members (the "Special Meeting") of the
Association to be held at the Association's main office located at 55 North Main
Street, Niles, Ohio, on ________ __, 1998 at __:__ _.m., Niles, Ohio time, and
at any adjournments thereof. The Special Meeting is being held for the purpose
of considering and voting upon a Plan of Conversion under which the Association
would be converted (the "Conversion") from a federally chartered mutual savings
association into a federally chartered stock savings association, the concurrent
sale of all the common stock of the stock savings association to First Niles
Financial, Inc. (the "Holding Company"), a Delaware corporation, and the sale by
the Holding Company of shares of its common stock (the "Common Stock"). The
Special Meeting is also being held to consider and vote upon the contribution of
30,000 shares of common stock of the Holding Company to The Home Federal Savings
and Loan Association of Niles Foundation, Inc. ("the Foundation"), a charitable
organization dedicated to the promotion of charitable purposes within the
communities in which the Association operates and such other business as may
properly come before the meeting and any adjournment thereof.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE BANK UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO
APPROVE THE PLAN OF CONVERSION AND THE CONTRIBUTION TO THE HOME FEDERAL SAVINGS
AND LOAN ASSOCIATION OF NILES FOUNDATION, INC. OF 30,000 SHARES OF HOLDING
COMPANY COMMON STOCK.
The Association is currently organized in "mutual" rather than "stock"
form, meaning that it has no stockholders and no authority under its federal
mutual charter to issue capital stock. The Association's Board of Directors has
adopted the Plan of Conversion providing for the Conversion. The sale of Common
Stock of the Holding Company, which was recently formed to become the holding
company of the Association, will substantially increase the Association's net
worth. The Holding Company will exchange 50% of the net proceeds from the sale
of the Common Stock for the common stock of the Association to be issued upon
Conversion. The Holding Company expects to retain the balance of the net
proceeds as its initial capitalization, a portion of which the Holding Company
intends to lend to the Association's Employee Stock Ownership Plan (the "ESOP")
to fund its purchase of Common Stock. This increased capital will support the
existing and possible expansion of the Association's financial services to the
public. The Board of Directors of the Association also believes that the
conversion to stock form and the use of a holding company structure will enhance
the Association's ability to expand through possible mergers and acquisitions
(although no such transactions are contemplated at this time) and will
facilitate its future access to the capital markets.
The Board of Directors of the Association believes that the Conversion will
further benefit the Association by enabling it to attract and retain key
personnel through prudent use of stock-related incentive compensation and
benefit plans. The Board of Directors of the Holding Company intends to adopt a
stock option and incentive plan and a recognition and retention plan, subject to
approval of Holding Company stockholders following completion of the Conversion.
See "Management of the Association - Benefit Plans" in the accompanying
Prospectus.
Voting in favor of the Plan of Conversion will not obligate any person to
purchase any Common Stock.
As a reflection of the Association's long-standing commitment to the local
community, in 1998 the Association established The Home Federal Savings and Loan
Association of Niles Foundation, Inc., a private charitable foundation under the
laws of the State of Delaware. The Foundation was established as a means of
supporting the needs of the local community while simultaneously increasing the
visibility and reputation of the Association. Under the Plan and subject to
member approval, the Holding Company will contribute to the Foundation 30,000
shares of its Common Stock (the
<PAGE>
"Stock Contribution"). The Stock Contribution will be either in the form of a
direct contribution or a sale of the shares for their aggregate par value ($.01
per share). The Holding Company believes that the Stock Contribution will be
fully tax-deductible at $10.00 per share for both federal tax and state income
tax purposes.
The Holding Company and the Association believe that the funding of the
Foundation with Common Stock of the Holding Company is a means of reinforcing
the bond among the Association and the communities in which the Association
operates, thereby enabling such communities to share in the potential growth and
success of the Holding Company over the long-term. Although the Stock
Contribution will result in a reduction in the Holding Company's conversion
appraisal (but not in its pro forma capital per share or earnings per share),
the Board believes that the Stock Contribution will enhance the long term value
of the Association's franchise by increasing customer loyalty as well as the
size of its customer base. The Board believes that customer loyalty and
community support are critical for the success of community oriented
institutions such as the Association.
Voting in favor of the Contribution to the Foundation will not obligate any
person to purchase any Common Stock.
THE OFFICE OF THRIFT SUPERVISION ("OTS") HAS APPROVED THE PLAN OF
CONVERSION SUBJECT TO THE APPROVAL OF THE ASSOCIATION'S MEMBERS AND THE
SATISFACTION OF CERTAIN OTHER CONDITIONS. HOWEVER, SUCH APPROVAL DOES NOT
CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION BY THE OTS.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Association has fixed ________ ____, 1998 as
the voting record date ("Voting Record Date") for the determination of members
entitled to notice of the Special Meeting. All Association depositors and
borrowers are members of the Association under its current charter. All
Association depositors and borrowers of record as of the close of business on
the Voting Record Date who continue to be depositors and borrowers as of the
date of the Special Meeting will be entitled to vote at the Special Meeting or
any adjournment thereof.
Each depositor member (including IRA and Keogh account beneficiaries) will
be entitled at the Special Meeting to cast one vote for each $100, or fraction
thereof, of the aggregate withdrawal value of all of such depositor's accounts
in the Association as of the Voting Record Date, up to a maximum of 400 votes.
In general, accounts held in different ownership capacities will be treated as
separate memberships for purposes of applying the 400 vote limitation. For
example, if two persons hold a $40,000 account in their joint names and each of
the persons also holds a separate account for $40,000 in his own name, each
person would be entitled to 400 votes for each separate account and they would
together be entitled to cast 400 votes on the basis of the joint account. Where
no proxies are received from IRA and Keogh account beneficiaries, after due
notification, the Association, as trustee of these accounts, is entitled to vote
these accounts in favor of the Plan of Conversion. Each member borrower is
entitled to one vote in addition to any other vote the borrower may otherwise
have.
Approval of the Plan of Conversion requires the affirmative vote of a
majority of the total outstanding votes of the Association's members eligible to
be cast at the Special Meeting. Approval of the contribution of 30,000 shares of
Holding Company Common Stock to the Foundation will also require the affirmative
vote of a majority of the total outstanding votes of the Association's members
eligible to be cast at the Special Meeting. As of _______ __, 1998, the
Association had approximately ______ members who were entitled to cast a total
of approximately _________ votes at the Special Meeting.
Association members may vote at the Special Meeting or any adjournment
thereof in person or by proxy. Any member giving a proxy will have the right to
revoke the proxy at any time before it is voted by giving written notice to the
Secretary of the Association, provided that such written notice is received by
the Secretary prior to the Special Meeting or any adjournment thereof, or upon
request if the member is present and chooses to vote in person.
All properly executed proxies received by the Board of Directors of the
Association will be voted in accordance with the instructions indicated thereon
by the members giving such proxies. If no instructions are given, such proxies
will be voted in favor of the Plan of Conversion and the establishment of the
charitable foundation. If any other matters are properly presented at the
Special Meeting and may properly be voted on, the proxies solicited hereby will
be voted
2
<PAGE>
on such matters in accordance with the best judgment of the proxy holders named
thereon. Management is not aware of any other business to be presented at the
Special Meeting.
If a proxy is not executed and is returned and the member does not vote in
person, the Association is prohibited by OTS regulations from using a previously
executed proxy to vote for the Conversion or the Foundation. As a result,
failure to vote may have the same effect as a vote against the Plan of
Conversion and the Foundation.
To the extent necessary to permit approval of the Plan of Conversion,
proxies may be solicited by officers, directors or regular employees of the
Association, in person, by telephone or through other forms of communication
and, if necessary, the Special Meeting may be adjourned to a later date. In
addition, Webb will assist the Association in the solicitation of proxies. Such
persons will be reimbursed by the Association for their expenses incurred in
connection with such solicitation. The Association will bear all costs of this
solicitation. The proxies solicited hereby will be used only at the Special
Meeting and at any adjournment thereof.
DESCRIPTION OF THE PLAN OF CONVERSION
The Plan of Conversion to be presented for approval at the Special Meeting
provides for the Conversion to be accomplished through adoption of amended
charter and bylaws for the Association to authorize the issuance of capital
stock along with the concurrent formation of a holding company. As part of the
Conversion, the Plan of Conversion provides for the subscription offering (the
"Subscription Offering") of the Common Stock to the Association's (i) Eligible
Account Holders (deposit account holders with an account balance of $50 or more
as of March 31, 1997); (ii) Tax-Qualified Employee Plans, (iii) Supplemental
Eligible Account Holders (deposit account holders with an account balance of $50
or more as of __________ __, 1998); (iv) Other Members (deposit account holders
eligible to vote at the Special Meeting who are not as Eligible Account Holders
or Supplemental Eligible Account Holders); and (v) the Association's employees,
officers and directors. Notwithstanding the foregoing, to the extent orders for
shares exceed the maximum of the appraisal range, Tax-Qualified Employee Plans
shall be afforded a first priority to purchase shares sold above the maximum of
the appraisal range. It is anticipated that Tax-Qualified Employee Plans will
purchase 8% of the Common Stock sold in the Conversion. If necessary, all shares
of Common Stock not purchased in the Subscription Offering, if any, may be
offered to selected persons in connection with the Public Offering and/or Direct
Community Offering through Webb.
THE SUBSCRIPTION OFFERING HAS COMMENCED AS OF THE DATE OF MAILING OF THIS
PROXY STATEMENT. A PROSPECTUS EXPLAINING THE TERMS OF THE SUBSCRIPTION OFFERING,
INCLUDING HOW TO ORDER AND PAY FOR SHARES AND DESCRIBING THE BUSINESS OF THE
ASSOCIATION AND THE HOLDING COMPANY, ACCOMPANIES THIS PROXY STATEMENT AND SHOULD
BE READ BY ALL PERSONS WHO WISH TO CONSIDER SUBSCRIBING FOR COMMON STOCK. THE
SUBSCRIPTION OFFERING EXPIRES AT NOON, NILES, OHIO TIME ON ________ __, 1998
UNLESS EXTENDED BY THE ASSOCIATION AND THE HOLDING COMPANY.
The federal conversion regulations require that all stock offered in a
conversion must be sold in order for the conversion to become effective. The
conversion regulations require that the offering be completed within 45 days
after completion of the Subscription Offering period unless extended by the
Association and the Holding Company with the approval of the OTS. This 45-day
period expires ________ __, 1999 unless the Subscription Offering is extended.
If this is not possible, an occurrence that is currently not anticipated, the
Board of Directors of the Association and the Holding Company will consult with
the OTS to determine an appropriate alternative method of selling all
unsubscribed shares offered in the Conversion. The Plan of Conversion provides
that the Conversion must be completed within 24 months after the date of the
Special Meeting.
The Public Offering and/or Direct Community Offering or any other sale of
the unsubscribed shares will be made as soon as practicable after the completion
of the Subscription Offering. No sales of shares may be completed, either in the
Subscription Offering or otherwise, unless the Plan of Conversion is approved by
the members of the Association.
The commencement and completion of the Offering, however, is subject to
market conditions and other factors beyond the Association's control. No
assurance can be given as to the length of time after approval of the Plan of
Conversion at the Special Meeting that will be required to complete Offering of
the Common Stock to be offered in the Conversion. If delays are experienced,
significant changes may occur in the estimated pro forma market value of the
Holding Company's Common Stock, together with corresponding changes in the
offering price and the net proceeds
3
<PAGE>
realized by the Association and the Holding Company from the sale of the Common
Stock. The Association and the Holding Company may also incur substantial
additional printing, legal, accounting and other expenses in completing the
Conversion.
The following is a brief summary of the Conversion and is qualified in its
entirety by reference to the Plan of Conversion, a complete copy of which is
attached hereto. The Association's federal stock charter and bylaws that will
become effective upon completion of the Conversion are available from the
Association upon request. A copy of the Holding Company's certificate of
incorporation and bylaws are also available from the Association upon request.
Principal Effects of Conversion
Depositors. The Conversion will not change the amount, interest rate,
withdrawal rights or federal insurance protection of deposit accounts, or affect
deposit accounts in any way other than with respect to voting and liquidation
rights as discussed below.
Borrowers. The rights and obligations of borrowers under their loan
agreements with the Association will remain unchanged by the Conversion. The
principal amount, interest rate and maturity date of loans will remain as they
were contractually fixed prior to the Conversion.
Voting Rights of Members. Under the Association's current federal mutual
charter, depositors and borrowers have voting rights as members of the
Association with respect to the election of directors and certain other affairs
of the Association. After the Conversion, exclusive voting rights with respect
to all such matters will be vested in the Holding Company as the sole
stockholder of the Association. Depositors and borrowers will no longer have any
voting rights, except to the extent that they become stockholders of the Holding
Company through the purchase of its Common Stock. Voting rights in the Holding
Company will be held exclusively by its stockholders.
Liquidation Rights of Depositor Members. Currently, in the unlikely event
of liquidation of the Association, any assets remaining after satisfaction of
all creditors' claims in full (including the claims of all depositors to the
withdrawal value of their accounts) would be distributed pro rata among the
depositors of the Association, with the pro rata share of each being the same
proportion of all such remaining assets as the withdrawal value of each
depositor's account is of the total withdrawal value of all accounts in the
Association at the time of liquidation. After the Conversion, the assets of the
Association would first be applied, in the event of liquidation, against the
claims of all creditors (including the claims of all depositors to the
withdrawal value of their accounts). Any remaining assets would then be
distributed to the persons who qualified as Eligible Account Holders or
Supplemental Eligible Account Holders under the Plan of Conversion to the extent
of their interests in a "Liquidation Account" that will be established at the
time of the completion of the Conversion and then to the Holding Company as the
sole stockholder of the Association's outstanding common stock. The
Association's depositors who did not qualify as Eligible Account Holders or
Supplemental Eligible Account Holders would have no right to share in any
residual net worth of the Association in the event of liquidation after the
Conversion, but would continue to have the right as creditors of the Association
to receive the full withdrawal value of their deposits prior to any distribution
to the Holding Company as the Association's sole stockholder. In addition, the
Association's deposit accounts will continue to be insured by the Federal
Deposit Insurance Corporation ("FDIC") to the maximum extent permitted by law,
currently up to $100,000 per insured account. The Liquidation Account will
initially be established in an amount equal to the net worth of the Association
as of the date of the Association's latest statement of financial condition
contained in the final prospectus used in connection with the Conversion. Each
Eligible Account Holder and/or Supplemental Eligible Account Holder will receive
an initial interest in the Liquidation Account in the same proportion as the
balance in all of his qualifying deposit accounts was of the aggregate balance
in all qualifying deposit accounts of all Eligible Account Holders and
Supplemental Eligible Account Holders on March 31, 1997 or ________ __, 1998,
respectively. For accounts in existence on both dates, separate subaccounts
shall be determined on the basis of the qualifying deposits in such accounts on
the record dates. However, if the amount in the qualifying deposit account on
any annual closing date of the Association is less than the lowest amount in
such deposit account on the Eligibility Record Date and/or Supplemental
Eligibility Record Date, and any subsequent annual closing date, this interest
in the Liquidation Account will be reduced by an amount proportionate to such
reduction in the related deposit account and will not thereafter be increased
despite any subsequent increase in the related deposit account.
4
<PAGE>
The Association. Under federal law, the stock savings bank resulting from
the Conversion will be deemed to be a continuation of the mutual savings bank
rather than a new entity and will continue to have all of the rights,
privileges, properties, assets and liabilities of the Association prior to the
Conversion. The Conversion will enable the Association to issue capital stock,
but will not change the general objectives, purposes or types of business
currently conducted by the Association, and no assets of the Association will be
distributed in order to effect the Conversion, other than to pay the expenses
incident thereto. After the Conversion, the Association will remain subject to
examination and regulation by the OTS and will continue to be a member of the
Federal Home Loan Bank System. The Conversion will not cause any change in the
executive officers or directors of the Association.
Tax Consequences. Consummation of the Conversion is expressly conditioned
upon prior receipt of either a ruling of the United States Internal Revenue
Service ("IRS") or an opinion letter of the Association's counsel with respect
to federal taxation, and either a ruling of the Ohio taxation authorities or an
opinion letter with respect to Ohio taxation, to the effect that the Conversion
will not be a taxable transaction to the Holding Company, the Association or the
Association's deposit account holders receiving subscription rights.
The Association has received an opinion of its special counsel, Silver,
Freedman & Taff, L.L.P., to the effect that (i) the Conversion will qualify as a
reorganization under Section 368(a)(1)(F) of the Internal Revenue Code of 1986,
as amended, and no gain or loss will be recognized to the Association in either
its mutual form or its stock form by reason of the proposed Conversion, (ii) no
gain or loss will be recognized to the Association in its stock form upon the
receipt of money and other property, if any, from the Holding Company for the
stock of the Association; and no gain or loss will be recognized to the Holding
Company upon the receipt of money for Common Stock of the Holding Company; (iii)
the assets of the Association in either its mutual or its stock form will have
the same basis before and after the Conversion; (iv) the holding period of the
assets of the Association in its stock form will include the period during which
the assets were held by the Association in its mutual form prior to Conversion;
(v) gain, if any, will be realized by the depositors of the Association upon the
constructive issuance to them of withdrawable deposit accounts of the
Association in its stock form, nontransferable subscription rights to purchase
Holding Company Common Stock and/or interests in the Liquidation Account (any
such gain will be recognized by such depositors, but only in an amount not in
excess of the fair market value of the subscription rights and Liquidation
Account interests received); (vi) the basis of the account holder's savings
accounts in the Association after the Conversion will be the same as the basis
of his or her savings accounts in the Association prior to the Conversion; (vii)
the basis of each account holder's interest in the Liquidation Account is
assumed to be zero; (viii) based on the Keller Letter, as hereinafter defined,
the basis of the subscription rights will be zero; (ix) the basis of the Holding
Company Common Stock to its stockholders will be the purchase price thereof; (x)
a stockholder's holding period for Holding Company Common Stock acquired through
the exercise of subscription rights shall begin on the date on which the
subscription rights are exercised and the holding period for the Conversion
Stock purchased in the Offering will commence on the date following the date on
which such stock is purchased; (xi) the Association in its stock form will
succeed to and take into account the earnings and profits or deficit in earnings
and profits, of the Association, in its mutual form, as of the date of
Conversion; (xii) the Association, immediately after Conversion, will succeed to
and take into account the bad debt reserve accounts of the Association, in
mutual form, and the bad debt reserves will have the same character in the hands
of the Association after Conversion as if no Conversion had occurred; and (xiii)
the creation of the Liquidation Account will have no effect on the Association's
taxable income, deductions or addition to reserve for bad debts either in its
mutual or stock form.
The opinion from Silver, Freedman & Taff, L.L.P. is based on, among other
things, certain assumptions, including the assumptions that the exercise price
of the Subscription Rights to purchase Holding Company Common Stock will be
approximately equal to the fair market value of that stock at the time of the
completion of the proposed Conversion. With respect to the Subscription Rights,
the Association will receive a letter from Keller (the "Keller Letter") which,
based on certain assumptions, will conclude that the Subscription Rights to be
received by Eligible Account Holders, Supplemental Eligible Account Holders and
other eligible subscribers do not have any economic value at the time of
distribution or at the time the Subscription Rights are exercised, whether or
not a Direct Community or Public Offering takes place.
The Association has also received an opinion of Silver, Freedman & Taff,
L.L.P. to the effect that, based in part on the Keller Letter: (i) no taxable
income will be realized by depositors as a result of the exercise of
non-transferable Subscription Rights to purchase shares of Holding Company
Common Stock at fair market value; (ii) no taxable income will be recognized by
borrowers, directors, officers and employees of the Association on the receipt
or exercise of Subscription Rights to purchase shares of Holding Company Common
Stock at fair market value; and (iii) no taxable
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income will be realized by the Association or Holding Company on the issuance of
Subscription Rights to eligible subscribers to purchase shares of Holding
Company Common Stock at fair market value.
Notwithstanding the Keller Letter, if the Subscription Rights are
subsequently found to have a fair market value and are deemed a distribution of
property, it is Silver, Freedman & Taff, L.L.P.'s opinion that gain or income
will be recognized by various recipients of the Subscription Rights (in certain
cases, whether or not the rights are exercised) and the Association and/or the
Holding Company may be taxable on the distribution of the Subscription Rights.
With respect to Ohio taxation, the Association has received an opinion from
Anness Gerlach & Williams to the effect that the Ohio tax consequences to the
Association, in its mutual or stock form, the Holding Company, eligible account
holders, parties receiving Subscription Rights, parties purchasing conversion
stock, and other parties participating in the Conversion will be the same as the
federal income tax consequences described above.
Unlike a private letter ruling, the opinions of Silver, Freedman & Taff,
L.L.P. and Anness Gerlach & Williams, as well as the Keller Letter, have no
binding effect or official status, and no assurance can be given that the
conclusions reached in any of those opinions would be sustained by a court if
contested by the IRS or the federal or Ohio tax authorities.
Approval, Interpretation, Amendment and Termination
Under the Plan of Conversion, the letter from the OTS giving approval
thereto, and applicable regulations, consummation of the Conversion is subject
to the satisfaction of the following conditions: (a) approval of the Plan of
Conversion by members of the Association casting at least a majority of the
votes eligible to be cast at the Special Meeting; (b) sale of all of the Common
Stock to be offered in the Conversion; and (c) receipt of favorable rulings or
opinions of counsel as to the federal and Ohio tax consequences of the
Conversion.
The Plan of Conversion may be substantively amended by the Boards of
Directors of the Association and the Holding Company with the concurrence of the
OTS. If the Plan of Conversion is amended, proxies which have been received
prior to such amendment will not be resolicited unless otherwise required by the
OTS. Also, as required by the federal regulations, the Plan of Conversion
provides that the transactions contemplated thereby may be terminated by the
Board of Directors of the Association alone at any time prior to the Special
Meeting and may be terminated by the Board of Directors of the Association at
any time thereafter with the concurrence of the OTS, notwithstanding approval of
the Plan of Conversion by the members of the Association at the Special Meeting.
All interpretations by the Association and the Holding Company of the Plan of
Conversion and of the order forms and related materials for the Subscription
Offering will be final, except as regards or affects the OTS.
Judicial Review
Section 5(i)(2)(B) of the Home Owners' Loan Act, as amended, 12 U.S.C.
ss.1464(i)(2)(B) and Section 563b.8(u) of the Rules and Regulations promulgated
thereunder (12 C.F.R. Section 563b.8(u)) provide: (i) that persons aggrieved by
a final action of the OTS which approves, with or without conditions, or
disapproves a plan of conversion, may obtain review of such final action only by
filing a written petition in the United States Court of Appeals for the circuit
in which the principal office or residence of such person is located, or in the
United States Court of Appeals for the District of Columbia, requesting that the
final action of the OTS be modified, terminated or set aside, and (ii) that such
petition must be filed within 30 days after publication of notice of such final
action in the Federal Register, or 30 days after the date of mailing of the
notice and proxy statement for the meeting of the converting institution's
members at which the conversion is to be voted on, whichever is later. The
notice of the Special Meeting of the Association's members to vote on the Plan
of Conversion described herein is included at the beginning of this Proxy
Statement. The statute and regulation referred to above should be consulted for
further information.
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DESCRIPTION OF THE STOCK CONTRIBUTION TO
THE HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NILES
FOUNDATION , INC.
Stock Contribution to the Charitable Foundation
General. As a reflection of the Association's long-standing commitment to
the local community, in 1998 the Association established The Home Federal
Savings and Loan Association of Niles Foundation, Inc., a private charitable
foundation organized under the laws of the State of Delaware. The Foundation was
established as a means of supporting the needs of the local community while
simultaneously increasing the visibility and reputation of the Association.
Under the Plan and subject to member approval, the Holding Company will
contribute to the Foundation 30,000 shares of its Common Stock. The Stock
Contribution will either be in the form of a direct contribution or a sale of
the shares for their aggregate par value ($.01 per share).
In the future, the Holding Company may make additional contributions to the
Foundation, although the Holding Company has no current plans regarding the
amount or timing of any such future contributions. The amount of future
contributions, if any, will be determined based upon, among other factors, an
assessment of the Holding Company's then current financial position, operations,
and prospects and on the need for charitable activities in the Association's
market area. Any such contributions, regardless of form, will result in an
increase in non-interest expense and thus a reduction in net earnings. In
addition, any contributions of authorized but unissued shares would dilute the
interests of outstanding shares. However, the Holding Company currently
anticipates that any contributions of shares by it to the Foundation will be
funded through shares repurchased in the open market. The Holding Company does
not intend to make any contributions to the Foundation which are not deductible
for Federal Income Tax purposes.
The Stock Contribution will be considered as a separate matter from the
proposal to approve the Plan of Conversion. If the Association's members approve
the Plan of Conversion, but not the Stock Contribution, the Association intends
to complete the Conversion without the Stock Contribution. Failure to approve
the Stock Contribution may materially affect the pro forma market value of the
Common Stock. If the resulting pro forma market value of the Common Stock (not
including the shares to be issued pursuant to the Stock Contribution) is less
than $____ million or more than $____ million (the "Estimated Valuation Range"),
or if the OTS otherwise requires a resolicitation, the Association will
establish a new Estimated Valuation Range and commence a resolicitation of
subscribers. In the event of a resolicitation, unless an affirmative response is
received within a specified period of time, all funds will be promptly returned
to investors, as described elsewhere herein. See "The Conversion -- Stock
Pricing and Number of Shares to be Issued" in the Prospectus.
Purpose of the Stock Contribution. The purpose of the Foundation is to
provide funding to support charitable purposes within the communities in which
the Association operates. The Association has long emphasized community lending
and community development activities and currently has a satisfactory rating
under the Community Reinvestment Act ("CRA"). The Foundation is a complement to
the Association's existing community activities, not a replacement for such
activities.
The Foundation is a means of supporting the needs of the local community
while simultaneously increasing the visibility and reputation of the
Association. The Holding Company and the Association believe that the funding of
the Foundation with Common Stock of the Holding Company is a means of
establishing a common bond between the Association and the communities in which
the Association operates thereby enabling such communities to share in the
potential growth and success of the Holding Company over the long-term. Although
the Stock Contribution will result in a reduction in the Holding Company's
conversion appraisal and pro forma capital (although not in its pro forma
capital per share), the Board believes that the Stock Contribution will enhance
the long term value of the Association's franchise by increasing customer
loyalty as well as the size of its customer base. The Board believes that
customer loyalty and community support are critical for the success of community
oriented institutions such as the Association.
The Board believes that the Stock Contribution will enable the Foundation
to support charitable activities during periods when the Holding Company may not
be in a position to support such activities. (Similarly, the Stock Contribution
would enable the Foundation to offset the impact of variations in contribution
levels by accumulating funds during periods of relatively large contributions
from the Holding Company and disbursing such funds during periods of relatively
small contributions.) In addition, the Board believes that the Stock
Contribution will have a highly beneficial public relations impact. Finally, the
Board believes that the Stock Contribution will facilitate the participation of
non-Holding Company personnel in charitable activities. The Board believes that
the Stock Contribution represents an opportunity to make a significant
charitable contribution which will benefit the Holding Company and the
Association at a time when they have adequate capital, they are not yet subject
to possible earnings pressure resulting from the Holding Company's status as a
public company and there is a need for charitable donations in the Association's
market area.
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Structure of the Foundation. The Foundation is a private foundation under
the Code. As a private foundation, the Foundation is required to distribute
annually in grants or donations at least 5% of its net investment assets. The
Foundation is dedicated to the promotion of charitable purposes within the
communities in which the Association operates, including, but not limited to,
providing grants or donations to support cultural activities, not-for-profit
medical facilities, elder and youth care, community groups and other types of
organizations or projects. While the Foundation is authorized to engage directly
in charitable activities, in order to limit overhead costs, the Foundation's
primary activity currently consists of making grants to other charitable
organizations.
The authority for the affairs of the Foundation is vested in the Board of
Trustees of the Foundation which is comprised of _______________,
__________________ and ________________. Although all of the Foundation's
initial trustees were selected by the Association, future Foundation trustees
may be nominated and elected only by its Board of Trustees. As a result, the
Board of Trustees is self-perpetuating. The Board of Trustees may be expanded
following the Conversion to include additional Association directors and other
community members as trustees; but it is currently anticipated that at least a
majority of the Foundation's Board of Trustees will consist of persons who are
then-current or former directors of the Association.
The Foundation's certificate of incorporation provides that the earnings of
the Foundation shall not result in any private benefit for its members,
directors or officers. In addition, it is anticipated that the Foundation will
adopt a conflicts of interest policy to protect against inappropriate insider
benefits. While these provisions would not prohibit the payment of reasonable
compensation for services rendered, the members of the Board of Trustees do not
currently receive fees for such service. Currently, the Foundation does not have
any paid employees.
The trustees are responsible for establishing and carrying out the policies
of the Foundation with respect to grants or donations by the Foundation,
consistent with the purposes for which the Foundation was established. The
trustees of the Foundation are also responsible for directing the activities of
the Foundation, and managing its assets.
While the Foundation does not currently intend to purchase any shares of
the Common Stock on the open market, it is authorized to do so. The OTS has
informed the Holding Company that any such purchases by the Foundation would be
deemed to be repurchases by the Holding Company for the purposes of the OTS
restrictions on post- conversion stock repurchases.
Under the order of the OTS approving the Association's conversion
application, all shares of Common Stock held by the Foundation, including those
acquired pursuant to the Stock Contribution, must be voted in the same ratio as
all other shares of the Holding Company's Common Stock on all proposals
considered by stockholders of the Holding Company; provided, however, that the
OTS will waive this voting restriction under certain circumstances if compliance
with the restriction would: (i) cause a violation of the law of the State of
Delaware and the OTS determines that federal law would not preempt the
application of the laws of the State of Delaware to the Foundation; (ii) cause
the Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Foundation; or (iii) cause the Foundation to be
subject to an excise tax under Section 4941 of the Code. In order for the OTS to
waive such voting restriction, the Holding Company's or the Foundation's legal
counsel must render an opinion satisfactory to OTS that compliance with the
voting restriction would have the effect described in clauses (i), (ii) or (iii)
above. Under those circumstances, the OTS will grant a waiver of the voting
restrictions upon submission of such legal opinion(s) by the Holding Company or
the Foundation. In the event that the OTS waives the voting restriction, the
trustees would direct the voting of the Common Stock held by the Foundation.
However, a condition to the OTS approval of the Conversion provides that in the
event such voting restriction is waived or becomes unenforceable, the Director
of the OTS, or his designees, at that time may impose conditions on the
composition of the board of trustees of the Foundation or such other conditions
or restrictions relating to the control of the Common Stock held by the
Foundation, any of which could limit the ability of the board of trustees of the
Foundation to control the voting of the Common Stock held by the Foundation. The
Holding Company has no current intention to seek such a waiver.
There are no agreements or understandings with trustees of the Foundation
regarding the exercise of control directly or indirectly, over the management or
policies of the Holding Company or the Association, including agreements related
to voting, acquisition or disposition of the Holding Company's stock. As
trustees of a nonprofit corporation, trustees of the Foundation are at all times
bound by their fiduciary duty to advance the Foundation's charitable goals, to
protect the assets of the Foundation and to act in a manner consistent with the
charitable purposes for which the Foundation is established.
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It is currently anticipated that the Foundation will adopt a policy
addressing affiliated transactions between the Foundation and the Holding
Company or the Association. Transactions between the Foundation and the
Association will comply with applicable provisions of Sections 23A and 23B of
the Federal Reserve Act, as amended and the OTS conflicts of interests rules.
Additionally, the Holding Company (but not the Association) may provide office
space and administrative support to the Foundation without charge provided that
such actions comply with applicable conflicts of interests restrictions.
The Stock Contribution. Under the terms of the Plan, the Holding Company
will contribute, either in the form of a donation in a sale for their aggregate
par value ($.01 per share), 30,000 shares to the Foundation, subject to
stockholder approval. Such Stock Contribution, once made, will not be
recoverable by the Holding or the Association. The Holding Company and the
Association determined to make the Stock Contribution with Common Stock rather
than cash because it desired to form a bond with its community in a manner that
would allow the community to share in the potential growth and success of the
Holding Company and the Association over the long term. The funding of the Stock
Contribution with stock also provides the Foundation with a potentially larger
endowment than if the Holding Company contributed cash to the Foundation since,
as a shareholder, the Foundation will share in the potential growth and success
of the Holding Company. As such, the Stock Contribution of stock to the
Foundation has the potential to provide a self-sustaining funding mechanism
which reduces the amount of cash that the Holding Company, if it were not making
the stock contribution, would have to contribute to the Foundation in future
years in order to maintain a level amount of charitable grants and donations.
One of the conditions imposed on the gift of Common Stock by the Holding
Company is that the amount of Common Stock that may be sold by the Foundation in
any one year shall not exceed 5% of the average market value of the assets held
by the Foundation, except where the board of directors of the Foundation, by
three-fourths vote, determines that the failure to sell an amount of common
stock greater than such amount would result in a long-term reduction of the
value of the Foundation's assets and as such would jeopardize the Foundation's
capacity to carry out its charitable purposes. While there may be greater risk
associated with a one-stock portfolio in comparison to a diversified portfolio,
the Holding Company believes any such risk is mitigated by the ability of the
Foundation's trustees to sell more than 5% of its stock in such circumstances.
Upon completion of the Conversion and the Stock Contribution, the Holding
Company would have __________, __________ and __________ shares issued and
outstanding at the minimum, midpoint and maximum of the Estimated Valuation
Range. Because the Holding Company will have an increased number of shares
outstanding, the voting and ownership interest of shareholders in the Holding
Company's common stock would be diluted by ___%, as compared to their interests
in the Holding Company if the Stock Contribution were not made. For additional
discussion of the dilutive effect, see "Comparison of Valuation and Pro Forma
Information With No Foundation" and "Pro Forma Data" in the Prospectus.
If the Stock Contribution is approved by the members, the Holding Company
will recognize a $300,000 expense (offset, in part, by a corresponding tax
deduction), during the quarter in which the Conversion is completed, which is
expected to be the fourth quarter of fiscal 1998. Assuming an initial
contribution of $300,000 of stock, the Holding Company estimates a net tax
effected expense of $___ million. Such expense will likely eliminate earnings in
the quarter recognized and have a material adverse impact on the Holding
Company's earnings for fiscal year 1998. If the Stock Contribution had been made
at April 30, 1998, the Association would have reported a net loss of $_______
for the four months ended April 30, 1998 rather than net income of $287,000. For
further discussion of the Foundation and its impact on purchasers in the
Conversion, see "Risk Factors - The Expense and Dilutive Effect of the Stock
Contribution to the Charitable Foundation" and "Pro Forma Data" in the
Prospectus.
Although the Stock Contribution will be accrued in the fourth quarter of
1998 as described above, such contribution may be paid at any time during the
twelve month period following the completion of the Conversion. The reason for
permitting the Holding Company to pay the Stock Contribution in more than one
tax year is that the five year tax carry forward period commences on the date of
payment rather than the date of accrual and thus that, by paying the initial
contribution over a more than one tax year, the Holding Company can lengthen the
period over which the Stock Contribution may be carried forward for tax
purposes. See "--Tax Considerations" below.
Because the funding of the Foundation will result in dilution, it reduced
the conversion appraisal by approximately $___ at the midpoint of the Estimated
Valuation Range. As a result, the pro forma capital of the Holding Company will
be $___ lower at the midpoint of the Estimated Valuation Range than it would
have been without the Foundation. However, because of the lower number of shares
which are being offered (as a result of the lower appraisal), per
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<PAGE>
share capital and earnings will be essentially identical. See "Comparison of
Valuation and Pro Forma Information with No Stock Contribution" in the
Prospectus.
Tax Considerations. The Holding Company has been advised by its special
counsel, Silver, Freedman & Taff, L.L.P., that the Foundation qualifies as a
501(c)(3) exempt organization under the Code, and is classified as a private
foundation rather than a public charity. The Holding Company has also received a
determination letter from the IRS to that effect. A private foundation typically
receives its support from one person or one corporation whereas a public charity
receives its support from the public. The effective date of the Foundation's
status as a Section 501(c)(3) organization was the date of its organization.
A legal opinion of the OTS which addresses the establishment of charitable
foundations by savings associations opines that as a general rule funds
contributed to a charitable foundation should not exceed the deductible
limitation set forth in the Code, and if an association's contributions exceed
the deductible limit, such action must be justified by the board of directors.
In addition, under Delaware law, the Holding Company is authorized by statute to
make charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must merely be within reasonable limits as to
amount and purpose to be valid. Under the Code, the Holding Company may deduct
up to 10% of its taxable income in any one year and any contributions made by
the Holding Company in excess of the deductible amount will be deductible for
federal tax purposes over each of the five succeeding taxable years. The Holding
Company and the Association believe that the conversion presents a unique
opportunity to make the Stock Contribution given the substantial amount of
additional capital being raised in the Conversion. In making such a
determination, the Holding Company and the Association considered the dilutive
impact of the Stock Contribution on the conversion appraisal. See "Comparison of
Valuation and Pro Forma Information with No Stock Contribution" in the
Prospectus. Based on such considerations, the Holding Company and Association
believe that the contribution to the Foundation in excess of the 10% annual
limitation is justified given the Association's capital position and its
earnings, the substantial additional capital being raised in the Conversion and
the potential benefits of the Foundation to the Association's community. In this
regard, assuming the sale of the Common Stock at the midpoint of the Estimated
Valuation Range, the Holding Company would have pro forma consolidated capital
of $____ million of the Association's pro forma tangible, core and risk-based
capital ratios would be ____%, ____% and ____%, respectively. See "Regulatory
Capital Compliance," "Capitalization," and "Comparison of Valuation and Pro
Forma Information with No Stock Contribution" in the Prospectus. Thus, the
amount of the contribution will not adversely impact the financial condition of
the Holding Company and the Association, and the Holding Company and the
Association therefore believe that the amount of the charitable contribution is
reasonable given the Holding Company and the Association's pro forma capital
positions. As such, the Holding Company and the Association believe that the
contribution does not raise safety and soundness concerns.
The Holding Company and the Association have received an opinion of Silver,
Freedman & Taff, L.L.P. that the Holding Company's contribution of its own stock
to the Foundation will not constitute an act of self-dealing, and that the
Holding Company will be entitled to a deduction in the amount of the $300,000,
subject to a limitation based on 10% of the Holding Company's annual taxable
income. The Holding Company, however, would be able to carry forward any unused
portion of the deduction for five years following the year in which the
contribution is made for federal and state tax purposes.
The Holding Company currently estimates that substantially all of the Stock
Contribution should be deductible. However, no assurances can be made that the
Holding Company will have sufficient pre-tax income over the periods following
the year in which the contributions are made to utilize fully the carryover
related to the excess contribution.
In cases of willful, flagrant or repeated acts or failures to act which
result in violations of the IRS rules governing private foundations, a private
foundation's status as a private foundation may be involuntarily terminated by
the IRS. In such event, the managers of a private foundation could be liable for
excise taxes based on such violations and the private foundation could be liable
for a termination tax under the Code. The Foundation's certificate of
incorporation provides that it shall have a perpetual existence. In the event,
however, the Foundation were subsequently dissolved as a result of a loss of its
tax exempt status, the Foundation would be required under the Code and its
articles of incorporation to distribute any assets remaining in the Foundation
at that time for one or more exempt purposes within the meaning of Section
501(c)(3) of the Code, or to distribute such assets to the federal government,
or to a state or local government, for a public purpose.
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As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant.
Regulatory Conditions Imposed on the Foundation. The Stock Contribution is
subject to the following conditions imposed by the OTS: (i) the Foundation will
be subject to examination by the OTS, at the Foundation's own expense; (ii) the
Foundation must comply with supervisory directives imposed by the OTS; (iii) the
Foundation will provide annual reports to the OTS describing grants made and
grant recipients; (iv) the Foundation will operate in accordance with written
policies adopted by the board of directors, including a conflict of interest
policy; (v) the Foundation will not engage in self-dealing and will comply with
all laws necessary to maintain its tax-exempt status; and (vi) any shares of
Common Stock of the Holding Company held by the Foundation must be voted in the
same ratio as all other shares of the Holding Company's Common Stock on all
proposals considered by stockholders of the Holding Company; provided, however,
that the OTS will waive this voting restriction under certain circumstances if
compliance with the voting restriction would: (a) cause a violation of the law
of the State of Delaware and the OTS determines the federal law does not preempt
the application of the laws of the State of Delaware to the Foundation; (b)
cause the Foundation to lose its tax-exempt status or otherwise have a material
and adverse tax consequence on the Foundation; or (c) cause the Foundation to be
subject to an excise tax under Section 4941 of the Code. In order for the OTS to
waive such voting restriction, the Holding Company's or the Foundation's legal
counsel must render an opinion satisfactory to OTS that compliance with the
voting restriction would have the effect described in clauses (a), (b) or (c)
above. Under those circumstances, the OTS will grant a waiver of the voting
restriction upon submission of such opinion(s) by the Holding Company or the
Foundation. There can be no assurances that either a legal or tax opinion
addressing these issues will be rendered, or if rendered, that the OTS will
grant an unconditional waiver of the voting restriction. In this regard, a
condition to the OTS approval of the Conversion provides that in the event such
voting restriction is waived or becomes unenforceable, the Director of the OTS,
or his designees, at that time may impose conditions on the composition of the
board of trustees of the Foundation to control the voting of Common Stock held
by the Foundation. In no event will the voting restriction survive the sale of
shares of the Common Stock held by the Foundation.
The Stock Contribution is subject to the approval of a majority of the
total outstanding votes of the Association's members eligible to be cast at the
Special Meeting. The Stock Contribution will be considered as a separate matter
from approval of the Plan of Conversion. If the Association's members approve
the Plan of Conversion, but not the Stock Contribution, the Association intends
to complete the Conversion without the Stock Contribution. Failure to approve
the Foundation may materially increase the pro forma market value of the Common
Stock being offered since the Estimated Valuation Range, as set forth herein,
takes into account the after-tax impact of the Stock Contribution.
See "Pro Forma Data" in the Prospectus.
ADDITIONAL INFORMATION
The information contained in the accompanying Prospectus, including a more
detailed description of the Plan of Conversion, consolidated financial
statements of the Association and a description of the capitalization and
business of the Association and the Holding Company, including the Association's
directors and executive officers and their compensation, the anticipated use of
the net proceeds from the sale of the Common Stock, the stock contribution to
the Foundation and a description of the Common Stock, is intended to help you
evaluate the Conversion and the establishment of the Foundation and is
incorporated herein by reference.
YOUR VOTE IS VERY IMPORTANT TO US. PLEASE TAKE A MOMENT NOW TO COMPLETE AND
RETURN YOUR PROXY CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED. YOU MAY STILL
ATTEND THE SPECIAL MEETING AND VOTE IN PERSON EVEN THOUGH YOU HAVE VOTED YOUR
PROXY. FAILURE TO SUBMIT A PROXY WILL HAVE THE SAME EFFECT AS VOTING AGAINST THE
CONVERSION AND THE STOCK CONTRIBUTION TO THE FOUNDATION.
11
<PAGE>
If you have any questions, please call our Information Center at (__)
_____ - ______.
IMPORTANT: YOU MAY BE ENTITLED TO VOTE IN MORE THAN ONE CAPACITY. PLEASE
SIGN, DATE AND PROMPTLY RETURN EACH PROXY CARD YOU RECEIVE.
----------
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
THE COMMON STOCK IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED
OR GUARANTEED.
12
<PAGE>
REVOCABLE PROXY
HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF NILES
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF HOME FEDERAL
SAVINGS AND LOAN ASSOCIATION OF NILES.
The undersigned member of Home Federal Savings and Loan Association of
Niles (the "Association") hereby appoints the Board of Directors of the
Association as proxies to cast all votes which the undersigned member is
entitled to cast at a Special Meeting of Members to be held at the main office
of the Association, located at 55 N. Main Street, Niles, Ohio, at the hour and
date stated in the Proxy Statement, and at any and all adjournments and
postponements thereof, and to act with respect to all votes that the undersigned
would be entitled to cast, if then personally present, in accordance with the
instructions on the reverse side hereof to vote FOR or AGAINST:
1) The adoption of the Plan of Conversion to convert the Association from a
federally chartered mutual savings association to a federally chartered
stock savings association, including the adoption of a federal stock
savings association charter and bylaws, with the simultaneous issuance
of its common stock to First Niles Financial, Inc., a Delaware
corporation (the "Company") and sale by the Company of shares of its
Common Stock; and
2) The contribution of 30,000 shares of Company Common Stock to The Home
Federal Savings and Loan Association of Niles Foundation, Inc. (the
"Foundation"), a private charitable foundation dedicated to the
promotion of charitable purposes within the community in which the
Association operates.
This proxy will be voted as directed by the undersigned member. UNLESS
CONTRARY DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR ADOPTION OF THE PLAN
OF CONVERSION AND IN FAVOR OF THE STOCK CONTRIBUTION TO THE FOUNDATION. In
addition, this proxy will be voted at the discretion of the Board of Directors
upon any other matter as may properly come before the Special Meeting.
The undersigned member may revoke this proxy at any time before it is voted
by delivering to the Secretary of the Association either by a written revocation
of the proxy or a duly executed proxy bearing a later date, or by appearing at
the Special Meeting and voting in person. The undersigned member hereby
acknowledges receipt of the Notice of Special Meeting and Proxy Statement.
(IMPORTANT: PLEASE VOTE, DATE AND SIGN ON REVERSE SIDE)
<PAGE>
HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF NILES
Please Mark Votes Below
Approval of the Plan of Conversion, as amended
Approval of the Plan of Conversion
FOR [ ] AGAINST [ ]
Approval of the Contribution to the Foundation
FOR [ ] AGAINST [ ]
DATE: ____________________, 1998
X _____________________________
X _____________________________
IMPORTANT: Please sign your name
exactly as it appears on this
proxy. Joint accounts need only
one signature. When signing as
an attorney, administrator,
agent, corporation, officer,
executor, trustee or guardian,
etc., please add your full title
to your signature.
NOTE: IF YOU RECEIVE MORE THAN ONE PROXY CARD, PLEASE SIGN AND RETURN ALL
CARDS IN THE ACCOMPANYING ENVELOPE.
EXHIBIT 99.3
STOCK ORDER FORM AND
ORDER FORM INSTRUCTIONS
<PAGE>
FIRST NILES FINANCIAL, INC.
Conversion Center
55 North Main Street
Niles, Ohio 44446
(XXX)-XXX-XXXX
STOCK ORDER FORM
- --------------------------------------------------------------------------------
Deadline: The Subscription Offering ends at 12:00 Noon, Eastern Time, on October
XX, 1998. Your original Stock Order Form and Certification Form, properly
executed and with the correct payment, must be received (not postmarked) at the
address on the top of this form, or at the Home Federal Savings and Loan office,
by the deadline, or it will be considered void. Faxes or copies of this form
will not be accepted.
- --------------------------------------------------------------------------------
(1) Number of Shares Price Per Share (2) Total Amount Due
- -------------------- --------------- --------------------
X $10.00 = $
The minimum number of shares that may be subscribed for is 25. The maximum
individual subscription is 15,000 shares. No person, together with associates of
and persons acting in concert with such person may purchase more than 30,000
shares of the Common Stock sold in the Conversion. There are additional purchase
limitations for associates and groups acting in concert, as defined in the
Prospectus.
- --------------------------------------------------------------------------------
Method of Payment
(3) [ ] Enclosed is a check, bank draft or money order payable to First Niles
Financial, Inc., for $_____________.
(4) [ ] I authorize Home Federal Savings and Loan Association of Niles to make
withdrawals from my Home Federal Savings certificate or savings
account(s) shown below, and understand that the amounts will not
otherwise be available for withdrawal:
Account Number(s) Amount(s)
___________________________ ________________
___________________________ ________________
___________________________ ________________
Total Withdrawal ________________
There is NO penalty for early withdrawal.
- --------------------------------------------------------------------------------
(5) [ ] Check here if your are a director, officer or employee of Home Federal
Savings and Loan Association of Niles or a member of such
person's immediate family (same household).
(6) [ ] Associate - Acting in Concert
Check here, and complete the reverse side of this form, if you or any
associates or persons acting in concert with you have submitted other
orders for shares in the Subscription Offering.
(7) Purchaser Information (check one)
a. [ ] Eligible Account Holder Check here if you were a depositor with $50.00
or more on deposit with Home Federal Savings and Loan Association of Niles
as of 3/31/97. Enter information below for all deposit accounts that you
had at Home Federal Savings and Loan Association on X/XX/XX.
b. [ ] Supplemental Eligible Account Holder - Check here if you were a
depositor with $50.00 or more on deposit with Home Federal Savings and Loan
Association of Niles as of xx/xx/xx but are not an Eligible Account Holder.
Enter information below for all deposit accounts that you have at Home
Federal Savings and Loan Association of Niles on xx/xx/xx.
c. [ ] Voting Member - Check here if you were a depositor of Home Federal
Savings and Loan Association as of xx/xx/xx, but are not an Eligible
Account Holder or a Supplemental Eligible Account Holder or were a borrower
of Home Federal Savings and Loan Association of Niles as of x/xx/98 whose
loan was in existence on xx/xx/xx, but are not an Eligible Account Holder
or a Supplemental Eligible Account Holder. Enter information below for all
deposit accounts and/or loan accounts that you had at Home Federal Savings
and Loan Association of Niles on x/xx/xx.
Account Title (Names on Accounts) Account Number
_____________________________________ _____________________
_____________________________________ _____________________
_____________________________________ _____________________
Please Note: Failure to list all of your accounts may result in the loss of part
or all of your subscription rights. (additional space on back of form)
- --------------------------------------------------------------------------------
<PAGE>
(8) Stock Registration - Please Print Legibly and Fill Out Completely
(Note: The Stock Certificate and all correspondence related to this stock
order will be mailed to the address provided below)
[ ]Individual [ ]Uniform Transfer to Minors [ ]Partnership
[ ]Joint Tenants [ ]Uniform Gift to Minors [ ]Individual Retirement
Account
[ ]Tenants in Common [ ]Corporation [ ]Fiduciary/Trust (Under
Agreement Dated_____)
- --------------------------------------------------------------------------------
Name Social Security or Tax I.D.
- --------------------------------------------------------------------------------
Name Social Security or Tax I.D.
- --------------------------------------------------------------------------------
Mailing Daytime
Address Telephone
- --------------------------------------------------------------------------------
Zip Evening
City State Code County Telephone
- --------------------------------------------------------------------------------
[ ] NASD Affiliation (This section only applies to those individuals who meet
the delineated criteria)
Check here if you are a member of the National Association of Securities
Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of the
immediate family of any such person to whose support such person contributes,
directly or indirectly, or the holder of an account in which an NASD member or
person associated with an NASD member has a beneficial interest. To comply with
conditions under which an exemption from the NASD's Interpretation With Respect
to Free-Riding and Withholding is available, you agree, if you have checked the
NASD affiliation box: (1) not to sell, transfer or hypothecate the stock for
a period of three months following the issuance and (2) to report this
subscription in writing to the applicable NASD member within one day of the
payment therefor.
- --------------------------------------------------------------------------------
Acknowledgment By signing below, I acknowledge receipt of the Prospectus dated
September XX, 1998 and understand I may not change or revoke my order once it is
received by First Niles Financial, Inc. I also certify that this stock order is
for my account and there is no agreement or understanding regarding any further
sale or transfer of these shares. Applicable regulations prohibit any persons
from transferring, or entering into any agreement directly or indirectly to
transfer, the legal or beneficial ownership of subscription rights or the
underlying securities to the account of another person. First Niles Financial,
Inc. will pursue any and all legal and equitable remedies in the event it
becomes aware of the transfer of subscription rights and will not honor orders
known by it to involve such transfer. Under penalties of perjury, I further
certify that: (1) the social security number or taxpayer identification number
given above is correct; and (2) I am not subject to backup withholding. You
must cross out this item, (2) above, if you have been notified by the Internal
Revenue Service that you are subject to backup withholding because of
under-reporting interest or dividends on your tax return. By signing below, I
also acknowledge that I have not waived any rights under the Securities Act of
1933 and the Securities Exchange Act of 1934.
THE COMMON SHARES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION
INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY.
Signature THIS FORM MUST BE SIGNED AND DATED TWICE: Here and on the
Certification Form. THIS ORDER IS NOT VALID IF THE STOCK ORDER FROM AND
CERTIFICATION FORM ARE NOT BOTH SIGNED. YOUR ORDER WILL BE FILLED IN ACCORDANCE
WITH THE PROVISIONS OF THE PROSPECTUS. An additional signature is required only
if payment is by withdrawal from an account that requires more than one
signature to withdraw funds.
Signature Date
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
Turn Page Over
FOR OFFICE Date Rec'd _____/___/____ Check # _____________
USE Amount $ ______________ Category _____________
Batch # ________ - _____________ Order # Deposit $ _____________
<PAGE>
First Niles Financial, Inc.
Stock Ownership Guide and Stock Order Form Instructions
Stock Order Form Instructions
- --------------------------------------------------------------------------------
Item 1 and 2 - Fill in the number of shares that you wish to purchase and the
total payment due. The amount due is determined by multiplying the number of
shares ordered by the subscription price of $10.00 per share. The minimum
purchase is 25 shares. The maximum purchase for any person is 15,000 shares;
provided, however that such shares when added to any exchange shares to which
such person may be entitled as a shareholder of the Savings Bank may not exceed
30,000 shares. There are additional purchase limitations for associates and
groups acting in concert as defined in the Prospectus. First Niles Financial,
Inc. reserves the right to reject the subscription of any order received in the
Direct Community Offering, if any, in whole or in part.
Item 3 - Payment for shares may be made in cash (only if delivered by you in
person), by check, bank draft or money order payable to First Niles Financial,
Inc. DO NOT MAIL CASH. Your funds will earn interest at Home Federal Savings and
Loan Association of Niles current passbook rate.
Item 4 - To pay by withdrawal from a savings account or certificate at Home
Federal Savings and Loan Association of Niles, insert the account number(s) and
the amount(s) you wish to withdraw from each account. If more than one signature
is required to withdraw, each must sign in the signature box on the front of
this form. To withdraw from an account with checking privileges, please write a
check. Home Federal Savings and Loan Association of Niles will waive any
applicable penalties for early withdrawal from certificate accounts. A hold will
be placed on the account(s) for the amount(s) you show. Payments will remain in
account(s) until the stock offering closes. If a partial withdrawal reduces the
balance of a certificate account to less than the applicable minimum, the
remaining balance will thereafter earn interest at the passbook rate.
Item 5 - Please check this box to indicate whether you are a director, officer
or employee of Home Federal Savings and Loan Associtaion of Niles or a member of
such person's immediate family
Item 6 - Please check this box if you or any associate (as defined on the
reverse side of the Stock Order Form) or person acting in concert with you has
submitted another order for shares and complete the reverse side of the Stock
Order Form.
Item 7 - Please check the appropriate box if you were:
a) A depositor with $50.00 or more on deposit at Home Federal
Savings and Loan Association of Niles as of March 31, 1997. Enter
information below for all deposit accounts that you had at Home
Federal on March 31, 1997.
b) A depositor with $50.00 or more on deposit at Home Federal
Savings and Loan Association of Niles as of XX XX, 1998, but is
not an Eligible Account Holder. Enter information below for all
deposit accounts that you had at Home Federal on XX XX, 1998.
c) A depositor at Home Federal Savings and Loan Association of Niles
as of ______ __, 1998, but are not an Eligible Account Holder or
Supplemental Eligible Account Holder or a borrower of Home
Federal as of _________, 199x whose loan continues to be
outstanding as of ______ __, 1998, but are not an Eligible
Account Holder or Supplemental Eligible Account Holder.
d) An officer, director, or employee of Home Federal Savings and
Loan Association of Niles
e) General Community
Item 8 - The stock transfer industry has developed a uniform system of
shareholder registrations that we will use in the issuance of First Niles
Financial, Inc. common stock. Please complete this section as fully and
accurately as possible, and be certain to supply your social security or Tax
I.D. number(s) and your daytime and evening phone numbers. We will need to call
you if we can not execute you order as given. If you have any questions
regarding the registration of your stock, please consult your legal advisor.
Subscription rights are not transferable. If you are a qualified member, to
protect your priority over other purchasers as described in the Prospectus, you
must take ownership in at least one of the account holder's names.
Stock Ownership Guide
- --------------------------------------------------------------------------------
Individual - The Stock is to be registered in an individual's name only. You may
not list beneficiaries for this ownership
Joint Tenants - Joint tenants with rights of survivorship identifies two or more
owners. When stock is held by joint tenants with rights of survivorship,
ownership automatically passes to the surviving joint tenant(s) upon the death
of any joint tenant. You may not list beneficiaries for this ownership.
Tenants in Common - Tenants in common may also identify two or more owners. When
stock is to be held by tenants in common, upon the death of one co-tenant,
ownership of the stock will be held by the surviving co-tenant(s) and by the
heirs of the deceased co-tenant. All parties must agree to the transfer or sale
of shares held by tenants in common. You may not list beneficiaries for this
ownership.
Uniform Gift to Minors - For residents of many states, stock may by held in the
name of a custodian for the benefit of a minor under the Uniform Gift to Minors
Act. For residents in other states, stock may be held in a similar type of
ownership under the Uniform Transfer to Minors Act of the individual state. For
either ownership, the minor is the actual owner of the stock with the adult
custodian being responsible for the investment until the child reaches legal
age. Only one custodian and one minor may be designated.
Instructions: On the first name line, print the first name, middle initial and
last name of the custodian, with the abbreviation "CUST" after the name. Print
the first name, middle initial and last name of the minor on the second name
line. Use the minor's social security number.
Corporation/Partnership - Corporation/Partnerships may purchase stock. Please
provide the Corporation/Partnership's legal name and Tax I.D. To have depositor
rights, the Corporation/Partnership must have an account in the legal name.
Please contact the Stock Information Center to verify depositor rights and
purchase limitations.
Individual Retirement Account - Individual Retirement Account ("IRA") holders
may make stock purchases from their deposits through a prearranged
"trustee-to-trustee" transfer. Stock may only be held in a self-directed IRA.
Home Federal Savings and Loan Association of Niles does not offer a
self-directed IRA. Please contact the Stock Information Center if you have any
questions about your IRA account.
Fiduciary/Trust - Generally, fiduciary relationships (such as Trusts, Estates,
Guardianships, etc.) are established under a form of trust agreement or pursuant
to a court order. Without a legal document establishing a fiduciary
relationship, your stock may not be registered in a fiduciary capacity.
Instructions: On the first name line, print the first name, middle initial and
last name of the fiduciary if the fiduciary is an individual. If the fiduciary
is a corporation, list the corporate title on the first name line. Following the
name, print the fiduciary title such as trustee, executor, personal
representative, etc. On the second name line, print the name of the maker ,
donor or testator or the name of the beneficiary. Following the name, indicate
the type of legal document establishing the fiduciary relationship (agreement,
court order, etc.). In the blank after "Under Agreement Dated", fill in the date
of the document governing the relationship. The date of the document need not be
provided for a trust created by a will.
EXHIBIT 99.4
CERTIFICATION
<PAGE>
Exhibit 99.4
CERTIFICATION
I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED, AND IS NOT GUARANTEED BY HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF NILES, OR BY THE FEDERAL GOVERNMENT.
If anyone asserts that this security is federally insured or guaranteed, or
is as safe as an insured deposit, I should call the Office of Thrift
Supervision, Central Regional Director, Ronald N. Karr (312) 917-5005.
I further certify that, before purchasing the common stock, par value $0.01
per share of First Niles Financial, Inc., the proposed holding company for Home
Federal Savings and Loan Association of Niles (the "Association"), I received a
prospectus dated ___________, 1998 (the "Prospectus").
The Prospectus that I received contains disclosure concerning the nature of
the security being offered and describes the risks involved in the investment,
including, but not limited to: vulnerability to changes in interest rates;
expense and dilutive effect of the stock contribution to the charitable
foundation; decreased return on average equity and increased expenses
immediately after conversion; competition; geographical concentration of loans;
certain anti-takeover provisions; voting control of shares by the board,
management and employee plans; low return of equity and low net interest margin;
ESOP compensation expense; absence of active market for common stock; risk of
delayed offering; dilutive effect of restricted stock plan and stock options;
restrictions on repurchase of shares; and possible year 2000 computer problems.
For a more detailed description of the risks involved in the offering, see
"Risk Factors" at pages __ through __ of the Prospectus.
In addition, the certificate of incorporation of the Company requires a
vote of 80% of stockholders to remove directors, to approve certain business
combinations or to amend the certificate of incorporation, which may have the
effect of discouraging a future takeover attempt of the Company. For additional
information, see pages ___ through ___ of the Prospectus.
NOTE: If the stock is to be held Signature: _________________________
jointly, both parties must
sign.
Signature: _________________________
Date: _________________
EXHIBIT 99.5
QUESTION AND ANSWER BROCHURE
<PAGE>
- --------------------
STOCK OFFERING
QUESTIONS
AND ANSWERS
- --------------------
First Niles Financial, Inc.
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL
AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK.
THE OFFER IS MADE ONLY BY THE PROSPECTUS.
<PAGE>
FACTS ABOUT CONVERSION
The Board of Directors of Home Federal Savings and Loan Association of Niles
("Home Federal") unanimously adopted a Plan of Conversion (the "Conversion") to
convert from a federally chartered mutual savings and loan association to a
federally chartered stock savings and loan association.
This brochure answers some of the most frequently asked questions about the
Conversion and about your opportunity to invest in First Niles Financial, Inc.,
(the "Holding Company"), the newly formed corporation that will serve as holding
company for Home Federal following the conversion.
Investment in the stock of First Niles Financial, Inc. involves certain risks.
For a discussion of these risks and other factors, including a complete
description of the offering, investors are urged to read the accompanying
Prospectus, especially the discussion under the heading "Risk Factors".
WHY IS HOME FEDERAL CONVERTING TO STOCK FORM?
- --------------------------------------------------------------------------------
The stock form of ownership is used by most business corporations and an
increasing number of savings institutions. Through the sale of stock, Home
Federal will raise additional capital enabling it to:
o support and expand its current financial and other services.
o allow customers and friends to purchase stock and share in the Holding
Company's and Home Federal's future.
WILL THE CONVERSION AFFECT ANY OF MY DEPOSIT ACCOUNTS OR LOANS?
- --------------------------------------------------------------------------------
No. The Conversion will have no effect on the balance or terms of any savings
account or loan, and your deposits will continue to be federally insured by the
Federal Deposit Insurance Corporation ("FDIC") to the maximum legal limit. Your
savings account is not being converted to stock.
WHO IS ELIGIBLE TO PURCHASE STOCK IN THE SUBSCRIPTION AND COMMUNITY OFFERINGS?
- --------------------------------------------------------------------------------
Certain past and present depositors of Home Federal, the Holding Company's
Employee Stock Ownership Plan and members of the general public.
HOW MANY SHARES OF STOCK ARE BEING OFFERED AND AT WHAT PRICE?
- --------------------------------------------------------------------------------
First Niles Financial, Inc. is offering up to 2,270,000 shares of common stock,
subject to adjustment as described in the Prospectus, at a price of $10.00 per
share through the Prospectus.
HOW MUCH STOCK MAY I BUY?
- --------------------------------------------------------------------------------
The minimum order is 25 shares. No person may purchase more than $150,000.00 of
common stock in the subscription offering and no person, together with
associates of and persons acting in concert with such person, may purchase more
than $300,000.00 of common shares.
DO MEMBERS HAVE TO BUY STOCK?
- --------------------------------------------------------------------------------
No. However, the Conversion will allow Home Federal's depositors an opportunity
to buy stock and become charter shareholders of the holding company for the
local financial institution with which they do business.
HOW DO I ORDER STOCK?
- --------------------------------------------------------------------------------
You must complete the enclosed Stock Order Form and Certification Form.
Instructions for completing your Stock Order Form and Certification Form are
contained in this packet. Your order must be received by 12:00 noon on October
xx, 1998.
HOW MAY I PAY FOR MY SHARES OF STOCK?
- --------------------------------------------------------------------------------
First, you may pay for stock by check, cash or money order. Interest will be
paid by Home Federal on these funds at the passbook rate, which is currently X%
per annum, from the day the funds are received until the completion or
termination of the Conversion. Second, you may authorize us to withdraw funds
from your Home Federal savings account or certificate of deposit for the amount
of funds you specify for payment. You will not have access to these funds from
the day we receive your order until completion or termination of the Conversion.
<PAGE>
CAN I PURCHASE SHARES USING FUNDS IN MY HOME FEDERAL IRA ACCOUNT?
- --------------------------------------------------------------------------------
Federal regulations do not permit the purchase of conversion stock from your
existing Home Federal IRA account. To accommodate our depositors, we have made
arrangements with an outside trustee to allow such purchases. Please call our
Stock Information Center for additional information.
WILL THE STOCK BE INSURED?
- --------------------------------------------------------------------------------
No. Like any other common stock, the Holding Company's stock will not be
insured.
WILL DIVIDENDS BE PAID ON THE STOCK?
- --------------------------------------------------------------------------------
The Board of Directors of the Holding Company will consider whether to pay a
cash dividend in the future, subject to regulatory limits and requirements. No
decision has been made as to the amount or timing of such dividends, if any.
HOW WILL THE STOCK BE TRADED?
- --------------------------------------------------------------------------------
The Holding Company's stock is expected to trade on The Nasdaq Stock Market.
However, no assurance can be given that an active and liquid market will
develop.
ARE OFFICERS AND DIRECTORS OF PEOPLES FEDERAL PLANNING TO PURCHASE STOCK?
- --------------------------------------------------------------------------------
Yes! Home Federal's officers and directors plan to purchase, in the aggregate,
$1,500,000 worth of stock or approximately 7.5% of the stock offered at the
midpoint of the offering range.
MUST I PAY A COMMISSION?
- --------------------------------------------------------------------------------
No. You will not be charged a commission or fee on the purchase of shares in the
Conversion.
SHOULD I VOTE?
- --------------------------------------------------------------------------------
Yes. Your "YES" vote is very important!
PLEASE VOTE, SIGN AND RETURN ALL PROXY CARDS!
WHY DID I GET SEVERAL PROXY CARDS?
- --------------------------------------------------------------------------------
If you have more than one account, you could receive more than one proxy card,
depending on the ownership structure of your accounts.
HOW MANY VOTES DO I HAVE?
- --------------------------------------------------------------------------------
Your proxy card(s) show(s) the number of votes you have. Every depositor
entitled to vote may cast one vote for each $100, or fraction thereof, on
deposit as of the voting record date up to 1,000 votes.
MAY I VOTE IN PERSON AT THE SPECIAL MEETING?
- --------------------------------------------------------------------------------
Yes, but we would still like you to sign and mail your proxy today. If you
decide to revoke your proxy you may do so by giving notice at the special
meeting.
FOR ADDITIONAL INFORMATION YOU MAY CALL OUR STOCK INFORMATION CENTER BETWEEN
9:00 A.M. AND 5:00 P.M. MONDAY THROUGH FRIDAY.
- --------------------------------------------------------------------------------
STOCK INFORMATION CENTER (XXX) XXX-XXXX
- --------------------------------------------------------------------------------
First Niles Financial, Inc.
55 North Main Street
Niles, Ohio 44446
Phone (xxx) xxx-xxxx
EXHIBIT 99.6
ADVERTISING, TRAINING AND COMMUNITY
INFORMATIONAL MEETING MATERIALS
<PAGE>
September XX, 1998
Dear Member:
We are pleased to announce that Home Federal Savings and Loan
Association of Niles ("Home Federal") is converting from a federally chartered
mutual savings and loan association to a federally chartered stock savings and
loan association (the "Conversion"). In conjunction with the Conversion, First
Niles Financial, Inc., the newly-formed corporation that will serve as holding
company for Home Federal, is offering shares of common stock in a subscription
offering and community offering to our depositors and to our Employee Stock
Ownership Plan pursuant to a Plan of Conversion.
To accomplish this Conversion, we need your participation in an
important vote. Enclosed is a proxy statement describing the Plan of Conversion
and your voting and subscription rights. First Niles Financial, Inc. Plan of
Conversion has been approved by the Federal Deposit Insurance Corporation and
now must be approved by you. YOUR VOTE IS VERY IMPORTANT.
Enclosed, as part of the proxy material, is your proxy card located
behind the window of your mailing envelope. This proxy should be signed and
returned to us prior to the Special Meeting scheduled on October XX, 1998.
Please take a moment to sign the enclosed proxy card and return it to us in the
postage-paid envelope provided. FAILURE TO VOTE HAS THE SAME EFFECT AS VOTING
AGAINST THE CONVERSION.
The Board of Directors of Home Federal feel that the Conversion will
offer a number of advantages, such as an opportunity for depositors and
customers of Home Federal to become shareholders. Please remember:
o Your accounts at Home Federal will continue to be insured up to the
maximum legal limit by the Federal Deposit Insurance Corporation
("FDIC").
o There will be no change in the balance, interest rate, or maturity of
any deposit accounts because of the Conversion.
o Members have a right, but no obligation, to buy stock before it is
offered to the public.
o Like all stock, stock issued in this offering will not be insured by
the FDIC.
Enclosed is a prospectus containing a complete discussion of the stock
offering. We urge you to read these materials carefully. If you are interested
in purchasing the common stock of First Niles Financial, Inc., you must submit
your Stock Order Form and Certification Form, and payment prior to 12:00 noon
October XX, 1998.
If you have additional questions regarding the stock offering, please
call us at (330) XXX-XXXX, Monday through Friday from 9:00 a.m. to 5:00 p.m., or
stop by the Stock Information Center located at 55 North Main Street in Niles,
Ohio.
Sincerely,
William L.Stephens
President and Chief Executive Officer
THE SHARES OF COMMON STOCK BEING OFFERED IN THIS OFFERING ARE NOT SAVINGS
ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE BANK INSURANCE FUND OR THE SAVINGS ASSOCIATION INSURANCE FUND
OR ANY OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
<PAGE>
October _____, 1998
Dear Member:
We are pleased to announce that Home Federal Savings and Loan
Association of Niles is converting from a federally chartered mutual savings and
loan association to a federally chartered stock savings and loan association
(the "Conversion"). In conjunction with the Conversion, First Niles Financial,
Inc., the newly formed corporation that will serve as holding company for Home
Federal, is offering shares of common stock in a subscription offering and
community offering.
Unfortunately, First Niles Financial, Inc. is unable to either offer or
sell its common stock to you because the small number of eligible subscribers in
your jurisdiction makes registration or qualification of the common stock under
the securities laws of your jurisdiction impractical, for reasons of cost or
otherwise. Accordingly, this letter should not be considered an offer to sell or
a solicitation of an offer to buy the common stock of First Niles Financial,
Inc.
However, as a member of Home Federal Savings and Loan Association of
Niles, you have the right to vote on the Plan of Conversion at the Special
Meeting of Members to be held on October XX, 1998. Therefore, enclosed is a
proxy card, a Proxy Statement (which includes the Notice of the Special
Meeting), Prospectus (which contains information incorporated into the Proxy
Statement) including a complete discussion of the offering and a return envelope
for your proxy card.
I invite you to attend the Special Meeting on October XX, 1998.
However, whether or not you are able to attend, please complete the enclosed
proxy card and return it in the enclosed envelope.
Sincerely,
William L. Stephens
President and Chief Executive Officer
<PAGE>
September XX, 1998
Dear Prospective Investor:
We are pleased to announce that Home Federal Savings and Loan
Association of Niles, ("Home Federal") is converting from a federally chartered
mutual savings and loan association to a federally chartered stock savings and
loan association (the "Conversion"). In conjunction with the Conversion, First
Niles Financial, Inc., the newly formed corporation that will serve as holding
company for Home Federal, is offering shares of common stock in a subscription
offering and community offering. The sale of stock in connection with the
Conversion will enable Home Federal to raise additional capital to support and
enhance its current operations.
We have enclosed the following materials that will help you learn more
about the merits of First Niles Financial, Inc.'s, common stock as an
investment. Please read and review the materials carefully.
PROSPECTUS: This document provides detailed information about
operations at Home Federal and a complete discussion on the proposed
stock offering.
QUESTIONS AND ANSWERS: Key questions and answers about the stock
offering are found in this pamphlet.
STOCK ORDER FORM & CERTIFICATION FORM: This form is used to purchase
stock by returning it with your payment in the enclosed business reply
envelope. All individuals and entities, registered as the Stock
Certificate, must sign the attached Certification Form. The deadline
for ordering stock is 12:00 noon., October xx, 1998.
We invite our loyal customers and local community members to become
charter shareholders of First Niles Financial Inc.. Through this offering you
have the opportunity to buy stock directly from First Niles Financial, Inc.,
without a commission or a fee. The board of directors and senior management of
Home Federal fully support the stock offering.
If you have additional questions regarding the Conversion and stock
offering, please call us at (XXX) XXX-XXXX, Monday through Friday from 9:00 a.m.
to 5:00 p.m. or stop by the Stock Information Center located at 55 North Main
Street, Niles, Ohio.
Sincerely,
William L. Stephens
President and Chief Executive Officer
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL
AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK.
THE OFFER IS MADE ONLY BY THE PROSPECTUS.
<PAGE>
[CHARLES WEBB & COMPANY LETTERHEAD AND LOGO]
To Members and Friends of
First Niles Financial, Inc.
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Charles Webb & Company, a member of the National Association of Securities
Dealers, Inc. ("NASD"), is assisting Home Federal Savings and Loan Association
of Niles ("Home Federal ") in its conversion from a federally chartered mutual
savings and loan association to a federally chartered stock savings and loan
association and the concurrent offering of shares of common stock by First Niles
Financial, Inc. (the "Holding Company"), the newly formed corporation that will
serve as holding company for Home Federal following the conversion.
At the request of the Holding Company, we are enclosing materials explaining
this process and your options, including an opportunity to invest in shares of
the Holding Company's common stock being offered to customers and the community
through October XX, 1998. Please read the enclosed offering materials carefully
including the prospectus for a complete discussion of the offering. The Holding
Company has asked us to forward these documents to you in view of certain
requirements of the securities laws in your state.
If you have any questions, please visit our Stock Information Center at 55 North
Main Street, Niles, Ohio or feel free to call the Stock Information Center at
(XXX) XXX-XXXX.
Very truly yours,
Charles Webb & Company
<PAGE>
STOCK GRAM
We are pleased to announce that Home Federal Savings and Loan Association of
Niles, ("Home Federal") is offering shares of common stock in a subscription and
community Offering. The sale of stock in connection with the offering will
enable Home Federal to raise additional capital to support and enhance its
current franchise.
We previously mailed to you a Prospectus providing detailed information about
Home Federal's operations and the proposed stock offering. We urge you to read
this carefully.
We invite our loyal customers and community members to become shareholders of
First Niles Financial, Inc. (the proposed Holding Company for Home Federal
Savings and Loan Association of Niles). If you are interested in purchasing the
common stock of First Niles Financial, Inc., you must submit your Stock Order
Form, Certification Form and payment prior to 12:00 noon, Niles, Ohio Time, on
October xx, 1998.
Should you have additional questions regarding the stock offering or need
additional materials, please call the Stock Information Center at (xxx) xxx-xxxx
or stop by the Stock Information Center at 55 North Main Street in Niles, Ohio.
The shares of common stock being offered are not savings accounts or deposits
and are not insured by the Federal Deposit Insurance Corporation, the Bank
Insurance Fund or any other governmental agency. This is not an offer to sell or
a solicitation of an offer to buy stock. The offer is made only by the
Prospectus.
<PAGE>
PROXY GRAM
We recently forwarded to you a proxy statement and related materials regarding a
proposal to convert First Niles Financial, Inc., from a federally chartered
mutual savings and loan association to a federally chartered stock savings and
loan association.
Your vote on our Plan of Conversion has not yet been received. Failure to Vote
has the Same Effect as Voting Against the Conversion.
Your vote is important to us, and we, therefore, are requesting that you sign
the enclosed proxy card and return it promptly in the enclosed postage-paid
envelope.
Voting for the Conversion does not obligate you to purchase stock or affect the
terms or insurance on your accounts.
The Board of Directors unanimously recommend you vote "FOR" the Conversion.
FIRST NILES FINANCIAL, Inc.
Niles, Ohio
William L. Stephens
President and Chief Executive Officer
- --------------------------------------------------------------------------------
If you mailed the proxy, please accept our thanks and disregard this request.
For further information call xxx-xxx-xxxx.
The shares of common stock being offered are not savings accounts or deposits
and are not insured by the Federal Deposit Insurance Corporation, the Bank
Insurance Fund or any other governmental agency. This is not an offer to sell or
a solicitation of an offer to buy stock. The offer is made only by the
Prospectus.
EXHIBIT 99.7
LETTER OF KELLER & COMPANY, INC.
WITH RESPECT TO SUBSCRIPTION RIGHTS
<PAGE>
July 9, 1998
The Board of Directors
Home Federal Savings and Loan Association of Niles
55 N. Main Street
Niles, Ohio 44446
Re: Subscription Rights - Conversion of Home Federal Savings and Loan
Association of Niles
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Gentlemen:
The purpose of this letter is to provide an opinion of the value of the
subscription rights of the "to be issued" common stock of First Niles Financial,
Inc. (the "Corporation"), Niles, Ohio in regard to the conversion of Home
Federal Savings and Loan Association of Niles ("Home Federal" or the
"Association") from a federal-chartered mutual savings and loan association to a
federal-chartered stock savings and loan association.
Because the Subscription Rights to purchase shares of Common Stock in First
Niles Financial, Inc., which are to be issued to the depositor of Home Federal
Savings and Loan Association of Niles, and the other members of the Association
and will be acquired by such recipients without cost, will be nontransferable
and of short duration and will afford the recipients the right only to purchase
shares of Common Stock at the same price as will be paid by members of the
general public in a Direct Community Offering, we are of the opinion that:
(1) The Subscription Rights will have no ascertainable fair market value,
and;
(2) The price at which the Subscription Rights are exercisable will not be
more or less than the fair market value of the shares on the date of
the exercise.
Further, it is our opinion that the Subscription Rights will have no economic
value on the date of distribution or at the time of exercise, whether or not a
community offering takes place.
Sincerely,
KELLER & COMPANY, INC.
/s/ Michael R. Keller
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Michael R. Keller
President
