<PAGE>
Filed pursuant to Rule 424(b)(3)
SEC File No. 333-63099
PROSPECTUS
FIRST PLACE FINANCIAL CORP.
(Proposed Holding Company for First Federal
Savings and Loan Association of Warren)
9,077,065 Shares of Common Stock
First Place Financial Corp. (the "Company"), a Delaware corporation, is
offering up to 9,077,065 shares of its common stock, par value $.01 per share
(the "Common Stock"), in connection with the conversion of First Federal Savings
and Loan Association of Warren (the "Association") from a federally-chartered
mutual savings and loan association to a federally-chartered stock savings and
loan association and the issuance of the Association's capital stock to the
Company pursuant to the Association's plan of conversion (the "Plan" or "Plan of
Conversion"). The simultaneous conversion of the Association to stock form, the
issuance of the Association's stock to the Company and the offer and sale of the
Common Stock by the Company are herein referred to as the "Conversion." In
certain circumstances, the Company may increase the amount of Common Stock
offered hereby up to 10,438,625 shares. See Footnote 4 to the table below.
(continued on following page)
---------------------
FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE FOR COMMON STOCK, PLEASE
CALL THE CONVERSION CENTER AT (330) 373-6022.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" ON PAGES 16 THROUGH 25.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION ("SEC"), THE OFFICE OF THRIFT SUPERVISION ("OTS") OR ANY
OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, OR ANY OTHER AGENCY,
NOR HAS SUCH COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE BANK INSURANCE FUND ("BIF") OR
THE SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC") OR ANY OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY
THE COMPANY OR ASSOCIATION. THE COMMON STOCK IS SUBJECT TO INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL INVESTED.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
ESTIMATED UNDERWRITING
COMMISSIONS AND OTHER FEES ESTIMATED NET
SUBSCRIPTION PRICE(1) AND EXPENSES(2) PROCEEDS(3)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share $ 10.00 $ 0.27 $ 9.73
- -------------------------------------------------------------------------------------------------------------
Midpoint Per Share $ 10.00 $ 0.25 $ 9.75
- -------------------------------------------------------------------------------------------------------------
Maximum Per Share $ 10.00 $ 0.23 $ 9.77
- -------------------------------------------------------------------------------------------------------------
Total Minimum(1) $ 67,091,350 $1,811,000 $ 65,280,350
- -------------------------------------------------------------------------------------------------------------
Total Midpoint(1) $ 78,931,000 $1,947,000 $ 76,984,000
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Total Maximum(1) $ 90,770,650 $2,082,000 $ 88,688,650
- -------------------------------------------------------------------------------------------------------------
Total Maximum, as adjusted(4) $104,386,250 $2,082,000 $102,304,250
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by Keller &
Company, Inc. ("Keller") dated August 14, 1998 and updated October 23, 1998,
which states that the aggregate estimated pro forma market value of the
Common Stock being issued in the Conversion ranged from $72.3 million to
$97.8 million with a midpoint of $85.0 million taking into account the
contribution to the First Federal of Warren Community Foundation of an
amount of Common Stock equal to approximately 7.7% of the Common Stock sold
in the Conversion (the "Valuation Range"). The independent appraisal of
Keller is based upon estimates and projections that are subject to change
and the valuation must not be construed as a recommendation as to the
advisability of purchasing the Common Stock nor an assurance that a
purchaser of Common Stock will thereafter be able to sell the Common Stock
at prices within the Valuation Range. Based on the Valuation Range, the
Board of Directors of the Company and the Board of Directors of the
Association established an estimated price range of the Common Stock being
offered for sale in the Conversion within the Valuation Range of $67.1
million to $90.8 million (the "Estimated Price Range") or between 6,709,135
and 9,077,065 shares of Common Stock issued at the $10.00 per share price
(the "Purchase Price") to be paid for each share of Common Stock subscribed
for or purchased in the Offerings. See "The Conversion--Stock Pricing."
(2) Consists of the estimated costs to the Association and the Company arising
from the Conversion, including estimated fixed expenses of approximately
$1.1 million, and marketing fees to be paid to Charles Webb & Company
("Webb"), a Division of Keefe, Bruyette & Woods, Inc. ("KBW"), estimated to
be between $711,000 and $983,000 at the minimum and maximum of the Estimated
Price Range, respectively. See "The Conversion--Marketing and Underwriting
Arrangements." The actual fees and expenses may vary from the estimates.
See "Pro Forma Data" for the assumptions used to arrive at these estimates.
(3) Actual net proceeds may vary substantially from estimated amounts depending
upon the number of shares sold in the Offerings and other factors. Includes
the purchase of shares of Common Stock by the First Federal Savings and Loan
Association of Warren Employee Stock Ownership Plan and related trust (the
"ESOP") which is intended to be funded by a loan to the ESOP from the
Company or from a third party, which will be deducted from the Company's
stockholders' equity. See "Use of Proceeds" and "Pro Forma Data."
(4) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the Purchase Price, without resolicitation of
subscribers or any right of cancellation, due to regulatory considerations,
changes in market conditions or general financial and economic conditions.
See "Pro Forma Data" and "The Conversion--Stock Pricing." For a discussion
of the distribution and allocation of the additional shares, if any, see
"The ConversionSubscription Offering and Subscription Rights," "--Community
Offering" and "--Limitations on Common Stock Purchases."
------------------------
CHARLES WEBB & COMPANY
A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
------------------------
The date of this Prospectus is November 12, 1998.
<PAGE>
(continued from previous page)
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK IN A SUBSCRIPTION
OFFERING (THE "SUBSCRIPTION OFFERING") HAVE BEEN GRANTED IN THE FOLLOWING ORDER
OF PRIORITY TO: (1) THE ASSOCIATION'S ELIGIBLE ACCOUNT HOLDERS (DEFINED AS
HOLDERS OF DEPOSIT ACCOUNTS TOTALING $50 OR MORE AS OF MARCH 31, 1997); (2) THE
COMPANY'S AND ASSOCIATION'S TAX-QUALIFIED EMPLOYEE BENEFIT PLANS (COLLECTIVELY,
THE "EMPLOYEE PLANS"), INCLUDING THE ESOP WHICH INTENDS TO SUBSCRIBE FOR UP TO
8% OF THE COMMON STOCK ISSUED IN CONNECTION WITH THE CONVERSION (INCLUDING
SHARES ISSUED TO THE FIRST FEDERAL OF WARREN COMMUNITY FOUNDATION (THE
"FOUNDATION")); (3) THE ASSOCIATION'S SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS
(DEFINED AS HOLDERS OF DEPOSIT ACCOUNTS TOTALING $50 OR MORE AS OF SEPTEMBER 30,
1998); AND (4) OTHER MEMBERS OF THE ASSOCIATION (DEFINED AS DEPOSITORS OF THE
ASSOCIATION AS OF OCTOBER 31, 1998, THE VOTING RECORD DATE (THE "VOTING RECORD
DATE") FOR THE SPECIAL MEETING (AS DEFINED HEREIN), AND BORROWERS WITH LOANS
OUTSTANDING AS OF SEPTEMBER 8, 1998, OTHER THAN THOSE MEMBERS WHO OTHERWISE
QUALIFY AS ELIGIBLE ACCOUNT HOLDERS AND SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS).
SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE. PERSONS FOUND TO BE TRANSFERRING
SUBSCRIPTION RIGHTS WILL BE SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE
FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OTS. Concurrently, and subject
to the prior rights of holders of subscription rights, the Company is offering
the shares of Common Stock not subscribed for in the Subscription Offering for
sale in a community offering to certain members of the general public (the
"Community Offering") with a preference given to natural persons residing in
Trumbull and Mahoning Counties, Ohio (the Association's "Local Community") (such
natural persons herein referred to as "Preferred Subscribers"). Shares not
subscribed for in the Subscription and Community Offerings will be offered to
certain members of the general public in a syndicated community offering (the
"Syndicated Community Offering") (the Subscription Offering, Community Offering
and the Syndicated Community Offering are referred to collectively as the
"Offerings"). For a description of limitations on the amount of Common Stock
that can be purchased in the Offerings, see "Summary of the Conversion and the
OfferingsPurchase Limitations" and "The Conversion--Subscription Offering and
Subscription Rights," "--Community Offering" and "--Limitation on Common Stock
Purchases."
The Plan provides that the Association and the Company create the
Foundation, which has been incorporated under Delaware law as a non-stock
corporation, and fund the Foundation with shares of Common Stock contributed by
the Company from authorized but unissued shares, in an amount equal to 7.7% of
the number of shares of Common Stock sold in the Conversion. For a discussion
of the Foundation and its effects on the Conversion, including if the members do
not approve the establishment of the Foundation, see "Risk Factors--Effects of
the Establishment of the Charitable Foundation," "Pro Forma Data," and "The
Conversion--Establishment of the Charitable Foundation."
The Association has engaged Webb to consult with and advise the Company and
the Association in the Offerings and Webb has agreed to use its best efforts to
assist the Company with the solicitation of subscriptions and purchase orders
for shares of Common Stock in the Offerings. Webb is not obligated to take or
purchase any shares of Common Stock in the Offerings. The Association and the
Company will pay a fee to Webb which will be based on the aggregate Purchase
Price of the Common Stock sold in the Offerings. The Company and the
Association have agreed to indemnify Webb against certain liabilities arising
under the Securities Act of 1933, as amended (the "Securities Act"). See "The
Conversion--Marketing and Underwriting Arrangements."
THE SUBSCRIPTION AND COMMUNITY OFFERINGS WILL TERMINATE AT 12:00 NOON,
EASTERN TIME, ON DECEMBER 16, 1998 (THE "EXPIRATION DATE") UNLESS EXTENDED BY
THE ASSOCIATION AND THE COMPANY, WITH THE APPROVAL OF THE OTS, IF NECESSARY.
Orders submitted are irrevocable until the completion of the Conversion;
provided, that if the Conversion is not completed within 45 days after the close
of the Subscription and Community Offerings, unless such period has been
extended with the consent of the OTS, if necessary, all subscribers will have
their funds returned promptly with interest, and all withdrawal authorizations
will be cancelled. Such extensions may not go beyond December 22, 2000. See
"The Conversion--Procedure for Purchasing Shares." The Company and the
Association reserve the right, in their absolute discretion, to accept or
reject, in whole or in part, any and all subscriptions in the Community Offering
and the Syndicated Community Offering, either at the time of receipt of an order
or as soon as practicable following the termination of the Offerings.
The Company has received conditional approval to have its Common Stock
quoted on the Nasdaq National Market under the symbol "FPFC" upon completion of
the Conversion. Prior to this offering there has not been a public market for
the Common Stock, and there can be no assurance that an active and liquid
trading market for the Common Stock will develop, or that the Common Stock will
trade at or above the Purchase Price. To the extent an active and liquid
trading market does not develop, the liquidity and market value of the Common
Stock may be adversely affected. See "Risk Factors--Absence of Market for
Common Stock" and "Market for the Common Stock."
2
<PAGE>
EXPLANATORY NOTE: This Prospectus contains certain forward looking
statements consisting of estimates with respect to the financial condition,
results of operations and business of the Company and the Association.
Prospective investors are cautioned that such forward looking statements are not
guarantees of future performance and are subject to various factors which could
cause actual results to differ materially from these estimates. These factors
include changes in general, economic and market conditions, and the development
of an interest rate environment that adversely affects the interest rate spread
or other income anticipated from the Company's and the Association's operations
and investments. See "Risk Factors" for a discussion of other factors that
might cause actual results to differ from such estimates.
[MAP GOES HERE]
3
<PAGE>
SUMMARY OF THE CONVERSION AND THE OFFERINGS
The following summary of the Conversion and the Offerings is qualified in
its entirety by the more detailed information appearing elsewhere in this
Prospectus.
<TABLE>
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Risk Factors...................... A purchase of the Common Stock involves a substantial degree of
risk. Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members and other prospective investors should
carefully consider the matters set forth under "Risk Factors."
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT INSURED OR
GUARANTEED BY THE FDIC, BIF OR SAIF OR ANY OTHER GOVERNMENT AGENCY
AND ARE NOT GUARANTEED BY THE COMPANY OR ASSOCIATION.
First Place Financial Corp........ The Company is a Delaware corporation organized at the direction
of the Association to become a savings and loan holding company
and own all of the Association's capital stock to be issued upon
its conversion from mutual form to stock form. To date, the
Company has not engaged in any business. Its executive office is
located at 185 East Market Street, Warren, Ohio 44482 and its
telephone number is (330) 373-1221.
First Federal Savings and Loan
Association of Warren........... The Association is a federally-chartered mutual savings
association. At June 30, 1998, the Association had total assets
of $609.4 million, total deposits of $435.5 million and retained
earnings of $59.4 million. The Association is located at 185 East
Market Street, Warren, Ohio 44482 and its telephone number is
(330) 373-1221.
The Association is a community-oriented savings institution whose
principal business consists of accepting retail deposits from the
general public in its primary market area and investing those
deposits, together with funds generated from operations and
borrowings, primarily in one- to four-family residential mortgage
loans, automobile and home equity loans and, to a much lesser
extent, multi-family and commercial real estate loans,
construction loans, commercial loans and passbook savings loans.
The Association also invests in government issued and sponsored
mortgage-backed securities, securities issued by the U.S.
Government and agencies thereof, and other investments permitted
by applicable laws and regulations. See "Business of the
Association."
The Conversion and
Reasons for Conversion.......... The Board of Directors of the Association has adopted a Plan of
Conversion pursuant to which the Association intends to convert to
a federally-chartered stock savings association and issue all of
its stock to the Company. The Company is offering shares of its
Common Stock in the Offerings in connection with the Association's
Conversion. Management believes the Conversion offers a number of
advantages, including: (i) providing a larger capital base on
which to operate; (ii) providing enhanced future access to capital
markets; (iii) providing enhanced ability to diversify into other
financial services related activities; and (iv) providing enhanced
ability to increase its presence in the communities it serves
through the acquisition or establishment of branch offices or the
acquisition of other financial institutions. The Conversion and
the Offerings are subject to approval of members of the
Association eligible to vote at a special meeting to be held on
December 22, 1998 (the "Special Meeting"). The OTS issued an
approval letter on November 12, 1998. See "The Conversion--General."
</TABLE>
4
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First Federal of Warren Community
Foundation...................... The Association's Plan of Conversion provides for the
establishment of a charitable foundation in connection with the
Conversion. The Foundation, which has been incorporated under
Delaware law as a non-stock corporation, will be funded concurrent
with the sale of Common Stock of the Company with a contribution
by the Company equal to approximately 7.7% of the Common Stock
sold in the Conversion. The authority for the affairs of the
Foundation is vested in the Board of Directors of the Foundation,
three of whom are existing Directors of the Company and the
Association and one of whom is not a director, officer or employee
of the Company or the Association. See "The Conversion--
Establishment of the Charitable Foundation."
Terms of the Offering............. The shares of Common Stock to be sold in connection with the
Conversion are being offered at a fixed price of $10.00 per share
in the Subscription Offering pursuant to subscription rights in
the following order of priority to: (i) Eligible Account Holders;
(ii) the ESOP; (iii) Supplemental Eligible Account Holders; and
(iv) Other Members. Concurrently, and subject to the prior rights
of holders of subscription rights, any shares of Common Stock not
subscribed for in the Subscription Offering are being offered in
the Community Offering at $10.00 per share to certain members of
the general public with a preference given to Preferred
Subscribers. Subscription rights will expire if not exercised by
12:00 Noon, Eastern time, on December 16, 1998, unless extended by
the Association and the Company, with the approval of the OTS, if
necessary. See "The Conversion--Subscription Offering and
Subscription Rights" and "--Community Offering."
Procedure for Ordering Shares
and Prospectus Delivery.......... Forms to order Common Stock offered in the Subscription Offering
and the Community Offering will only be distributed with or
preceded by a Prospectus. Any person receiving a stock order form
and certification form who desires to subscribe for shares must do
so prior to the Expiration Date by delivering to the Association a
properly executed stock order form and certification form together
with full payment. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE
REVOKED OR MODIFIED WITHOUT THE CONSENT OF THE ASSOCIATION. To
ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
no prospectus will be mailed any later than five days prior to the
Expiration Date or hand delivered any later than two days prior to
such date. The Company and the Association are not obligated to
accept subscriptions not submitted on an original stock order
form. See "The Conversion--Procedure for Purchasing Shares."
IMPORTANT: TO ENSURE THAT YOUR SUBSCRIPTION RIGHTS ARE PROPERLY
IDENTIFIED, YOU MUST LIST ALL QUALIFYING DEPOSIT ACCOUNTS AND
LOANS, AS OF THE RESPECTIVE QUALIFYING DATES ON THE STOCK ORDER
FORM. PERSONS WHO DO NOT LIST ALL QUALIFYING DEPOSIT ACCOUNTS AND
LOANS MAY BE SUBJECT TO REDUCTION OR REJECTION OF THEIR
SUBSCRIPTION.
Form of Payment for Shares........ Payment for subscriptions may be made: (i) in cash (if delivered
in person); (ii) by check, bank draft or money order; or (iii) by
authorization of withdrawal from deposit accounts maintained at
the Association. No wire transfers will be accepted. See "The
Conversion--Procedure for Purchasing Shares."
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5
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Nontransferability of
Subscription Rights............. The subscription rights of Eligible Account Holders, Supplemental
Eligible Account Holders, Other Members and the Employee Plans,
including the ESOP, are nontransferable. THE ASSOCIATION AND THE
COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES
(INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE
TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY
THEM TO INVOLVE THE TRANSFER OF SUCH RIGHTS. Certificates
representing shares of Common Stock purchased in the Subscription
Offering must be registered in the name of the Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member, as
the case may be. Joint stock registration will be allowed only if
the qualifying deposit account is so registered. See "The
Conversion--Restrictions on Transfer of Subscription Rights and
Shares."
Purchase Limitations.............. No Eligible Account Holder, Supplemental Eligible Account Holder
or Other Member may purchase in the Subscription Offering more
than $250,000 of Common Stock. No person, together with
associates and persons acting in concert with such person, may
purchase in the Community Offering and the Syndicated Community
Offering more than $250,000 of Common Stock. No person, together
with associates and persons acting in concert with such person,
may purchase in the aggregate more than 1% of the Common Stock
offered (exclusive of any increase in Common Stock sold by 15%
above the Maximum of the Estimated Price Range). However, the
ESOP may purchase up to 10% of the Common Stock issued, including
shares issued to the Foundation. Pursuant to the Plan of
Conversion, it is the intent of the ESOP to purchase 8% of the
Common Stock issued, including shares issued to the Foundation.
The minimum purchase is 25 shares of Common Stock. At any time
during the Conversion and without approval of the Association's
depositors or a resolicitation of subscribers, the Association and
the Company may, in their sole discretion, decrease the maximum
purchase limitation below $250,000 of Common Stock; however, such
amount may not be reduced to less than 0.10% of the Common Stock
offered. Additionally, at any time during the Conversion, the
Association and the Company may, in their sole discretion,
increase the maximum purchase limitation in the Subscription and
Community Offerings to an amount in excess of $250,000 up to a
maximum of 5% of the shares to be issued in the Conversion.
Similarly, the 1% overall maximum purchase limitation may be
increased up to 5% of the total shares of Common Stock offered in
the Conversion.
Securities Offered and Purchase
Price............................ The Company is offering between 6,709,135 and 9,077,065 shares of
Common Stock at a Purchase Price of $10.00 per share. The maximum
of the Estimated Price Range may be increased by up to 15% and the
maximum number of shares of Common Stock to be offered may be
increased up to 10,438,625 shares due to regulatory considerations
and changes in market or general financial or economic conditions.
See "The Conversion--Stock Pricing" and "--Number of Shares to Be
Issued."
Appraisal......................... The Purchase Price per share has been fixed at $10.00. The total
number of shares to be issued in the Conversion is based upon an
independent appraisal prepared by Keller, dated as of August 14,
1998, and updated October 23, 1998, which states that the
estimated pro forma market value of the Common Stock ranged from
$72.3 million to $97.8 million, taking into account shares to be
issued to the Foundation. The final aggregate value will be
determined at the time of closing of the Offerings
</TABLE>
6
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<TABLE>
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and is subject to change due to changing market conditions and other
factors. See "The Conversion--Stock Pricing."
Use of Proceeds................... The Company will use 50% of the net proceeds of the Offerings to
purchase all of the outstanding common stock of the Association to
be issued in the Conversion. A portion of net proceeds retained
by the Company will be used for general business activity,
including a loan of funds by the Company directly to the ESOP to
enable the ESOP to purchase up to 8% of the stock issued in
connection with the Conversion, including shares issued to the
Foundation. The Company intends to initially invest the remaining
net proceeds primarily in mortgage-backed and mortgage-related
securities and investment grade debt and equity securities. The
Association intends to utilize net proceeds from the sale of its
stock to the Company to expand its lending and investment
activities and to enhance customer services. The Association
currently intends to utilize the net proceeds received for general
business purposes, including investment in loans and securities,
as well as the possible expansion of its facilities and operations
through marketing, business development, or the acquisition or
establishment of branch offices, although the Company and the
Association have no current arrangements, understanding or
agreements regarding any such transactions. The Association
anticipates that the portion of the net proceeds received by the
Association will initially be invested in overnight funds and
short-term investments with maturities of up to three years. See
"Use of Proceeds."
Dividend Policy................... Upon Conversion, the Board of Directors of the Company will have
the authority to declare dividends on the Common Stock, subject to
statutory and regulatory requirements. In the future, the Board
of Directors of the Company may consider a policy of paying cash
dividends on the Common Stock. However, no decision has been made
with respect to such dividends, if any. See "Dividend Policy."
Benefits of the Conversion to
Management...................... Among the benefits to the Association and the Company anticipated
from the Conversion is the ability to attract and retain personnel
through the use of stock options and other stock related benefit
programs. Subsequent to the Conversion, the Company intends to
adopt a Stock Program (as defined herein) and Stock Option Plan
(as defined herein) for the benefit of directors, officers and
employees. If such benefit plans are adopted within one year
after the Conversion, such plans will be subject to stockholders'
approval at a meeting of stockholders which may not be held
earlier than six months after the Conversion.
</TABLE>
7
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<TABLE>
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The following table presents the dollar value and percentage of
the shares to be issued in the Offerings, including shares issued
to the Foundation, of the shares to be allocated under the ESOP to
all eligible employees over a ten year period in accordance with
the requirements of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the proposed Stock Program and
Stock Option Plan that the Company intends to adopt within one
year of the consummation of the Conversion, subject to shareholder
approval.
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
ESTIMATED ISSUED, INCLUDING
VALUE OF SHARES ISSUED
SHARES (1) TO THE FOUNDATION(1)
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<S> <C> <C>
ESOP........................ $ 7,820,000 7.3%
Stock Awards (2)............ 3,910,000 3.6
Stock Options............... - (3) 9.1
----------- ----
Total.................... $11,730,000 20.0%
=========== ====
______________
(1) Assumes shares are allocated to participants at $10.00 per
share, that shares are sold in the Offerings at the maximum
of the Valuation Ranges and that all Stock Options granted
are exercised.
(2) Any Common Stock awarded under the Stock Program will be
awarded at no cost to the recipients.
(3) Stock Options will be granted with an exercise price equal to
the fair market value of Common Stock on the day of grant.
Recipients of stock options realize value only in the event
of an increase in the price of the Common Stock of the Company
following the date of grant of the stock options.
</TABLE>
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Additionally, certain officers of the Company and the Association
will be provided with employment agreements or change in control
agreements which provide such officers with employment rights
and/or payments upon their termination of service following a
change in control. For a further description of the Stock Program
and Stock Option Plan, see "Risk FactorsStock Based Benefits to
Management, Employment Contracts and Change in Control Payments"
and "Management of the AssociationBenefit Plans." See "Management
of the Association--Subscriptions of Executive Officers and
Directors," "Restrictions on Acquisition of the Company and the
Association--Restrictions in the Company's Certificate of
Incorporation and Bylaws," and "The Conversion--Establishment of the
Charitable Foundation."
Expiration Date for the
Subscription and
Community Offerings.............. The Expiration Date for the Subscription and Community Offerings
is 12:00 Noon, Eastern time on December 16, 1998, unless extended
by the Association and the Company. See "The
Conversion--Subscription Offering and Subscription Rights."
Market for Stock.................. As a mutual institution, the Association has never issued capital
stock and, consequently, there is no existing market for the
Common Stock. The Company has received approval to have its
Common Stock quoted on the Nasdaq National Market under the symbol
"FPFC" subject to the completion of the Conversion and compliance
with certain conditions, including the presence of at least three
registered and active market makers. KBW has advised the Company
that it intends to make a market in the Common Stock following
completion of the Conversion, but it is under no obligation to do
so. See "Market for the Common Stock."
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8
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No Board Recommendations.......... The Association's Board of Directors and the Company's Board of
Directors are not making any recommendations to depositors or
other potential investors regarding whether such persons should
purchase the Common Stock. An investment in the Common Stock must
be made pursuant to each investor's evaluation of his or her best
interests.
Conversion Center................. If you have any questions regarding Conversion, please call the
Conversion Center at (330) 373-6022.
Voting Control of Officers
and Directors.................. Directors and executive officers of the Association and the
Company expect to purchase approximately 4.9% or 3.7% of shares of
Common Stock outstanding, based upon the minimum and the maximum
of the Estimated Price Range, including shares issued to the
Foundation, respectively. Additionally, assuming the
implementation of the ESOP, Stock Program and Stock Option Plan,
directors, executive officers and employees have the potential to
control the voting of approximately 24.5% or 23.3% of the Common
Stock at the minimum and the maximum of the Estimated Price Range,
respectively, including shares issued to the Foundation, on a
fully diluted basis. See "The Conversion--Establishment of the
Charitable Foundation," "Management of the Association--
Subscriptions of Executive Officers and Directors," and
"Restrictions on Acquisition of the Company and the
Association--Restrictions in the Company's Certificate of
Incorporation and Bylaws."
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9
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SELECTED FINANCIAL AND OTHER DATA OF THE ASSOCIATION
Set forth below are selected financial and other data of the Association.
These financial data are derived in part from, and should be read in conjunction
with, the Financial Statements of the Association and Notes thereto presented
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets............................................... $609,398 $548,870 $523,131 $481,192 $480,317
Loans receivable, net...................................... 353,012 285,212 254,435 239,459 217,574
Securities available for sale(1)........................... 211,185 202,677 202,176 148,273 158,243
Securities held to maturity(1)............................. 28,295 44,875 47,918 74,006 81,707
Deposits................................................... 435,462 412,934 392,350 377,644 382,710
Federal Home Loan Bank advances............................ 44,820 58,398 76,078 52,436 47,265
Repurchase agreements...................................... 60,430 16,000 - - 5,062
Total retained earnings.................................... 59,357 53,747 48,823 46,209 40,107
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income...................................... $ 42,482 $ 38,413 $ 36,436 $ 34,362 $ 32,208
Total interest expense..................................... 25,512 22,929 21,858 20,150 18,558
-------- -------- -------- -------- --------
Net interest income.................................... 16,970 15,484 14,578 14,212 13,650
Provision for loan losses.................................. 1,779 590 238 313 360
-------- -------- -------- -------- --------
Net interest income after provision for loan losses.... 15,191 14,894 14,340 13,899 13,290
Total noninterest income................................... 1,751 444 1,220 565 1,240
Total noninterest expense.................................. 10,372 11,898 9,149 8,396 8,039
-------- -------- -------- -------- --------
Income before income tax............................... 6,570 3,440 6,411 6,068 6,491
Provision for income tax................................... 2,498 1,216 2,262 2,039 2,249
-------- -------- -------- -------- --------
Net income............................................. $ 4,072 $ 2,224 $ 4,149 $ 4,029 $ 4,242
======== ======== ======== ======== ========
</TABLE>
(Continued on following page)
10
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(2):
PERFORMANCE RATIOS:
Return on average assets................................................... 0.70% 0.42% 0.82% 0.84% 0.87%
Return on average retained earnings........................................ 7.16 4.26 8.34 8.75 10.39
Average retained earnings to average assets................................ 9.71 9.81 9.83 9.57 8.41
Retained earnings to total assets at end of period......................... 9.48 9.78 9.84 9.82 9.01
Net interest rate spread(3)................................................ 2.55 2.52 2.48 2.49 2.39
Net interest margin(4)..................................................... 3.00 2.97 2.94 2.88 2.70
Average interest-earning assets to average interest-bearing liabilities.... 110.46 109.90 109.94 109.08 108.07
Total noninterest expense to average assets................................ 1.77 2.23 1.81 1.75 1.66
Efficiency ratio(5)........................................................ 55.40 74.70 57.91 56.82 53.99
Net interest income to operating expenses.................................. 163.60 130.13 159.35 169.27 169.79
REGULATORY CAPITAL RATIOS(6):
Tangible capital........................................................... 9.52% 9.80% 9.79% 9.81% 8.05%
Core capital............................................................... 9.52 9.80 9.79 9.81 8.05
Total risk-based capital................................................... 21.84 23.85 25.64 24.87 22.50
ASSET QUALITY DATA AND RATIOS:
Total nonperforming loans(7)............................................... $ 2,143 $ 2,480 $ 1,126 $ 992 $ 731
Real estate owned, net..................................................... - - - - 140
Total nonperforming assets(8).............................................. 2,143 2,480 1,126 992 871
Allowance for loan losses.................................................. 3,027 1,723 1,259 1,186 1,034
Nonperforming loans as a percent of total loans (7)(9)..................... 0.60% 0.86% 0.44% 0.41% 0.33%
Nonperforming assets as a percent of total assets(8)....................... 0.35 0.45 0.22 0.21 0.18
Allowance for loan losses as a percent of loans(9)......................... 0.85 0.60 0.49 0.49 0.47
Allowance for loan losses as a percent of nonperforming loans(7)........... 141.25 69.48 111.81 119.56 141.45
</TABLE>
___________________
(1) The Association adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," ("SFAS No. 115"), as of June 30, 1994.
(2) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average daily balances during the indicated periods and are annualized
where appropriate.
(3) The net interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(5) The efficiency ratio represents the ratio of noninterest expense divided by
the sum of net interest income and noninterest income.
(6) For definitions and further information relating to the Association's
regulatory capital requirements, see "Regulation--Federal Savings
Institution Regulation--Capital Requirements." See "Regulatory Capital
Compliance" for the Association's pro forma capital levels as a result of
the Offerings.
(7) Nonperforming loans consist of all non-accrual loans and all other loans 90
days or more past due. It is the Association's policy to generally cease
accruing interest on all loans 90 days or more past due when, in
management's opinion, the collection of all or a portion of the loan
principal has become doubtful. See "Business of the Association--Delinquent
Loans, Classified Assets and Real Estate Owned."
(8) Nonperforming assets consist of nonperforming loans and real estate owned,
net ("REO").
(9) Loans represent loans receivable, net, excluding the allowance for loan
losses.
11
<PAGE>
SUMMARY OF RECENT DEVELOPMENTS
The selected financial and operating data presented below at September 30,
1998 and for the three month periods ended September 30, 1998 and 1997 are
derived from unaudited financial data, but, in the opinion of management reflect
all adjustments (consisting only of normal recurring adjustments) which are
necessary to present fairly the results for such interim periods. The results
of operations for the three months ended September 30, 1998 are not necessarily
indicative of the results of operations that may be expected for the year ended
June 30, 1999.
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, 1998 JUNE 30, 1998
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL DATA:
Total assets................................ $628,664 $609,398
Loans receivable, net....................... 384,856 353,012
Securities available for sale............... 200,492 211,185
Securities held to maturity................. 27,039 28,295
Deposits.................................... 437,382 435,462
Federal Home Loan Bank advances............. 57,694 44,820
Repurchase agreements....................... 60,430 60,430
Total retained earnings..................... 61,105 59,357
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1998 1997
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Total interest income....................... $ 11,215 $ 10,194
Total interest expense...................... 6,700 6,094
-------- --------
Net interest income.................... 4,515 4,100
Provision for loan losses................... 183 245
-------- --------
Net interest income after provision
for loan losses................... 4,332 3,855
Total noninterest income.................... 458 558
Total noninterest expense................... 2,900 2,649
-------- --------
Income before income tax............... 1,890 1,764
Provision for income tax.................... 643 498
-------- --------
Net income............................. $ 1,247 $ 1,266
======== ========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1998 1997
------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA (1):
PERFORMANCE RATIOS:
Return on average assets.................................... 0.81% 0.91%
Return on average retained earnings......................... 8.21 9.14
Average retained earnings to average assets................. 9.86 9.93
Retained earnings to total assets at end of period.......... 9.72 9.74
Net interest rate spread (2)................................ 2.55 2.58
Net interest margin (3)..................................... 3.03 3.04
Average interest-earning assets to
average interest-bearing liabilities................... 110.89 110.45
Total noninterest expense to average assets................. 1.88 1.94
Efficiency ratio (4)........................................ 54.10 53.58
Net interest income to operating expenses................... 155.67 154.76
REGULATORY CAPITAL RATIOS (5):
Tangible capital............................................ 9.43% 9.77%
Core capital................................................ 9.43 9.77
Total risk-based capital.................................... 21.00 23.37
ASSET QUALITY DATA AND RATIOS:
Total nonperforming loans (6)............................... $ 1,289 $ 2,324
Real estate owned, net...................................... - 115
Total nonperforming assets (7).............................. 1,289 2,439
Allowance for loan losses................................... 3,143 1,841
Nonperforming loans as a percent of total loans (6)(8)...... 0.33% 0.66%
Nonperforming assets as a percent of total assets (7)....... 0.21 0.40
Allowance for loan losses as a percent of loans (8)......... 0.81 0.52
Allowance for loan losses as a percent of
nonperforming loans (6).................................. 243.83 79.22
</TABLE>
__________
(1) Asset Quality Ratios and Regulatory Capital ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average daily balances during the indicated periods and are annualized
where appropriate.
(2) The net interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-earning liabilities.
(3) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(4) The efficiency ratio represents the ratio of noninterest expense divided by
the sum of net interest income and noninterest income, net of security
gains.
(5) For definitions and further information relating to the Association's
regulatory capital requirements, see "Regulation--Federal Savings
Institution RegulationCapital Requirements." See "Regulatory Capital
Compliance" for the Association's pro forma capital levels as a result of
the Offerings.
(6) Nonperforming loans consist of all non-accrual loans and all other loans
90 days or more past due. It is the Association's policy to generally cease
accruing interest on all loans 90 days or more past due when, in
management's opinion, the collection of all or a portion of the loan
principal has become doubtful. See "Business of the Association--Delinquent
Loans, Classified Assets and Real Estate Owned."
(7) Nonperforming assets consist of nonperforming loans and REO.
(8) Loans represent loans receivable, net, excluding the allowance for loan
losses.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE 30, 1998
Total assets at September 30, 1998 were $628.7 million compared to
$609.4 million at June 30, 1998, an increase of $19.3 million. The primary
factor in this increase was a $31.9 million increase in loans receivable, net
from $353.0 million at June 30, 1998 to $384.9 million at September 30, 1998,
due primarily to expansion into Mahoning County, and was partially offset by a
$10.7 million decrease in securities available for sale from $211.2 million at
June 30, 1998 to $200.5 million at September 30, 1998 as a result of funding
loan growth with proceeds from maturing securities and principal repayments.
Total deposits of the Association increased by $1.9 million from
$435.5 million at June 30, 1998 to $437.4 million at September 30, 1998 due
principally to an increase in NOW accounts as a result of the expansion into
Mahoning County. Federal Home Loan Bank ("FHLB") advances increased by
$12.9 million from $44.8 million at June 30, 1998 to $57.7 million at
September 30, 1998. The Association used the new advances to fund loan growth
during the three months ended September 30, 1998.
Total retained earnings at September 30, 1998 were $61.1 million compared
to $59.4 million at June 30, 1998, an increase of $1.7 million, or 2.9%, due to
net earnings of $1.2 million for the three months ended September 30, 1998 and a
$500,000 increase in the value of securities available for sale, net of tax.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND SEPTEMBER 30, 1997
General. Net income for the three months ended September 30, 1998 was
$1.25 million compared to $1.27 million for the three months ended September 30,
1997. Net interest income increased $415,000 or 10.1% for the three months
ended September 30, 1998 compared to the same period in 1997, due to the
increase in the average balance of interest-earning assets and the change in the
composition of assets and liabilities.
Average interest-earning assets for the three months ended September 30,
1998 increased 10.9% to $605.2 million, due primarily to loan growth by
expansion into Mahoning County, and average interest-bearing liabilities
increased 10.4% to $545.7 million compared to the three months ended
September 30, 1997 as a result of increased average deposits and borrowings used
to fund the loan growth. The net interest margin decreased only one basis point
from 3.04% for the three months ended September 30, 1997 to 3.03% for the three
months ended September 30, 1998. The growth in net interest income during the
three months ended September 30, 1998 compared to the same period in 1997 was
the result of growth in interest-earning assets.
Noninterest income for the three months ended September 30, 1998 decreased
$100,000, due to the sale of debt securities during the same period in 1997.
Noninterest expense increased $251,000 in the three months ended September 30,
1998 from the three months ended September 30, 1997, attributable to the
increase in salaries and wages and other operating expenses.
Interest Income. Interest income for the three months ended September 30,
1998 was $11.2 million compared to $10.2 million for the three months ended
September 30, 1997, an increase of $1.0 million or 10%. The increase in
interest income was primarily the result of growth in average interest-earning
assets from $546.2 million for the three months ended September 30, 1997 to
$605.2 million for the three months ended September 30, 1998. The yield on
interest-earning assets for the three months ended September 30, 1998 decreased
to 7.40% as compared to 7.46% for the same period in 1997, which partially
offset the increase in interest income due to volume.
Interest Expense. Interest expense for the three months ended
September 30, 1998 was $6.7 million as compared to $6.1 million for the three
months ended September 30, 1997, an increase of $606,000 or 9.9%. The increase
in interest expense was primarily the result of growth in average interest-
bearing liabilities from $494.5 million for the three months ended September 30,
1997 to $545.7 million for the three months ended September 30, 1998. The yield
on interest-bearing liabilities for the three months ended September 30, 1998
decreased to 4.86% compared to 4.88% for the same period in 1997, which
partially offset the increase in interest expense due to volume.
14
<PAGE>
Provision for Loan Losses. The Association's provision for loan losses for
the three months ended September 30, 1998 was $183,000, compared to $245,000 for
the three months ended September 30, 1997. The amount of the provision for loan
losses is based upon management's periodic analysis of the adequacy of the
allowance for loan losses. The change in the provision for loan losses is due
to a decrease in the level of charge-offs for the three months ended
September 30, 1998 compared to the same period in 1997. Charge-offs reduce the
amount of loan loss allowance recorded on the balance sheet and generally
necessitate that the Association set aside additional funds to replace the
allowance through the loan loss provision.
Noninterest Income. Noninterest income for the three months ended
September 30, 1998 was $458,000 compared to $558,000 for the three months ended
September 30, 1997, a decrease of $100,000, or 17.9%. The Association sold debt
securities and recorded a $100,000 gain on sale for the three months ended
September 30, 1997. No securities were sold during the three months ended
September 30, 1998.
Noninterest Expense. Noninterest expense was $2.9 million for the three
months ended September 30, 1998 compared to $2.6 million for the three months
ended September 30, 1997, a $300,000, or 9.5%, increase. Compensation and
benefits expense increased to $1.5 million for the three months ended
September 30, 1998 compared to $1.4 million for the three months ended
September 30, 1997, a $100,000, or 7.1% increase. The increase was due to the
addition of approximately twelve full-time equivalent employees over the year,
in part to implement the expansion into Mahoning County. The employees were
added to facilitate the loan production process as evidenced by the 29% increase
in loan volume for the three months ended September 30, 1998 as compared to the
three months ended September 30, 1997. Other operating expenses increased to
$608,000 for the three months ended September 30, 1998 compared to $420,000 for
the same period in 1997, an increase of $188,000 or 44.8%. $110,000 of the
increase in other operating expenses is related to an advertising and
promotional campaign targeting customers of competing institutions, as well as
stationery and supplies expenditures. The Association purchases its stationery
and other supplies in bulk in amounts that are expected to last four to six
months; therefore, such expenses are not regularly incurred on a quarterly
basis.
Income Taxes. Income taxes for the three months ended September 30, 1998
were $643,000 compared to $498,000 for the three months ended September 30,
1997, an increase of $145,000 or 29.1%.
15
<PAGE>
RISK FACTORS
The following special considerations, in addition to those discussed
elsewhere in this Prospectus, should be considered by investors in deciding
whether to purchase the Common Stock offered hereby.
SENSITIVITY TO INCREASES IN INTEREST RATES
The Association's profitability, like that of most financial institutions,
is dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and securities, and its interest expense on interest-bearing liabilities, such
as its deposits and borrowed funds. Accordingly, the Association's results of
operations and financial condition are largely dependent on movements in market
interest rates and its ability to manage its assets and liabilities in response
to such movements.
At June 30, 1998, the Association had $185.5 million of long-term, fixed-
rate mortgage loans, or 51% of the Association's total loan portfolio, all of
which the Association maintains in its portfolio. At that date, $111 million,
or 30.5% of the Association's total loan portfolio consisted of adjustable-rate
mortgage ("ARM") loans. As of June 30, 1998, $60.6 million, or 25.3%, of the
Association's securities had adjustable rates and its securities portfolio had a
weighted average life of 6.4 years. The Association's certificates of deposit
with maturities of less than one year totaled $167.8 million, and certificates
of deposit over $100,000 ("jumbo certificates of deposit") totaled
$53.2 million. Such jumbo certificates of deposit tend to be less stable sources
of funding as compared to money market, savings, retail checking/negotiable
order of withdrawal ("NOW") accounts and commercial checking accounts
(collectively, "core deposits"), and at June 30, 1998, represented 10.3% of the
Association's interest-bearing liabilities.
Management monitors the Association's interest rate sensitivity through the
use of an internally generated Net Portfolio Value Model which generates
estimates of the change in the Association's net portfolio value ("NPV") over a
range of interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities and off-balance sheet contracts. The NPV ratio,
under any interest rate scenario, is defined as the NPV in that scenario divided
by the market value of assets in the same scenario. As of June 30, 1998, the
Association's NPV was $72.2 million, or 11.7% of the market value of assets. A
200 basis point increase in interest rates would result in a decrease in the
Association's NPV to $53.4 million, representing a 26.0% reduction in the value
of the Association's discounted cash flows. Conversely, a 200 basis point
decrease in interest rates would result in a decrease in the Association's NPV
to $66.6 million, representing only a 7.7% decrease in the value of the
Association's discounted cash flows. Consequently, an increase in interest
rates will have a significantly greater impact on the Association's NPV than a
corresponding decrease in interest rates.
Significant increases in the level of market interest rates also may
adversely affect the fair value of the Association's securities and other
interest-earning assets. At June 30, 1998, $178.9 million, or 74.7%, of the
Association's securities had fixed interest rates. Generally, the value of
fixed-rate instruments fluctuates inversely with changes in interest rates. As
a result, increases in interest rates could result in decreases in the market
value of interest-earning assets which could adversely affect the Association's
results of operations if sold or, in the case of interest-earning assets
classified as available-for-sale, the Association's retained earnings if
retained. Increases in market interest rates also can affect the type (fixed-
rate or adjustable-rate) and amount of loans originated by the Association and
the average life of loans and securities, which can adversely impact the yields
earned on the Association's loan and securities portfolio. In periods of
decreasing interest rates, the average life of loans held by the Association may
be shortened to the extent increased prepayment activity occurs during such
periods which, in turn, may result in the Association investing funds from such
prepayments in lower yielding assets. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Asset and Liability Management
and Market Risk."
RISKS ASSOCIATED WITH ECONOMIC CONDITIONS IN THE ASSOCIATION'S PRIMARY
MARKET AREA
The Association's primary market area consists of Trumbull and Mahoning
Counties in Northeastern Ohio. Nine of the Association's offices are located in
Trumbull County, including the Association's main office in the City of Warren
and two offices are in Mahoning County. With regard to several important
economic factors, statistics for the Association's primary market area in recent
years have trailed both the State of Ohio and the United States.
16
<PAGE>
In 1997, the per capita annual income of $14,953 for the Association's
primary market area was lower than the $17,244 and $18,100 per capita annual
income for Ohio and the United States, respectively. The median annual
household income for the Association's primary market area was $31,060 in 1996,
compared to $36,165 for the State of Ohio and $36,961 for the United States.
The unemployment rates for the Association's market area and the City of Warren
have exceeded both the Ohio and national rates in the recent past. For 1998,
through May, the unemployment rate in the Association's primary market area
averaged 5.0%, compared to 4.2% for Ohio and 3.9% for the United States. The
City of Warren experienced a significantly higher unemployment rate of 9.3% in
January 1998.
There have been published reports that General Motors ("GM") is evaluating
which of its plants will be awarded their next generation of small cars,
replacing their Cavalier and Sunbird models in 2002. The assembly plant
producing the current models noted is located in Lordstown, Ohio, and employs
approximately 6,000 people in the Warren/Youngstown area. As a result, the
future of the plant beyond 2002 remains uncertain unless or until GM awards the
Lordstown complex a new model line. GM has not commented on such reports, and
the possibility of a plant closure cannot be determined. If the plant were to
be shut down, the resulting unemployment would, in all likelihood, have a major
adverse impact on the economy in the region, and therefore on the Association's
results of operations. Additionally, a number of businesses in the
Warren/Youngstown area are dependent on the Lordstown plant and/or its employees
and the impact of a plant closing would have a ripple effect on other businesses
in the area, which in turn would exacerbate the adverse impact of the closing on
the Association. The reports estimate that a closure, should it occur, would be
effective in 2002-2003. The reports state that decision on the future of the
Lordstown plant could be made within the next twelve months. The Association is
unable to estimate the extent of the adverse impact that such a closure would
have on its results of operations.
A decline in the local economy could result in an increase in the level of
defaults by borrowers in the repayment of existing loans and could suppress
demand for new loans. Similarly, a decline in the local economy could result in
a decline in core deposits as customers would have fewer discretionary funds for
savings. If these conditions occurred, they could adversely affect the
Association's net income. Moreover, the absence of a robust local economy could
limit the Association's potential for growth in its primary market area.
LENDING AND DEPOSIT CONCENTRATIONS
At June 30, 1998, the majority of the Association's total real estate loans
were secured by properties in Trumbull and Mahoning Counties, located in
northeastern Ohio. A concentration of loans secured by properties in any single
area presents the risk that any adverse change in the local economic or
employment conditions may result in increased loan delinquencies and loan
losses. The Association attempts to address this risk by relying upon
conservative underwriting practices when considering loans and frequently
reviewing general economic information relating to northeastern Ohio. See
"Business of the Association--Lending Activities."
INCREASED LENDING RISKS ASSOCIATED WITH AUTOMOBILE LOANS
In recent years, as part of its efforts to diversify its loan portfolio and
generate greater returns, the Association has increased its emphasis on
automobile loans. At June 30, 1998, the Association's consumer loan portfolio
totaled $64.1 million, or 17.6% of the Association's total loans, and consisted
primarily of new and used automobile loans. At that date, automobile loans
totaled $52.8 million, or 14.5% of total loans and 82.5% of consumer loans.
Loans secured by rapidly depreciable assets such as automobiles entail greater
risks than one- to four-family residential mortgage loans. In such cases,
repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral.
Further, collections on these loans are dependent on the borrower's continuing
financial stability and, therefore, are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. Finally, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans in
the event of a default. See "Business of the Association--Lending Activities--
Consumer Lending."
17
<PAGE>
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION
At June 30, 1998, the Association's ratio of average retained earnings to
average assets was 9.7%. The national average ratio of average retained
earnings to average assets for all savings institutions was 4.0% at June 30,
1998, while the average ratio for savings institutions in Ohio with assets
between $300 million to $1 billion was 5.6% at that same date, as reported by a
national banking information service. The Company's equity position will be
significantly increased as a result of the Conversion. On a pro forma basis as
of June 30, 1998, assuming the sale of Common Stock at the midpoint of the
Estimated Price Range, the Company's ratio of equity to assets would exceed
18.9%. The national average ratio of equity to assets for all savings
institutions was 8.6% at June 30, 1998, while the average ratio of equity to
assets for savings institutions in Ohio with assets between $300 million to
$1 billion was 9.3% at that same date, as reported by a national banking
information service. The Company's ability to deploy this new capital through
investments in interest-bearing assets, such as loans and securities, which bear
rates of return comparable to its current investments, will be significantly
affected by industry competition for such investments. The Company currently
anticipates that it will take time to prudently deploy such capital. In
addition, the issuance of authorized but unissued shares of Common Stock to the
Foundation will adversely impact the Company's earnings per share on a going-
forward basis. As a result, the Company's return on equity initially is
expected to be below its historical return on equity and may be below peer group
institutions after the Conversion.
YEAR 2000 COMPLIANCE
The Federal Financial Institutions Examination Council (the "FFIEC"),
through the bank regulatory agencies, has issued compliance guidelines requiring
financial institutions to develop and implement plans for addressing Year 2000
issues relevant to their operations. The Association has implemented a detailed
Year 2000 plan, as required by the FFIEC guidelines, to evaluate Year 2000
compliance of its computer systems and the equipment which supports the
operations of the Association. Also included in this Year 2000 plan is a
detailed review of the readiness of the Association's service providers,
vendors, major fund providers, major borrowers and companies with which the
Association has material investments. As of October 15, 1998, the Association
has met all current target objectives of the Year 2000 plan, and management
believes that it will continue to meet all future target objectives in
accordance with the terms of the plan.
To date, the Association has not identified any system which presents a
material risk of not being Year 2000 ready in a timely fashion or for which a
suitable alternative cannot be implemented. However, as the Association
progresses with its Year 2000 conversion, the Association may identify systems
which do present a material risk of Year 2000 disruption. Such disruption may
include, among other things, the inability to process and underwrite loan
applications, to credit deposits and withdrawals from customer accounts, to
credit loan payments or track delinquencies, to properly reconcile and record
daily activity or to engage in similar normal banking activities. Additionally,
if the Association's commercial customers are not Year 2000 compliant and suffer
adverse effects on their operations, their ability to meet their obligations to
the Association could be adversely affected.
The failure of the Association to identify systems which require Year 2000
conversion that are critical to the Association's operations or the failure of
the Association or others with which the Association does business to become
Year 2000 ready in a timely manner could have a material adverse impact on the
Association's financial condition and results of operations. Moreover, to the
extent that the risks posed by the Year 2000 problem are pervasive in data
processing and transmission and communications services worldwide, the
Association cannot predict with any certainty that its operations will remain
materially unaffected after January 1, 2000 or on dates preceding this date at
which time post-January 1, 2000 dates become significant within the
Association's systems. For further discussion of the Association's Year 2000
compliance efforts, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Issues."
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HIGHLY COMPETITIVE INDUSTRY AND GEOGRAPHIC AREA
The Association faces significant competition in its primary market area
both in attracting deposits and in originating loans. All of the Association's
offices are located in Trumbull and Mahoning Counties in northeastern Ohio. The
Association's share of deposits in Trumbull and Mahoning Counties amounts to
approximately 7.3%. The remainder of deposits in Trumbull and Mahoning Counties
are spread among a number of competitors; no one competitor holds more than 15%
of deposits in the Association's primary market area. The Association faces
direct competition from a significant number of financial institutions operating
in its market area, many with a state-wide or regional presence, and, in some
cases, a national presence. This competition arises from commercial banks,
savings banks, mortgage banking companies, credit unions and other providers of
financial services, many of which are significantly larger than the Association
and, therefore, have greater financial and marketing resources than those of the
Association. As the Trumbull and Mahoning Counties area continues to develop,
the continued profitability of the Association will depend, in part, upon its
ability to compete successfully in its primary market area. See "Business of
the Association--Primary Market Area."
PROVISIONS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS
Provisions in the Company's and the Association's Governing Instruments.
Certain provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Association's Stock
Charter and Bylaws, as well as certain federal regulations, assist the Company
in maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting on certain
matters, staggered boards of directors, noncumulative voting for directors,
limits on the calling of special meetings of shareholders, limits on the ability
to vote Common Stock in excess of 10% of outstanding shares, and certain uniform
price provisions for certain business combinations. The uniform price
provisions for certain business combinations provide that 80% approval of
shareholders is required for any business combination involving an Interested
Stockholder (generally defined as any individual, corporation, partnership or
other entity (other than the Company or its subsidiaries) which owns or controls
10% or more of the voting power of the outstanding shares of voting stock of the
Company), unless the transaction is approved by a majority of directors
unaffiliated with the Interested Stockholder or if the proposed transaction
meets certain conditions which are designed to provide shareholders a fair price
in consideration for their shares, in which case approval of only a majority of
the outstanding shares of voting stock would be required. By requiring a vote
of shareholders in excess of that required by statute generally, the uniform
fair price provision would permit management controlling the voting of greater
than 20% of the outstanding Common Stock to reject certain takeover attempts
that certain stockholders deem to be in their best interests. See "Restrictions
on Acquisition of the Company and the AssociationRestrictions in the Company's
Certificate of Incorporation and Bylaws--Stockholder Vote Required to Approve
Business Combinations with Interested Stockholders." The Association's Stock
Charter also prohibits, for five years, the acquisition or offer to acquire,
directly or indirectly, the beneficial ownership of more than 10% of the
Association's equity securities. Any person, or group acting in concert,
violating this restriction may not vote the Association's securities in excess
of 10%. These provisions in the Association's and the Company's governing
instruments may discourage potential proxy contests and other potential takeover
attempts, particularly those which have not been negotiated with the Boards of
Directors, and thus, generally may serve to perpetuate current management. For
a more detailed discussion of these provisions, see "Restrictions on Acquisition
of the Company and the Association."
Voting Control of Officers and Directors. Directors and executive officers
of the Association and the Company expect to purchase approximately 4.9% or 3.7%
of the shares of Common Stock to be issued in the Conversion, including shares
issued to the Foundation, based upon the minimum and the maximum of the
Estimated Price Range, respectively, and exclusive of shares that may be
attributable to directors and officers through the Stock Program, the Stock
Option Plan and the ESOP, which plans may give directors, executive officers and
employees the potential to control the voting of an additional 20.0% of the
Company's Common Stock on a fully diluted basis at the maximum of the Estimated
Price Range. In addition, the Foundation will be funded with a contribution by
the Company equal to 7.7% of the Common Stock sold in the Conversion, which if a
waiver of the voting restriction imposed on such Common Stock is obtained from
the OTS, may be voted as determined by the Directors of the Foundation a
majority of whom are Directors of the Company or the Association. Management's
potential voting control could, together with additional stockholder support,
defeat stockholder proposals requiring 80% approval of stockholders. As a
result, this
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potential voting control may preclude takeover attempts that certain
stockholders deem to be in their best interest and may tend to perpetuate
existing management. See "Restrictions on Acquisition of the Company and the
Association--Restrictions in the Company's Certificate of Incorporation and
Bylaws" and "The Conversion--Establishment of the Charitable Foundation."
ABSENCE OF MARKET FOR COMMON STOCK
The Company, as a newly organized company, has never issued capital stock,
and consequently, there is no established market for its Common Stock at this
time. The Company has received conditional approval to have its Common Stock
quoted on the Nasdaq National Market under the symbol "FPFC" upon completion of
the Conversion. A public trading market having the desirable characteristics of
depth, liquidity and orderliness depends upon the existence of willing buyers
and sellers at any given time, the presence of which is dependent upon the
individual decisions of buyers and sellers over which the Company has no
control. Accordingly, there can be no assurance that an active and liquid
trading market for the Common Stock will develop or that, if developed, will
continue, nor is there any assurance that purchasers of the Common Stock will be
able to sell their shares at or above the Purchase Price. The absence or
discontinuance of a market for the Common Stock would have an adverse impact on
both the price and liquidity of the Common Stock. See "Market for the Common
Stock."
POSSIBLE DILUTIVE EFFECT OF STOCK PROGRAM AND STOCK OPTIONS
Following the Conversion, the Stock Program (as defined herein) will
acquire an amount of shares equal to 4% of the shares of Common Stock issued in
the Conversion, including shares issued to the Foundation, either through open
market purchases or the issuance of authorized but unissued shares of Common
Stock from the Company. If the Stock Program is funded by the issuance of
authorized but unissued shares, the voting interests of existing shareholders
will be diluted by approximately 3.8%. Also following the Conversion, the
Company intends to implement the Stock Option Plan (as defined herein) which
will provide directors and selected employees of the Company and the Association
with Stock Options to purchase authorized but unissued shares in an amount equal
to 10% of the Common Stock issued in the Conversion, including shares issued to
the Foundation. If all of the Stock Options intended to be granted were to be
exercised using authorized but unissued Common Stock and if the Stock Program
were funded with authorized but unissued shares, the voting interests of
existing stockholders would be diluted by approximately 12.3%.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF
SUBSCRIPTION RIGHTS
The Association has received an opinion of Keller that subscription rights
granted to Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members have no value. However, this opinion is not binding on the IRS.
If the subscription rights granted to Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are deemed to have an ascertainable
value, such recipients could be taxed upon receipt of such subscription rights.
Additionally, the Association could recognize a gain for tax purposes on such
distribution. Whether subscription rights are considered to have ascertainable
value is an inherently factual determination. See "The Conversion--Effects of
Conversion" and "--Tax Aspects."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be issued in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% to reflect
changes in market and financial conditions following the commencement of the
Subscription and Community Offerings. In the event that the Estimated Price
Range is so increased, it is expected that the Company will sell up to
10,438,625 shares of Common Stock at the Purchase Price for an aggregate
purchase price of up to $104.4 million. An increase in the number of shares
issued will decrease a subscriber's pro forma net earnings per share and
stockholders' equity per share and will increase the Company's pro forma
consolidated stockholders' equity and net earnings. Such an increase will also
increase the Purchase Price as a percentage of pro forma stockholders' equity
per share and net earnings per share.
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NO FAIRNESS OPINION
The Association has engaged Webb as a financial and marketing advisor, and
Webb has agreed to assist the Association and the Company in its solicitation of
subscriptions and purchase orders for Common Stock in the Offerings. Webb has
not prepared any report or opinion constituting recommendations or advice to the
Association. In addition, Webb has expressed no opinion as to the prices at
which Common Stock to be issued in the Offerings may trade. Furthermore, Webb
has not verified the accuracy or completeness of the information contained in
the Prospectus or the proxy statement for the Special Meeting. See "The
Conversion--Marketing and Underwriting Arrangements."
POTENTIAL DELAYS OF CONSUMMATION OF THE CONVERSION
Orders submitted in the Subscription Offering, Community Offering and/or
Syndicated Community Offering are irrevocable. The Company and the Association
expect to complete the Conversion within the time periods indicated in this
Prospectus. Nevertheless, it is possible that several factors, including, but
not limited to, a delay in receiving regulatory approval of the final updated
appraisal prepared by Keller, a delay in processing orders in the event the
Offerings are oversubscribed or a delay caused by a regulatory or legal
challenge to the establishment and funding of the Foundation or other actions
taken in connection with the Conversion could significantly delay the completion
of the Conversion. Subscribers will have no access to subscription funds and/or
shares of Common Stock until the Conversion is completed or terminated. In the
event the Conversion is terminated, subscribers will be refunded their
subscription funds, together with interest at a rate equal to the Association's
interest rate paid on passbook accounts, or will have their withdrawal
authorization terminated. See "The Conversion."
EFFECTS OF THE ESTABLISHMENT OF THE CHARITABLE FOUNDATION
Pursuant to the Plan, the Company has voluntarily established a charitable
foundation in connection with the Conversion. The Foundation has been
incorporated under Delaware law as a non-stock corporation and will be funded
with shares of Common Stock contributed by the Company. Establishment and
funding of the Foundation is subject to the approval of the Association's
members at the Special Meeting. If approved by members, the establishment of
the Foundation and the contribution of Common Stock to the Foundation will be
dilutive to the interests of stockholders and will have an adverse impact on the
reported earnings of the Company in fiscal 1999, the year in which the
Foundation will be funded.
Dilution of Stockholders' Interests. The Company proposes to fund the
Foundation with Common Stock of the Company in an amount equal to approximately
7.7% of the Common Stock to be sold in the Conversion. At the minimum, midpoint
and maximum of the Estimated Price Range, the contribution to the Foundation
would equal 515,865, 606,900 and 697,935 shares, with a value of $5.2 million,
$6.1 million and $7.0 million, respectively, based on the Purchase Price of
$10.00 per share. Assuming the sale of Common Stock at the maximum of the
Estimated Price Range, upon completion of the Conversion and funding of the
Foundation, the Company will have 9,775,000 shares issued and outstanding of
which the Foundation will own 697,935 shares, or 7.1%. AS A RESULT, PERSONS
PURCHASING SHARES OF COMMON STOCK IN THE CONVERSION WILL HAVE THEIR OWNERSHIP
AND VOTING INTERESTS IN THE COMPANY DILUTED BY 7.1%, AS COMPARED TO COMPLETING
THE CONVERSION WITHOUT THE FOUNDATION. SEE "PRO FORMA DATA" AND "COMPARISON OF
VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION."
Adverse Impact on Earnings. Assuming receipt of approval of the
Association's members, the contribution of Common Stock to the Foundation will
have an adverse impact on the Company's earnings in the year in which the
contribution is made. The Company will recognize the full expense in the amount
of the contribution of Common Stock to the Foundation in the quarter in which it
occurs, which is expected to be the second quarter of fiscal 1999. The amount
of the contribution will range from $5.2 million to $7.0 million, based on the
minimum and maximum of the Estimated Price Range. The contribution expense will
be partially offset by the tax benefit related to the expense. The Company and
the Association have been advised by their independent tax advisors that the
contribution to the Foundation will be tax deductible, subject to an annual
limitation based on 10% of the Company's annual taxable income. Assuming a
contribution of $7.0 million in Common Stock (based on the maximum of the
Estimated Price Range), the Company estimates a net tax effected expense of
$4.6 million (based upon a 34% tax rate). If the Foundation had been established
at June 30, 1998, the Association would have reported a net loss of $534,000,
rather
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than reporting net income of $4.1 million for the year ended June 30, 1998.
Management cannot predict earnings for fiscal 1999, but expects that the
establishment and funding of the Foundation will have an adverse impact on the
Company's earnings for the quarter in which the Foundation is funded. Due to the
contribution to the Foundation, the Association expects in the future to reduce
the amount of its current charitable contributions within its community. The
Company and the Association do not currently anticipate making additional
contributions to the Foundation within the first five years following the
initial contribution.
Tax Considerations. The Company and the Association have been advised by
Crowe, Chizek and Company LLP that an organization created for the above
purposes would qualify as a Section 501(c)(3) exempt organization under the
Internal Revenue Code of 1986, as amended (the "Code"), and would be classified
as a private foundation. The Foundation will submit a request to the Internal
Revenue Service ("IRS") to be recognized as an exempt organization. The Company
and the Association have received an opinion of Crowe, Chizek and Company LLP
that the Foundation would qualify as a Section 501(c)(3) exempt organization
under the Code. The independent tax advisors' opinion further provides 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 fair market value of the stock at the time of the contribution
less the nominal par value that the Foundation is required to pay to the Company
for such stock, 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 contribution
subject to the 10% annual limitation. Thus, while the Company would have
received a charitable contribution deduction of approximately $700,000 in fiscal
1998 (based upon the sale of stock at the maximum of the Estimated Price Range
and a contribution of $7.0 million of Common Stock and the Association's pre-tax
income for fiscal 1998), the Company is permitted under the Code to carryover
the excess contribution in the five following years. Assuming the sale of
Common Stock at the midpoint of the Estimated Price Range, the Company estimates
that substantially all of the deduction should be deductible over the six-year
period. Although the Company and the Association have received an opinion of
Crowe, Chizek and Company LLP that the Company will be entitled to the deduction
for the charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that the
deduction will be permitted. In such event, the Company's tax benefit related
to the Foundation would have to be fully expensed, resulting in a further
reduction in earnings in the year in which the IRS makes such a determination.
The establishment and funding of the Foundation is subject to the regulatory
condition agreed to by the Foundation that Common Stock issued to the Foundation
be voted in the same ratio as all shares of the Company's Common Stock voted on
all proposals considered by stockholders of the Company. See "The
Conversion--Establishment of the Charitable Foundation." Consistent with this
condition, in the event that the Company or the Foundation receives an opinion
of their legal or tax counsel that compliance with the 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 under Section 4941 of the Code, the OTS
will waive such voting restriction upon submission of an opinion by the Company
or the Foundation that is satisfactory to the OTS.
Comparison of Valuation and Other Factors Assuming the Foundation is Not
Established as Part of the Conversion. The establishment of the Foundation was
taken into account by Keller in determining the estimated pro forma market value
of the Common Stock of the Company. The aggregate price of the shares of Common
Stock being offered in the Subscription and Community Offerings is based upon
the independent appraisal conducted by Keller of the estimated pro forma market
value of the Common Stock of the Company. The pro forma aggregate price of the
Common Stock being offered for sale in the Conversion is currently estimated to
be between $67.1 million and $90.8 million, with a midpoint of $78.9 million.
Based on the appraisal, the pro forma market capitalization of the Association
at the midpoint of the Estimated Price Range, including shares issued to the
Foundation, is $85.0 million. The pro forma price to book ratio and the pro
forma price to earnings ratio, at and for the year ended June 30, 1998, are
66.30% and 13.81x, respectively, at the midpoint of the Estimated Price Range.
In the event that the Conversion did not include the Foundation, Keller has
estimated that the estimated pro forma market capitalization of the Association
would be approximately $90.5 million at the midpoint based on a pro forma price
to book ratio and the pro forma price to earnings ratio that are approximately
the same as the independent appraisal at 66.10% and 13.89x, respectively. If
the Foundation was not part of the Conversion, the pro forma market value of the
shares being offered is estimated to be between $76.9 million and $104.1
million. See "Comparison of Valuation and Pro Forma Information with No
Foundation." This estimate by Keller was prepared at the request of the OTS and
is solely for purposes of providing depositors and subscribers with information
with which to make an informed decision on the Conversion. There is no
assurance that
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if the Foundation was not approved the appraisal prepared at that time would
conclude that the pro forma market value of the Company would be the same as the
amount estimated herein. Any appraisal prepared at that time would be based on
the facts and circumstances existing at that time, including, among other
things, market and economic conditions.
The Association believes that the establishment of the Foundation is in the
best interests of the Association, its depositors, its prospective stockholders
and the communities in which it operates. The Foundation is integrally tied to
the Association's business of operating a community banking institution and the
Association believes that the Foundation will have a positive impact on the
Association's long-term franchise value. The amount of Common Stock being
offered in the Conversion at the midpoint of the Estimated Price Range is
approximately $11.6 million less than the estimated amount of Common Stock that
would be offered in the Conversion without the Foundation based on the estimate
provided by Keller. Accordingly, certain depositors of the Association who
subscribe to purchase Common Stock in the Subscription Offering may receive
fewer shares depending on the appraisal valuation at that time, the number of
shares sold based on that appraisal, the size of a depositor's stock order, the
amount of his or her qualifying deposits in the Association and the overall
level of subscriptions. The decrease in the amount of Common Stock being
offered as a result of the contribution of Common Stock to the Foundation will
not have a significant effect on the Company or the Association's capital
position. The Association's regulatory capital is significantly in excess of
its regulatory capital requirements and will further exceed such requirements
following the Conversion. The Association's tangible, core and risk-based
capital ratios at June 30, 1998 were 9.5%, 9.5% and 21.8%, respectively.
Assuming the sale of shares at the midpoint of the Estimated Price Range, the
Association's pro forma tangible, core and risk-based capital ratios at June 30,
1998 would be 13.5%, 13.5% and 30.6%, respectively. On a consolidated basis,
the Company's pro forma stockholders' equity would be $128.2 million, or
approximately 18.9% of pro forma consolidated assets, assuming the sale of
shares at the midpoint of the Estimated Price Range. Pro forma stockholders'
equity per share and pro forma net earnings per share would be $15.08 and $0.72,
respectively. If the Foundation was not being established in the Conversion,
based on the Keller estimate, the Company's pro forma stockholders' equity would
be approximately $140.5 million, or approximately 20.5% of pro forma
consolidated assets at the midpoint of the estimate, and pro forma stockholders'
equity per share and pro forma net earnings per share would be substantially
similar with the Foundation as without the establishment of the Foundation.
See "Comparison of Valuation and Pro Forma Information with No Foundation."
Potential Anti-Takeover Effect. If approved by members, upon completion of
the Conversion, the Foundation will own 7.1% of the total shares of the
Company's Common Stock outstanding. Such shares will be owned solely by the
Foundation; however, pursuant to the terms of the contribution as mandated by
the OTS, the shares of Common Stock held by the Foundation must be voted in the
same ratio as all other shares of the Company's Common Stock on all proposals
considered by the stockholders of the Company. See "The Conversion--
Establishment of the Charitable Foundation--Regulatory Conditions Imposed on the
Foundation." Such restriction is included in the Foundation's corporate
governance documents. In the event that the OTS were to waive this voting
restriction, the Foundation's Board of Directors would exercise sole voting
power over such shares and would no longer be subject to the restriction.
However, the OTS could impose additional conditions at that time on the
composition of the Board of Directors of the Foundation or which otherwise
relate to control of the Common Stock held by the Foundation. See "The
Conversion--Establishment of the Charitable Foundation--Regulatory Conditions
Imposed on the Foundation." If a waiver of the voting restriction were granted
by the OTS and no further conditions were imposed on the Foundation at that
time, management of the Company and the Association may benefit to the extent
that the Board of Directors of the Foundation determines to vote the shares of
Common Stock held by the Foundation in favor of proposals supported by the
Company and the Association. Furthermore, in such an event, when the
Foundation's shares are combined with shares purchased directly by officers and
directors of the Company, shares held by the Stock Program trust, and shares
held by the ESOP trust, the aggregate of such shares could exceed 20% of the
Company's outstanding Common Stock, which could enable management to defeat
stockholder proposals requiring 80% approval. Consequently, in the event the
voting restriction was waived, the potential voting control might preclude
takeover attempts that certain stockholders deem to be in their best interest,
and might tend to perpetuate management. However, since the ESOP shares are
allocated to all eligible employees of the Association, and any unallocated
shares will be voted by an independent trustee, and because the Stock Program
must first be approved by stockholders no sooner than six months following
completion of the Conversion, and awards under such proposed plans may be
granted to employees other than executive officers and Directors, management of
the Company does not expect to have voting control of all shares covered by the
ESOP and other stock-
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based benefit plans. See "--Provisions which May Discourage Takeover Attempts--
Voting Control of Officers and Directors."
Further, there will be no agreements or understandings, written or tacit,
with respect to the exercise of either direct or indirect control over the
management or policies of the Company by the Foundation which may discourage
takeover attempts, including agreements related to voting, acquisition or
disposition of the Company's Common Stock. Finally, as the Foundation sells its
shares of Common Stock over time, its ownership interest and voting power in the
Company is expected to decrease.
Potential Challenges. The establishment and funding of a charitable
foundation as part of a conversion of a mutual savings institution to stock form
is innovative and has been done in a limited number of instances. As such, the
Foundation may be subject to potential challenges notwithstanding that the Board
of Directors of the Company and the Board of Directors of the Association have
carefully considered the various factors involved in the establishment of the
Foundation in reaching their determination to establish the Foundation as part
of the Conversion. See "The Conversion--Establishment of the Charitable
Foundation--Purpose of the Foundation." In conjunction with its approval of the
Conversion, the Association determined to submit the Foundation for a vote of
members so that members have a right to vote on whether the Foundation should be
established as part of the Conversion. If certain parties were to institute an
action seeking to require the Association to eliminate establishment of the
Foundation in connection with the Conversion, no assurances can be made that the
resolution of such challenges 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 the Company and the
Association are forced to eliminate the Foundation, the Company may be required
to resolicit subscribers in the Offerings.
Approval of Members. Establishment and funding of the Foundation is
subject to the approval of a majority of the total outstanding votes of the
Association's members eligible to be cast the Special Meeting. The Foundation
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
establishment of the Foundation, the Association intends to complete the
Conversion without the establishment of the Foundation. Failure to approve the
Foundation may materially increase the pro forma market value of the Common
Stock being offered for sale in the Offerings since the Valuation Range, as set
forth herein, takes into account the dilutive impact of the issuance of shares
to the Foundation. If the pro forma market value of the Common Stock without
the Foundation is either greater than $104.4 million or less than $67.1 million,
the Association will establish a new Estimated Price 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
subscriptions funds will be promptly refunded with interest at the Association's
passbook rate of interest, or be permitted to increase, decrease, or cancel
their subscriptions). Any change in the Estimated Price Range must be approved
by the OTS. See "The Conversion--Stock Pricing." A resolicitation, if any,
following the conclusion of the Subscription and Community Offerings would not
exceed 45 days unless further extended by the OTS for periods of up to 90 days
not to extend beyond December 22, 2000.
STOCK-BASED BENEFITS TO MANAGEMENT, EMPLOYMENT CONTRACTS AND CHANGE IN
CONTROL PAYMENTS
Stock Program. The Company intends to adopt a stock benefit plan which
would provide stock grants of Common Stock to non-employee directors and
selected officers and employees of the Company and Association (the "Stock
Program") and intends to seek stockholder approval of such plan at a meeting of
stockholders following the Conversion, which may be held no earlier than six
months after completion of the Conversion. The Company expects to acquire
Common Stock on behalf of the Stock Program in an amount equal to 4% of the
Common Stock issued in connection with the Conversion, including shares issued
to the Foundation, or 289,000 shares and 391,000 shares at the minimum and
maximum of the Estimated Price Range, respectively. These shares will be
acquired either through open market purchases or from authorized but unissued
Common Stock. See "--Possible Dilutive Effect of Stock Program and Stock
Options." Although no specific award determinations have been made, the Company
anticipates that it will provide awards under the Stock Program to the directors
and selected officers and employees of the Company and Association to the extent
permitted by applicable regulations. See "Management of the Association--
Benefit Plans--Stock Program." These shares granted under the Stock Program will
be awarded at no cost to the recipients. The
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implementation of such Stock Program may result in increased compensation
expenses to the Company and may have a dilutive effect on existing stockholders.
See "Management of the Association--Benefit Plans--Stock Program" and
"--Possible Dilutive Effect of Stock Program and Stock Options."
Stock Option Plan. The Company also intends to adopt stock-based benefit
plans which would provide options to purchase Common Stock ("Stock Options") to
officers, employees and non-employee directors of the Company and Association
(the "Stock Option Plan") and intends to seek stockholder approval of such plans
at a meeting of stockholders following the Conversion, which may be held no
earlier than six months after completion of the Conversion. Although no
specific determinations have been made, the Company expects that non-employee
directors and selected officers and employees of the Company and Association
will be granted options to purchase Common Stock in an amount equal to 10% of
the Common Stock issued in connection with the Conversion, including shares
issued to the Foundation, or 722,500 shares and 977,500 shares at the minimum
and maximum of the Estimated Price Range, respectively. It is currently
intended that the exercise price of the Stock Options will be equal to the fair
market value of the underlying Common Stock on the date of grant. Recipients of
Stock Options will not be required to pay for the shares until the date of
exercise. The implementation of such Stock Option Plan may have a dilutive
effect upon existing stockholders of the Company to the extent option exercises
are satisfied with authorized but unissued shares. See "--Possible Dilutive
Effect of Stock Program and Stock Options" and "Management of the Association--
Benefit Plans--Stock Option Plan."
Change In Control Provisions. The Company and the Association intend to
enter into employment or change in control agreements with certain officers of
the Association and Company which will provide for benefits and cash payments in
the event of their involuntary or, in certain circumstances, voluntary
termination following a change in control of the Company or Association. These
provisions may have the effect of increasing the cost of acquiring the Company
or Association, thereby discouraging future attempts to take over the Company or
the Association. Additionally, the Association intends to adopt an employee
severance compensation plan, which similarly provides a cash payment and
benefits to eligible employees upon such employees' termination following a
change in control of the Company or Association, which, in addition to any
payments which may be made under the Stock Program and Stock Option Plan, also
may have the effect of increasing the cost of acquiring the Company or
Association. Based on current salaries, cash payments to be paid in the event
of a change in control pursuant to the terms of the employment agreements and
change in control agreements would be approximately $1.2 million. However, the
actual amount to be paid in the event of a change in control of the Association
or the Company cannot be estimated at this time because the actual amount is
based on the average salary of the employee and other factors existing at the
time of the change in control. See "Restrictions on Acquisition of the Company
and the Association--Restrictions in the Company's Certificate of Incorporation
and Bylaws," "Management of the Association--Employment Agreements," "--Change
in Control Agreements," "--Employee Severance Compensation Plan," "--Benefit
Plans--Stock Option Plan" and "--Benefit Plans--Stock Program."
25
<PAGE>
FIRST PLACE FINANCIAL CORP.
First Place Financial Corp. is a Delaware corporation recently organized at
the direction of the Board of Directors of the Association for the purpose of
acquiring all of the capital stock of the Association to be issued in the
Conversion. The Company expects to receive approval from the OTS to become a
savings and loan holding company and, upon completion of the Conversion, will be
subject to regulation by the OTS. See "The Conversion--General" and
"Regulation--Holding Company Regulation." Upon consummation of the Conversion,
the Company will have no significant assets other than all of the shares of the
Association's capital stock acquired in the Conversion and an amount equal to
50% of the net proceeds of the Conversion, including the loan to the ESOP, and
will have no significant liabilities. The Company intends to use a portion of
the net proceeds it retains to loan to the ESOP funds to enable the ESOP to
purchase up to 8% of the stock issued in connection with the Conversion,
including shares issued to the Foundation. The Company and the Association may,
however, alternatively choose to fund the ESOP through a loan to the ESOP trust
by a third-party financial institution. The management of the Company is set
forth under "Management of the Company." Initially, the Company will neither
own nor lease any property, but will instead use the premises, equipment and
furniture of the Association. At the present time, the Company does not intend
to employ any persons other than certain officers who are currently officers of
the Association but will utilize the support staff of the Association from time
to time. Additional employees will be hired as appropriate to the extent the
Company expands its business in the future.
Management believes that the holding company structure will provide the
Company additional flexibility to diversify its business activities through
existing or newly formed subsidiaries (which subsidiaries could be financial
institutions), or through acquisitions of or mergers with other financial
institutions and financial services related companies. Although there are no
current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Conversion, subject
to regulatory limitations and the Company's financial position, to take
advantage of any such acquisition and expansion opportunities that may arise.
The initial activities of the Company are anticipated to be funded by the
proceeds to be retained by the Company, income thereon and through dividends
from the Association.
The Company's executive office is located at the administrative offices of
the Association, 185 East Market Street, Warren, Ohio 44482. Its telephone
number is (330) 373-1221.
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
The Association was originally organized in 1922 as an Ohio-chartered
savings and loan association, and converted to a federally-chartered savings and
loan association in 1936. The Association's deposit accounts are insured to the
maximum allowable amount by the SAIF as administered by the FDIC. Including the
Association's principal office, which is located in Warren, Ohio, the
Association serves its customers from eleven full-service banking facilities and
two loan service centers located in Warren, Ohio and its surrounding areas. At
June 30, 1998, the Association had total assets of $609.4 million, total
deposits of $435.5 million, retained earnings of $59.4 million and had a
tangible capital ratio of 9.52%, a core capital ratio of 9.52% and a total risk-
based capital ratio of 21.84%. See "Regulation--Federal Savings Institution
Regulation--Capital Requirements."
The Association is a community-oriented savings institution whose principal
business consists of accepting retail deposits from the general public in its
primary market area, consisting of those areas surrounding its full-service
branch offices, and investing those deposits, together with funds generated from
operations and borrowings, primarily in one- to four-family residential mortgage
loans, automobile and home equity loans and, to a much lesser extent, multi-
family and commercial real estate loans, construction loans, commercial loans
and passbook savings loans. The Association also invests in government issued
and sponsored mortgage-backed securities, securities issued by the U.S.
Government and agencies thereof, and other investments permitted by applicable
laws and regulations. The Association's primary market area for lending
consists of Trumbull and Mahoning Counties. See "Business of the Association."
26
<PAGE>
At June 30, 1998, the Association's gross loan portfolio totaled
$363.2 million, or 59.6% of total assets, of which $268.0 million were one- to
four-family residential mortgage loans, $4.5 million were multi-family real
estate loans, $8.6 million were commercial real estate loans, $6.3 million were
construction loans, $9.2 were home equity loans and $64.1 million were consumer
loans, consisting primarily of automobile loans. The Association originates
one- to four-family mortgage loans generally secured by properties located in
the Association's primary market area. See "Business of the Association."
The Association's investment activities primarily consist of investments in
mortgage-backed securities and U.S. Government obligations. At June 30, 1998,
the Association's securities portfolio totaled $239.5 million, or 39.3% of total
assets, of which $211.2 million was categorized as available-for-sale. At
June 30, 1998, the Association's mortgage-backed securities portfolio totaled
$207.9 million, or 34.1% of total assets, of which $190.1 million was classified
as available-for-sale and consisted almost entirely of mortgage-backed
securities, guaranteed or issued by Governmental-sponsored and federal agencies
such as the Federal National Mortgage Association ("FNMA"), Federal Home Loan
Mortgage Corporation ("FHLMC") and Government National Mortgage Association
("GNMA"). The Association's investment securities generally consist of United
States Government or federal agency obligations. See "Business of the
Association--Investment Activities."
At June 30, 1998, the Association's deposit accounts totaled $435.5 million
or 79.2% of total liabilities, of which $175.5 million, or 40.3%, were comprised
of passbook saving accounts, retail checking/NOW accounts, money market accounts
and commercial checking accounts. In addition to core deposits, the Association
had $260.0 million of certificate accounts, or 59.7% of total deposits, of which
$167.8 million were certificates of deposit with maturities of one year or less
and $53.2 million were jumbo certificates of deposit.
The Association's executive office is located at 185 East Market Street,
Warren, Ohio 44482. Its telephone number at that location is (330) 373-1221.
27
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At June 30, 1998, the Association exceeded each of its regulatory capital
requirements. Set forth below is a summary of the Association's compliance with
the OTS capital standards as of June 30, 1998, on an historical and pro forma
basis assuming that the indicated number of shares were sold as of such date and
receipt by the Association of 50% of the net proceeds. For purposes of the
table below, the amount expected to be borrowed by the ESOP and the cost of its
shares expected to be acquired by the Stock Program are deducted from pro forma
regulatory capital.
<TABLE>
<CAPTION>
PRO FORMA AT JUNE 30, 1998 BASED UPON THE SALE AT $10.00 PER SHARE
------------------------------------------------------------------------------
6,709,135 SHARES 7,893,100 SHARES 9,077,065 SHARES 10,438,625 SHARES
(MINIMUM OF THE (MIDPOINT OF THE (MAXIMUM OF THE (15% ABOVE MAXIMUM
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED OF THE ESTIMATED
JUNE 30, 1998 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
------------------- ------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital(3)......... $59,357 9.7% $83,327 13.2% $87,649 13.7% $91,971 14.3% $97,020 15.0%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Tangible Capital:
Capital Level(4)...... $57,763 9.5% $81,733 12.9% $86,055 13.5% $90,370 14.1% $95,426 14.8%
Requirement(5)........ 9,117 1.5 9,477 1.5 9,541 1.5 9,606 1.5 9,682 1.5
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess................ $48,646 8.0% $72,256 11.4% $76,514 12.0% $80,764 12.6% $85,744 13.3%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Core Capital:
Capital Level(4)...... $57,763 9.5% $81,733 12.9% $86,055 13.5% $90,370 14.1% $95,426 14.8%
Requirement(5)........ 18,234 3.0 18,953 3.0 19,083 3.0 19,213 3.0 19,364 3.0
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess................ $39,529 6.5% $62,780 9.9% $66,972 10.5% $71,157 11.1% $76,062 11.8%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Risk-Based Capital:
Capital Level(4)(6)... $60,418(7) 21.8% $84,388 29.3% $88,710 30.6% $93,032 31.9% $98,081 33.4%
Requirement........... 22,134 8.0 23,005 8.0 23,161 8.0 23,318 8.0 23,502 8.0
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess................ $38,284 13.8% $61,383 21.3% $65,549 22.6% $69,714 23.9% $74,579 25.4%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
____________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations as changes in market or general
financial or economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of total adjusted assets
of $609.4 million. Core capital levels are shown as a percentage of total
adjusted assets of $609.4 million. Risk-based capital levels are calculated
on the basis of a percentage of risk-weighted assets of $276.7 million.
(3) GAAP defined as Generally Accepted Accounting Principles.
(4) Pro forma capital levels assume receipt by the Association of 50% of the net
proceeds from the shares of Common Stock sold at the minimum, midpoint,
maximum and maximum, as adjusted, of the Estimated Price Range. These
levels also assume funding by the Association of the Stock Program equal to
4% of the Common Stock issued, including shares issued to the Foundation,
and repayment of the Company's loan to the ESOP to enable the ESOP to
purchase 8% of the Common Stock issued, including shares issued to the
Foundation, valued at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Price Range. See "Management of the
Association--Benefit Plans" for a discussion of the Stock Program and ESOP.
(5) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and soundness
and that are not experiencing or anticipating significant growth, and a 4%
to 5% core capital ratio requirement for all other thrifts. See
"Regulation--Federal Savings Institution Regulation--Capital Requirements."
The Company will not be subject to regulatory capital requirements.
(6) Assumes net proceeds are invested in assets that carry a risk-weighting of
45.4%, the average risk weighting of the Association's assets as of June 30,
1998.
(7) Historical risk-based capital is comprised of tangible capital of
$57.8 million plus the Association's general valuation allowance of $2.7
million at June 30, 1998.
28
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Conversion is completed, it is presently anticipated
that the net proceeds from the sale of the Common Stock will be between $65.3
million and $88.7 million (or $102.3 million if the Estimated Price Range is
increased by 15%). See "Pro Forma Data" and "The Conversion--Stock Pricing" as
to the assumptions used to arrive at such amounts. The Company will be unable to
utilize any of the net proceeds of the Offerings until the consummation of the
Conversion.
The Company will purchase all of the outstanding capital stock of the
Association to be issued upon Conversion in exchange for 50% of the net proceeds
of the Offerings, with the remaining net proceeds to be retained by the Company.
Based on net proceeds of $65.3 million to $88.7 million, the Company expects to
utilize between $32.6 million and $44.3 million of net proceeds to purchase the
common stock of the Association. Such portion of net proceeds received by the
Association from the Company will be added to the Association's general funds to
permit the Association to expand its lending and investment activities and to
enhance customer services. The Association currently intends to utilize the net
proceeds received for general corporate purposes, including investment in loans
and securities, as well as the possible expansion of its facilities and
operations through marketing, business development, or the acquisition or
establishment of branch offices, although the Company and the Association have
no current arrangements, understandings or agreements regarding any such
transactions. The Association anticipates that the portion of the net proceeds
received by the Association will initially be invested in overnight funds and
short-term investments with maturities of up to three years. To the extent that
the stock-based benefit programs which the Company or the Association intend to
adopt subsequent to the Conversion are not funded with authorized but unissued
common stock of the Company, the Company or Association may use net proceeds
from the Conversion to fund the purchase of stock to be awarded under such stock
benefit programs. The Association has not yet determined the approximate amount
of net proceeds to be used for any of the purposes mentioned above. While the
amount of net proceeds received by the Association will further strengthen the
Association's capital position, which already substantially exceeds all
regulatory requirements, it should be noted that the Association is not
converting primarily to raise capital. Rather, one of the principal purposes
for the Conversion is to structure the Association in the stock form used in the
United States by all commercial banks, most major business organizations and
most savings institutions. See "Risk Factors--Stock-Based Benefits to
Management, Employment Contracts and Change in Control Payments" and "Management
of the Association--Benefit Plans--Stock Option Plan" and "--Stock Program."
The Company intends to use a portion of the net proceeds it retains (i.e.,
50% of the net proceeds, which based on net proceeds of $65.3 million to
$88.7 million will be between $32.6 million and $44.3 million) to make a loan
directly to the ESOP to enable the ESOP to purchase in the Conversion 8% of the
Common Stock issued in connection with the Conversion, including shares issued
to the Foundation. Based upon the sale of 6,709,135 shares or 9,077,065 shares
at the minimum and maximum of the Estimated Price Range, and the issuance of
shares to the Foundation, the amount of the loan to the ESOP would be
$5.8 million or $7.8 million, respectively (or $9.0 million if the Estimated
Price Range is increased by 15%), with a term of 15 years at the prevailing
prime rate of interest. The Company and Association may alternatively choose to
fund the ESOP's stock purchases through a loan by a third party financial
institution. See "Management of the Association--Benefit Plans--ESOP." The
remaining net proceeds retained by the Company will initially be invested in
mortgage-backed and investment securities.
Ultimately, the net proceeds retained by the Company may also be used to
support the future expansion of operations through branch acquisitions, the
establishment of branch offices and the acquisition of savings associations and
commercial banks or their assets, including those located within the
Association's market area or diversification into other banking related
businesses. The Company and the Association have no current arrangements,
understandings or agreements regarding any such transactions. The Company, upon
the Conversion, will be a unitary savings and loan holding company, which under
existing laws would not be restricted as to the types of business activities in
which it may engage. See "Regulation--Holding Company Regulation" for a
description of certain regulations applicable to the Company. The Company may
also determine to pay dividends, make a tax-free return of capital, repurchase
Common Stock and fund the Stock Program. However, the Company and the
Association have committed to the OTS that they will take no action to further
the payment of any return of capital during the one-year period following
consummation of the Conversion. See "Dividend Policy."
29
<PAGE>
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to adopt stock repurchase plans, subject to statutory
and regulatory requirements. Unless approved by the OTS, the Company, pursuant
to OTS regulations, will be prohibited from repurchasing any shares of Common
Stock for three years except (i) for an offer to all stockholders on a pro rata
basis, or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the Conversion, the OTS regulations permit the Company
to repurchase its Common Stock so long as: (i) the repurchases within the
following two years are part of an open-market program not involving greater
than 5% of its outstanding capital stock during a twelve-month period; (ii) the
repurchases do not cause the Association to become "undercapitalized" within the
meaning of the OTS prompt corrective action regulation; and (iii) the Company
provides to the Regional Director of the OTS no later than ten days prior to the
commencement of a repurchase program written notice containing a full
description of the program to be undertaken and such program is not disapproved
by the Regional Director. See "Regulation--Prompt Corrective Regulatory
Action." In addition, under current OTS policies, repurchases may be allowed in
the first year following Conversion and in amounts greater than 5% in the second
and third years following Conversion provided there are valid and compelling
business reasons for such repurchases and the OTS does not object to such
repurchases.
Based upon facts and circumstances following the Conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but
not be limited to: (i) market and economic factors such as the price at which
the stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares, and the opportunity to improve the
Company's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Company and its shareholders.
In the event the Company determines to repurchase stock, such repurchases may be
made at market prices which may be in excess of the Purchase Price in the
Conversion and in excess of the per share book value. To the extent that the
Company repurchases stock at market prices in excess of the per share book
value, such repurchases may have a dilutive effect upon the interests of
existing stockholders. Any stock repurchases will be subject to the
determination of the Board of Directors that both the Company and the
Association will be capitalized in excess of all applicable regulatory
requirements after any such repurchases and that such capital will be adequate,
taking into account, among other things, the level of non-performing and other
risk assets, the Company's and the Association's current and projected results
of operations and asset/liability structure, the economic environment, tax and
other considerations. See "The Conversion--Certain Restrictions on Purchase or
Transfer of Shares after Conversion."
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. In the future, the Board of Directors intends to
consider a policy of paying cash or stock dividends on the Common Stock.
However, no decision has been made with respect to the payment of dividends.
Declarations of dividends by the Board of Directors, if any, will depend upon a
number of factors, including the amount of net proceeds retained by the Company
in the Conversion, investment opportunities available to the Company or the
Association, capital requirements, regulatory limitations, the Company's and the
Association's financial condition and results of operations, tax considerations
and general economic conditions. No assurances can be given, however, that any
dividends will be paid or, if commenced, will continue to be paid. Special cash
dividends, stock dividends or returns of capital may be paid in addition to, or
in lieu of, regular cash dividends (however, the Company and the Association
have committed to the OTS that they will take no action to further the payment
of any return of capital during the one-year period following consummation of
the Conversion).
The Association will not be permitted to pay dividends to the Company on
its capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion--Liquidation Rights."
For information concerning federal regulations which apply to the Association in
determining the amount of proceeds which may be retained by the Company and
regarding a savings institution's ability to make capital
30
<PAGE>
distributions, including payment of dividends to its holding company, see
"Federal and State TaxationFederal TaxationDistributions" and "Regulation--
Federal Savings Institution Regulation--Limitation on Capital Distributions."
Unlike the Association, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be, in part, dependent upon dividends from the
Association in addition to the net proceeds retained by the Company and earnings
thereon. The Company is subject, however, to the requirements of Delaware law,
which generally limit dividends to an amount equal to the excess of the net
assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital (generally defined as the aggregate par
value of the outstanding shares of the Company's capital stock having a par
value plus the amount of the consideration paid for shares of the Company's
capital stock without par value) or, if there is no such excess, to its net
profits for the current and/or immediately preceding fiscal year.
MARKET FOR THE COMMON STOCK
The Company and the Association have never issued capital stock, and
consequently, there is no established market for the Common Stock at this time.
The Company has received conditional approval to have its Common Stock quoted on
the Nasdaq National Market under the symbol "FPFC." Making a market involves
maintaining bid and ask quotations and being able, as principal, to effect
transactions in reasonable quantities at these quoted prices, subject to various
securities laws and other regulatory requirements. Additionally, the
development of a liquid public market depends on the existence of willing buyers
and sellers, the presence of which is not within the control of the Company, the
Association or any market maker. Accordingly, the number of active buyers and
sellers of the Common Stock at any particular time may be limited. Under such
circumstances, investors in the Common Stock could have difficulty disposing of
their shares and should not view the Common Stock as a short-term investment.
Accordingly, there can be no assurance that an active and liquid trading market
for the Common Stock will develop or that, if developed, it will continue, nor
is there any assurance that persons purchasing shares of Common Stock will be
able to sell them at or above the Purchase Price. 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, the Company must satisfy certain minimum
capitalization requirements, and there must be at least 400 round lot
shareholders. KBW has indicated its intention to act as a market maker in the
Common Stock following the consummation of the Conversion, depending on trading
volume and subject to compliance with applicable laws and regulatory
requirements. Furthermore, Webb has agreed to use its best efforts to assist
the Company in obtaining at least two additional market makers for the Common
Stock. There can be no assurance there will be two additional market makers for
the Common Stock. There can be no assurance that purchasers will be able to
sell their shares at or above the Purchase Price.
31
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical capitalization of the
Association at June 30, 1998, and the pro forma consolidated capitalization of
the Company after giving effect to the Conversion, including the issuance of
shares to the Foundation, based upon the sale of the number of shares indicated
in the table and the other assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
---------------------------------------------------------------
10,438,625
6,709,135 7,893,100 9,077,065 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
ASSOCIATION ESTIMATED ESTIMATED ESTIMATED ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
----------- ------------ ------------ ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Borrowings:
Deposits (2).............................. $435,462 $435,462 $435,462 $435,462 $435,462
Repurchase agreements................ 60,430 60,430 60,430 60,430 60,430
FHLB advances............................. 44,820 44,820 44,820 44,820 44,820
-------- -------- -------- -------- --------
Total deposits and borrowed funds......... $540,712 $540,712 $540,712 $540,712 $540,712
======== ======== ======== ======== ========
Stockholders' equity:
Preferred Stock, $.01 par value,
3,000,000 shares authorized;
none to be issued....................... $ - $ - $ - $ - $ -
Common Stock, $.01 par value,
33,000,000 shares authorized;
shares to be issued as reflected(3)..... - 72 85 98 112
Additional paid-in capital(3)............. - 65,208 76,899 88,591 102,192
Retained earnings(4)...................... 57,763 57,763 57,763 57,763 57,763
Net unrealized gain (loss) on
securities available-for-sale,
net of taxes............................ 1,594 1,594 1,594 1,594 1,594
Shares issued to Foundation............... - 5,159 6,069 6,979 8,026
Less:
Foundation contribution expense,
net (5)................................. - 3,405 4,006 4,606 5,297
Common Stock acquired by the
ESOP(6)................................. - 5,780 6,800 7,820 8,993
Common Stock acquired by the
Stock Program(7)........................ - 2,890 3,400 3,910 4,497
-------- -------- -------- -------- --------
Total stockholders' equity................. $ 59,357 $117,721 $128,204 $138,689 $150,900
======== ======== ======== ======== ========
</TABLE>
____________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects the issuance of shares sold in the Offerings and the issuance of
additional shares of Common Stock to the Foundation in an amount of
515,865, 606,900, 697,935 and 802,625 shares at the minimum, midpoint,
maximum and maximum, as adjusted, of the Estimated Price Range, at a value
of $10.00 per share. No effect has been given to the issuance of
additional shares of Common Stock pursuant to the Company's Stock Option
Plan intended to be adopted by the Company and presented for approval of
stockholders at a meeting of stockholders following the Conversion. The
Stock Option Plan would provide the grant of stock options to purchase an
amount of Common Stock equal to 10% of the shares of Common Stock issued in
the Conversion, including shares issued to the Foundation. See "Management
of the Association--Benefit Plans--Stock Option Plan."
(4) The retained earnings of the Association will be substantially restricted
after the Conversion. See "The Conversion--Liquidation Rights."
(5) Represents the tax effect of the contribution of Common Stock to the
Foundation based on a 34% tax rate. The realization of the deferred 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.
(6) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the ESOP
and the funds used to acquire the ESOP shares will be borrowed from the
Company. The Common Stock acquired by the ESOP is reflected as a reduction
of stockholders' equity. See "Management of the Association--Benefit
Plans--ESOP" and "--Benefit Plans--Stock Program."
(7) Assumes that, subsequent to the Conversion, an amount equal to 4% of the
shares of Common Stock sold in the Conversion, including shares issued to
the Foundation, is purchased by the Stock Program through open market
purchases. The Common Stock purchased by the Stock Program is reflected as
a reduction of stockholders' equity. See "Risk Factors--Possible Dilutive
Effect of Stock Program and Stock Options," Footnote 3 to the table under
"Pro Forma Data" and "Management of the Association--Benefit Plans--Stock
Program."
32
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $65.3 million and $88.7 million based upon the
following assumptions: (i) $5.0 million will be sold to executive officers,
Directors and employees of the Association and Company, the ESOP will purchase
8% of the Common Stock issued in connection with the Conversion, including
shares issued to the Foundation, and the remaining shares will be sold in the
Subscription and Community Offerings; (ii) Webb will receive a fee equal to
1.25% of the aggregate Purchase Price of the shares sold in the Subscription
Offering and Community Offering, up to the maximum of the estimated price range,
except that no fee will be paid with respect to shares purchased by the Employee
Plans, including the ESOP, officers, employees, Directors of the Association and
Company and members of their immediate families; (iii) the Company will issue to
the Foundation an amount of Common Stock of equal to approximately 7.7% of the
Common Stock sold in the Conversion from authorized but unissued shares; and
(iv) Conversion expenses, excluding the marketing fees paid to Webb, will be
approximately $1.1 million. Actual Conversion expenses may vary from those
estimated.
Pro forma consolidated net income of the Company for the year ended
June 30, 1998 has been calculated as if the Common Stock had been sold at the
beginning of the fiscal year and the net proceeds had been invested at 5.38%,
the one year U.S. Treasury note rate at June 30, 1998. The Treasury yield was
used on the reinvestment of proceeds because it more appropriately reflects a
market rate of return than the arithmetic average of the average yield of the
Association's interest-earning assets and cost of deposits, which was 5.23% at
June 30, 1998. The tables do not reflect the effect of withdrawals from deposit
accounts for the purchase of Common Stock. The pro forma after-tax yield for
the Company and the Association is assumed to be 3.55% for the year ended June
30, 1998 (based on an assumed tax rate of 34%). Historical and pro forma per
share amounts have been calculated by dividing historical and pro forma amounts
by the indicated number of shares of Common Stock, as adjusted to give effect to
the purchase of shares by the ESOP and the effect of the issuance of shares to
the Foundation. No effect has been given in the pro forma stockholders' equity
calculations for the assumed earnings on the net proceeds. As discussed under
"Use of Proceeds," the Company will retain 50% of the net Conversion proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
The following table summarizes historical data of the Association and pro
forma data of the Company at or the year ended June 30, 1998, based on the
assumptions set forth above and in the table and should not be used as a basis
for projections of market value of the Common Stock following the Conversion.
The table below gives effect to the Stock Program, which are expected to be
adopted by the Company following the Conversion and presented to stockholders
for approval at a meeting of stockholders. See Footnote 3 to the table and
"Management of the Association--Benefit Plans--Stock Program." No effect has
been given in the table to the possible issuance of additional shares reserved
for future issuance pursuant to the Stock Option Plan to be adopted by the Board
of Directors of the Company and presented to stockholders for approval at a
meeting of stockholders, nor does book value as presented give any effect to the
liquidation account to be established for the benefit of Eligible Account
Holders or Supplemental Eligible Account Holders or, in the event of liquidation
of the Association, to the tax effect of the bad debt reserve and other factors.
See Footnote 4 to the tables below, "The Conversion--Liquidation Rights" and
"Management of the Association--Benefit Plans--Stock Option Plan." THE FOLLOWING
TABLES GIVE EFFECT TO THE ISSUANCE OF AUTHORIZED BUT UNISSUED SHARES OF THE
COMPANY'S COMMON STOCK TO THE FOUNDATION CONCURRENTLY WITH THE COMPLETION OF THE
CONVERSION. THE VALUATION RANGE, AS SET FORTH HEREIN AND IN THE TABLES BELOW,
TAKES INTO ACCOUNT THE DILUTIVE IMPACT OF THE ISSUANCE OF SHARES TO THE
FOUNDATION.
33
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30, 1998
-------------------------------------------------------------------------
10,438,625
6,709,135 7,893,100 9,077,065 SHARES SOLD AT
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT $10.00 PER SHARE
$10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE (15% ABOVE
(MINIMUM (MIDPOINT (MAXIMUM OF MAXIMUM OF
OF ESTIMATED OF ESTIMATED ESTIMATED PRICE ESTIMATED PRICE
PRICE RANGE) PRICE RANGE) RANGE) RANGE)(7)
-------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds..................................... $ 67,091 $ 78,931 $ 90,771 $104,386
Plus: Shares issued to the Foundation
(equal to 7.7% of stock sold in
Conversion)............................... 5,159 6,069 6,979 8,026
-------- -------- -------- --------
Pro forma market capitalization.................... $ 72,250 $ 85,000 $ 97,750 $112,412
======== ======== ======== ========
Gross proceeds..................................... $ 67,091 $ 78,931 $ 90,771 $104,386
Less: Offering expenses and
commissions............................... (1,811) (1,947) (2,082) (2,082)
-------- -------- -------- --------
Estimated net proceeds............................. 65,280 76,984 88,689 102,304
Less: Common Stock purchased
by ESOP................................... (5,780) (6,800) (7,820) (8,993)
Common Stock purchased by
Stock Program............................. (2,890) (3,400) (3,910) (4,497)
-------- -------- -------- --------
Estimated net proceeds, as adjusted.............. $ 56,610 $ 66,784 $ 76,959 $ 88,814
======== ======== ======== ========
Net income(1):
Historical....................................... $ 4,072 $ 4,072 $ 4,072 $ 4,072
Pro forma income on net proceeds,
as adjusted.................................... 2,010 2,371 2,733 3,154
Less: Pro forma ESOP adjustment(2)................ (254) (299) (344) (396)
Pro forma Stock Program
adjustment(3)............................. (381) (449) (516) (594)
-------- -------- -------- --------
Pro forma net income........................ $ 5,447 $ 5,695 $ 5,945 $ 6,236
======== ======== ======== ========
Per share net income(1):
Historical.................................. $ 0.61 $ 0.52 $ 0.46 $ 0.40
Pro forma income on net proceeds,
as adjusted............................... 0.30 0.30 0.30 0.30
Less: Pro forma ESOP adjustment(2)................ (0.04) (0.04) (0.04) (0.04)
Pro forma Stock Program
adjustment(3)............................. (0.06) (0.06) (0.06) (0.06)
-------- -------- -------- --------
Pro forma net income per share.............. $ 0.81 $ 0.72 $ 0.66 $ 0.60
======== ======== ======== ========
Stockholders' equity(4):
Historical....................................... $ 59,357 $ 59,357 $ 59,357 $ 59,357
Estimated net proceeds........................... 65,280 76,984 88,689 102,304
Plus: Shares issued to Foundation............... 5,159 6,069 6,979 8,026
Less: After tax cost of Foundation.............. (3,405) (4,006) (4,606) (5,297)
Less: Common Stock acquired
by ESOP(2).............................. (5,780) (6,800) (7,820) (8,993)
Less: Common Stock acquired
by Stock Program(3)..................... (2,890) (3,400) (3,910) (4,497)
-------- -------- -------- --------
Pro forma stockholders'
equity(3)(5)(6)........................... $117,721 $128,204 $138,689 $150,900
======== ======== ======== ========
Stockholders' equity per share(4)(7):
Historical....................................... $ 8.22 $ 6.98 $ 6.07 $ 5.28
Estimated net proceeds........................... 9.04 9.06 9.07 9.10
Plus: Shares issued to Foundation............... 0.71 0.71 0.71 0.71
Less: After tax cost of Foundation.............. (0.47) (0.47) (0.47) (0.47)
Less: Common Stock acquired by ESOP(2).......... (0.80) (0.80) (0.80) (0.80)
Less: Common Stock acquired by
Stock Program(3)........................ (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity
per share(3)(5)(6)........................ $ 16.30 $ 15.08 $ 14.18 $ 13.42
======== ======== ======== ========
Offering price as a percentage of
pro forma stockholders' equity per share......... 61.37% 66.30% 70.48% 74.49%
Offering price to pro forma net
earnings per share............................... 12.28x 13.81x 15.22x 16.68x
</TABLE>
(See footnotes on next page)
34
<PAGE>
____________________
(1) Does not give effect to the non-recurring expense that will be recognized in
fiscal 1999 as a result of the establishment of the Foundation. The Company
will recognize an after-tax expense for the amount of the contribution to
the Foundation which is expected to be $3.4 million, $4.0 million,
$4.6 million and $5.3 million at the minimum, midpoint, maximum and maximum
as adjusted, of the Estimated Price Range, respectively. Assuming the
contribution to the Foundation was expensed during the year ended June 30,
1998, pro forma net income (loss) per share would be $0.10, $0.01, $(0.06)
and $(0.12), at the minimum, midpoint, maximum and maximum, as adjusted,
respectively. Per share net income data is based on 6,685,533, 7,865,333,
9,045,153 and 10,401,903 shares outstanding which represents shares sold in
the Conversion, shares contributed to the Foundation and shares to be
allocated or distributed under the ESOP and Stock Program for the period
presented.
(2) It is assumed that 8% of the shares of Common Stock issued in connection
with the Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from the
Company. The amount to be borrowed is reflected as a reduction of
stockholders' equity. The Association intends to make annual contributions
to the ESOP in an amount at least equal to the principal and interest
requirement of the debt. The Association's total annual payment of the ESOP
debt is based upon fifteen equal annual installments of principal. The pro
forma net earnings assumes: (i) that the Association's contribution to the
ESOP is equivalent to the debt service requirement for the year ended
June 30, 1998, and was made at the end of the period; (ii) that 38,533,
45,333, 52,133 and 59,953 shares at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively, were committed to be released
during the year ended June 30, 1998 at an average fair value of $10.00 per
share in accordance with SOP 93-6; and (iii) only the ESOP shares committed
to be released were considered outstanding for purposes of the net earnings
per share calculations. See "Management of the Association--Benefit Plans--
ESOP."
(3) Gives effect to the Stock Program expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. If the Stock Program is approved by stockholders, the Stock
Program intends to acquire an amount of Common Stock equal to 4% of the
shares of Common Stock issued in connection with the Conversion, including
shares issued to the Foundation, or 289,000, 340,000, 391,000 and 449,650
shares of Common Stock at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively, either through open
market purchases, if permissible, or from authorized but unissued shares of
Common Stock or treasury stock of the Company, if any. Funds used by the
Stock Program to purchase the shares will be contributed to the Stock
Program by the Association. In calculating the pro forma effect of the
Stock Program, it is assumed that the shares were acquired by the Stock
Program at the beginning of the period presented in open market purchases at
the Purchase Price and that 20% of the amount contributed was an amortized
expense during such period. The issuance of authorized but unissued shares
of the Company's Common Stock to the Stock Program instead of open market
purchases would dilute the voting interests of existing stockholders by
approximately 3.8% and pro forma net earnings per share would be $0.80,
$0.71, $0.64 and $0.59 at the minimum, midpoint, maximum and 15% above the
maximum of the range, respectively and pro forma stockholders' equity per
share would be $18.57, $17.41, $16.55 and $15.82 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively. There can be
no assurance that stockholder approval of the Stock Program will be
obtained, or that the actual purchase price of the shares granted under the
Stock Program will be equal to the Purchase Price. See "Management of the
Association--Benefit Plans--Stock Program."
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan expected to be adopted by the
Company following the Conversion. The Company expects to present the Stock
Option Plan for approval at a meeting of stockholders. If the Stock Option
Plan is approved by stockholders, an amount equal to 10% of the Common Stock
issued in connection with the Conversion, including shares issued to the
Foundation, or 722,500, 850,000, 977,500 and 1,124,125 shares at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated Price
Range, respectively, will be reserved for future issuance upon the exercise
of options to be granted under the Stock Option Plan. The issuance of
Common Stock pursuant to the exercise of options under the Stock Option Plan
will result in the dilution of existing stockholders' interests. Assuming
all options were exercised at the end of the period at an exercise price of
$10.00 per share, the pro forma net earnings per share would be $0.77,
$0.69, $0.63 and $0.58, respectively, and the pro forma stockholders' equity
per share would be $18.11, $17.01, $16.19 and $15.50, respectively. See
"Management of the Association--Benefit Plans--Stock Option Plan."
(5) The retained earnings of the Association will continue to be substantially
restricted after the Conversion. See "Dividend Policy" and "The
Conversion--Liquidation Rights."
(6) Stockholders' equity per share data is based upon 7,225,000, 8,500,000,
9,775,000 and 11,241,250 shares outstanding representing shares sold in the
conversion, shares contributed to the Foundation and shares purchased by the
ESOP and Stock Program.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
35
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of the
Conversion, Keller has estimated that the pro forma aggregate market
capitalization of the Company would be approximately $90.5 million, at the
midpoint, which is approximately $5.5 million greater than the pro forma
aggregate market capitalization of the Company if the Foundation is approved by
members of the Association, and would result in approximately an $11.6 million
increase, or 14.66%, in the amount of Common Stock offered for sale in the
Conversion. The pro forma price to book 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 Foundation. Further, assuming
the midpoint of the Estimated Price Range, pro forma stockholders' equity per
share and pro forma earnings per share would be substantially the same with the
Foundation as without the Foundation. In this regard, pro forma stockholders'
equity and pro forma net income per share would be $15.13 and $0.72,
respectively, at the midpoint of the estimate, assuming no Foundation, and
$15.08 and $0.72, respectively, with the Foundation. The pro forma price to book
ratio and the pro forma price to earnings ratio are 66.10% and 13.89x,
respectively, at the midpoint of the estimate, assuming no Foundation and are
66.30% and 13.81x, respectively, with the Foundation. This estimate by Keller
was prepared at the request of the OTS and is solely for the purposes of
providing members with sufficient information with which to make an informed
decision on the Foundation. There is no assurance that in the event the
Foundation is not approved by members of the Association 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. Any appraisal prepared at
that time would be based on the facts and circumstances existing at that time,
including, among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Price Range, assuming the Conversion was completed at
June 30, 1998.
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM AS ADJUSTED
---------------------- ---------------------- ---------------------- ----------------------
WITH NO WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering amount.......... $ 67,091 $ 76,925 $ 78,931 $ 90,500 $ 90,771 $104,075 $104,386 $119,686
Pro forma market capitalization.... 72,250 76,925 85,000 90,500 97,750 104,075 112,412 119,686
Total assets....................... 667,762 678,244 678,245 690,577 688,730 702,911 700,942 717,198
Total liabilities.................. 550,041 550,041 550,041 550,041 550,041 550,041 550,041 550,041
Pro forma stockholders' equity..... 117,721 128,204 128,204 140,537 138,689 152,870 150,900 167,158
Pro forma consolidated net
earnings.......................... 5,447 5,730 5,695 6,030 5,945 6,329 6,236 6,677
Pro forma stockholders' equity
per share......................... 16.30 16.27 15.08 15.13 14.18 14.29 13.42 13.57
Pro forma consolidated net
earnings per share................ 0.81 0.81 0.72 0.72 0.66 0.66 0.60 0.60
Pro Forma Pricing Ratios:
Offering price as a percentage
of pro forma stockholders'
equity per share................. 61.37% 61.48% 66.30% 66.10% 70.48% 69.99% 74.49% 73.71%
Offering price to pro forma
net earnings per share........... 12.28x 12.42x 13.81x 13.89x 15.22x 15.22x 16.68X 16.59X
Pro forma market capitalization
to assets........................ 10.82% 11.34% 12.53% 13.10% 14.19% 14.61% 16.04% 16.69%
Pro Forma Financial Ratios:
Return on assets.................. 0.82% 0.84% 0.84% 0.87% 0.86% 0.90% 0.89% 0.93%
Return on stockholders' equity.... 4.63 4.47 4.44 4.29 4.29 4.14 4.13 3.99
Stockholders' equity to assets.... 17.63 18.90 18.90 20.35 20.14 21.75 21.53 23.31
</TABLE>
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Association's results of operations are dependent primarily on net
interest income, which is the difference ("spread") between the interest income
earned on its loans, mortgage-backed securities, and investment portfolio and
its cost of funds, consisting of interest paid on its deposits and borrowed
funds. The interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. The Association's net income is also affected by, among other things,
loan fee income, provisions for loan losses, service charges, operating expenses
and franchise and income taxes. The Association's revenues are derived
primarily from interest on mortgage loans, consumer loans, mortgage-backed
securities and investments, as well as income from service charges and loan
originations. The Association's operating expenses principally consist of
employee compensation and benefits, occupancy and other general and
administrative expenses. The Association's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
The Association has been, and intends to continue to be, a community-
oriented financial institution offering a variety of financial services to meet
the needs of the communities it serves. The Association attracts deposits from
the general public and uses such deposits, together with borrowings and other
funds, to originate one- to four-family residential mortgage loans and short-
term consumer loans. To a lesser extent, the Association also originates
residential construction loans in its market area and a limited amount of
commercial business loans and loans secured by multi-family and non-residential
real estate. The Association's deposits are insured up to the maximum allowable
amount by the SAIF as administered by the FDIC. The Association also invests in
mortgage-backed securities, most of which are insured or guaranteed by federal
agencies, as well as securities issued by the U.S. government or agencies
thereof.
The Association is not aware of any market or institutional trends, events
or uncertainties that are expected to have a material effect on liquidity,
capital resources or operations, except as discussed below. The Association is
also not aware of any current recommendations by its regulators which would have
a material effect if implemented, except as discussed below.
MANAGEMENT STRATEGY
The Association operates as a consumer-oriented savings association,
offering traditional savings deposit and loan products to its local community.
Management's primary goal has been to improve profitability and its capital
position, so that the Association can have greater flexibility in providing the
products and services desired by the customers in the communities it serves. To
accomplish this, the Association has employed an operating strategy which has:
(1) emphasized the increased origination of one- to four-family residential
mortgage loans secured by properties located in its primary market area;
(2) emphasized the increased origination of consumer loans, consisting primarily
of home equity and automobile loans, in an effort to diversify the loan
portfolio; (3) sought to maintain asset quality and manage credit risk by
limiting its investment in commercial real estate and multi-family lending;
(4) invested funds not utilized for lending in investment securities primarily
consisting of U.S. Government Agency and mortgage-backed securities; and
(5) focused on increasing its loan and deposit market share and the retention of
existing deposit accounts by offering competitive rates on its deposit and loan
products and expanding the number of deposit and loan products and services
offered. In addition, while the Association has not done so in the past, it may
in the future sell long-term, fixed-rate mortgage loans. Such sales would help
the Association better manage interest rate risk by giving it a portfolio of
interest-earning assets and interest-bearing liabilities that reprice more
similarly, thus reducing the risk posed by rapidly-changing interest rate
environments in which different periods to repricing adversely affect net
interest income.
Management periodically engages in arbitrage strategies as a means of
augmenting the earnings of the Association by leveraging the balance sheet while
helping to insulate against interest rate risk. The arbitrage is accomplished
by acquiring matching assets and liabilities with similar cash flow
characteristics as a means of increasing earnings on the positive spread between
the interest earning assets and the interest bearing liabilities. As the
Association typically makes relatively longer-term mortgage loans, while the
deposit base is generally short term in nature (i.e.
37
<PAGE>
passbook accounts, checking accounts and certificates of deposit with terms of
less than three years), the arbitrage strategy helps the Association manage
interest rate risk by more closely matching the term to repricing of the
interest-earning assets and the interest-bearing liabilities. The assets used in
the arbitrage strategies are mortgage-backed securities issued or guaranteed by
FNMA, FHLMC or GNMA, while funding is obtained through FHLB advances or through
reverse repurchase agreements. Historically, the Association has looked to
achieve spreads of between 100 to 120 basis points with its arbitrage positions.
38
<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 in both
dollars and rates. Average balances are derived from daily average balances.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-------------------------------------------------------------------------------
AT JUNE 30, 1998 1998 1997 1996
---------------- ------------------------- ------------------------- -------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- ------ -------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-bearing deposits
in other financial
institutions................ $ 1,565 5.50% $ 4,107 $ 306 7.45% $ 10,452 $ 623 5.96% $ 3,110 $ 191 6.14%
Taxable securities(1)........ 25,949 6.09 40,264 2,441 6.04 47,337 2,751 5.71 45,785 2,691 5.80
Nontaxable securities(1)(2).. 1,217 10.46 1,234 66 8.29 437 32 11.09 457 32 10.61
Mortgage-backed
securities(1)............... 207,899 6.74 200,866 13,581 6.84 188,362 12,805 6.76 193,599 13,124 6.73
Loans receivable, net........ 353,012 7.93 315,726 25,736 8.15 267,928 21,872 8.16 247,699 20,135 8.13
FHLB stock................... 4,415 7.25 4,869 352 7.23 4,683 330 7.05 3,749 263 7.02
-------- -------- ------- -------- -------- -------- -------
Total interest-earning
assets................... 594,057 567,066 42,482 7.52 519,199 38,413 7.37 494,399 36,436 7.34
Noninterest-earning assets:
Cash and amounts due from
depository institutions..... 6,668 9,780 9,366 4,953
Premises and equipment, net.. 5,899 6,183 5,589 4,958
Other noninterest-earning
assets...................... 2,774 2,304 (1,727) 2,023
-------- -------- -------- --------
Total assets.............. $609,398 $585,333 $532,427 $506,333
======== ======== ======== ========
Interest-bearing liabilities:
NOW and money market
accounts.................... $102,874 3.34 $ 95,871 3,300 3.44 $ 84,388 2,701 3.20 $ 70,183 1,942 2.77
Savings accounts............. 67,401 2.24 68,945 1,661 2.41 72,132 1,782 2.47 77,953 2,013 2.58
Time deposits................ 259,969 5.88 251,130 14,898 5.93 238,859 14,013 5.87 232,955 13,927 5.98
Repurchase agreements........ 60,430 5.69 45,044 2,596 5.76 8,470 480 5.67 - - -
FHLB advances................ 44,820 5.71 52,396 3,057 5.83 68,596 3,953 5.76 68,615 3,976 5.79
-------- -------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities.............. 535,494 513,386 25,512 4.97 472,445 22,929 4.85 449,706 21,858 4.86
Noninterest-bearing
liabilities.................. 14,547 13,739 9,368 7,944
-------- -------- -------- --------
Total liabilities............ 550,041 527,125 481,813 457,650
Retained earnings............. 59,357 58,208 50,614 48,683
-------- -------- -------- --------
Total liabilities and
retained earnings........ $609,398 $585,333 $532,427 $506,333
======== ======== ======== ========
Net interest income/interest
rate spread.................. $16,970 2.55% $15,484 2.52% $14,578 2.48%
======= ====== ======= ====== ======= ======
Net interest margin (net
interest income as a
percent of average
interest-earning assets)..... 3.00% 2.97% 2.94%
====== ====== ======
Average interest-earning
assets to interest-
bearing liabilities.......... 110.46% 109.90% 109.94%
====== ====== ======
</TABLE>
- ----------------
(1) Includes unamortized discounts and premiums. Average balance is computed
using the carrying value of securities. The average yield has been
computed using the historical amortized cost average balance for available
for sale securities.
(2) Average yields are stated on a fully taxable equivalent basis.
39
<PAGE>
Rate/Volume Analysis of Net Interest Income. The following table 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 increase or decrease related to changes in balances
and/or 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>
YEAR ENDED YEAR ENDED
JUNE 30, 1998 JUNE 30, 1997
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
----------------------------------- -----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------------- ----------------------
VOLUME RATE NET VOLUME RATE NET
---------- ---------- ----------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits in other
financial institutions.................... $ (445) $128 $ (317) $ 438 $ (6) $ 432
Taxable securities......................... (460) 150 (310) 102 (42) 60
Nontaxable securities...................... 67 (33) 34 (2) 2 -
Mortgage-backed securities................. 637 139 776 (385) 66 (319)
Loans receivable, net...................... 3,896 (32) 3,864 1,651 86 1,737
FHLB stock................................. 13 9 22 66 1 67
------ ---- ------ ------ ----- ------
Total interest-earning assets.......... 3,708 361 4,069 1,870 107 1,977
------ ---- ------ ------ ----- ------
INTEREST-BEARING LIABILITIES:
NOW and money market accounts.............. 385 214 599 428 331 759
Savings accounts........................... (77) (44) (121) (146) (85) (231)
Time deposits.............................. 727 158 885 349 (262) 87
Repurchase agreements...................... 2,108 8 2,116 480 - 480
FHLB advances.............................. (945) 49 (896) (1) (22) (23)
------ ---- ------ ------ ----- ------
Total interest-bearing liabilities..... 2,210 373 2,583 1,111 (39) 1,072
------ ---- ------ ------ ----- ------
Net change in net interest income.......... $1,498 $(12) $1,486 $ 759 $ 146 $ 905
====== ==== ====== ====== ===== ======
</TABLE>
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
General. The principal market risk affecting the Association is interest
rate risk. The Association does not maintain a trading account for any class of
financial instrument, and the Association is not affected by foreign currency
exchange rate risk or commodity price risk. Because the Association does not
hold any equity securities other than stock in the FHLB of Cincinnati, the
Association is not subject to equity price risk.
The Association, like other financial institutions, is subject to interest
rate risk to the extent that its interest-earnings assets reprice differently
than its interest-bearing liabilities. As part of its efforts to monitor and
manage the interest rate risk of the Association, the Board of Directors has
adopted an interest rate risk policy which charges the Board with reviewing
quarterly reports related to interest rate risk and to set exposure limits for
the Association as a guide to senior management in setting and implementing day
to day operating strategies.
Quantitative Aspects of Market Risk. As part of its efforts to monitor and
manage interest rate risk, the Association uses the NPV methodology adopted by
the OTS as part of its capital regulations. See "Regulation--Federal Savings
Institution Regulation--Capital Requirements." In essence, NPV is the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities. The Association uses a
net portfolio value simulation model prepared in-house as the primary method of
managing interest rate risk. The model utilizes the actual cash flows and
repricing characteristics of its assets and liabilities and incorporates market-
based
40
<PAGE>
assumptions regarding the impact of changing interest rates on future volumes
and prepayment rates. For purposes of valuing core deposit products, valuations
derived by the OTS for the Association each quarter are utilized.
Presented below, as of June 30, 1998, is an analysis of the Association's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis point increments in market interest rates. The
percentage changes fall within the policy limits set forth by the Board of
Directors of the Association.
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES ------------------------------------ -----------------------
IN BASIS POINTS %
(RATE SHOCK) AMOUNT $ CHANGE CHANGE NPV RATIO CHANGE
- ----------------- ---------- ------------ ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 $32,658 $(39,530) -54.76% 5.99% -571 bp
300 43,056 (29,132) -40.36 7.65 -405
200 53,449 (18,739) -25.96 9.19 -251
100 63,770 (8,418) -11.66 10.63 -107
0 72,188 - - 11.70 -
(100) 71,122 (1,066) -1.48 11.40 -30
(200) 66,614 (5,574) -7.72 10.64 -106
(300) 65,500 (6,688) -9.26 10.37 -133
(400) 64,447 (7,741) -10.72 10.13 -157
</TABLE>
As illustrated in the table, the Association's NPV is more sensitive to
increases in interest rates than to decreases. This sensitivity arises because
as interest rates rise borrowers become less likely to prepay fixed-rate loans
than when rates are falling. Since a majority of the Association's assets have
longer terms and its liabilities have shorter terms, an increase in market
interest rates results in the cash flow characteristics of the Association's
liabilities changing more rapidly than the cash flow characteristics of its
assets resulting in a decrease in NPV from the base.
In evaluating the Association's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
have similar maturities or period to repricing, they may react in varying
degrees to changes in market interest rates. In addition, 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. Furthermore, in the event of a change in interest
rates, prepayments on loans and mortgage-backed securities and early withdrawals
of certificates of deposit would likely deviate significantly from those assumed
in calculating the table. Therefore, the actual effect of changing interest
rates may differ from that presented in the foregoing table.
The Board of Directors and management of the Association believe that
certain factors afford the Association the ability to operate successfully
despite its exposure to interest rate risk. The Association manages its
interest rate risk by maintaining capital and liquidity well in excess of
regulatory requirements. The Association continually manages interest rate
risk, and formally measures changes in interest rate risk quarterly using its
own interest rate risk model, as well as the OTS model outlined above. The
Board of Directors sets interest rate risk limits to give management guidelines
and limitations as to how much risk can be maintained. The guidelines are
reviewed periodically to ensure effectiveness. Management makes adjustments to
both assets and liabilities continuously to mitigate interest rate risk
exposure. For the year ended June 30, 1998, the Association's tangible capital
was 9.5% of total assets and its liquidity ratio was 9.4%. At that same date,
the average liquidity ratio for all savings institutions was 7.0%, while the
average
41
<PAGE>
liquidity ratio for Ohio savings institutions with assets between $300 million
and $1 billion was 9.7%, as reported by a national banking information service.
FINANCIAL CONDITION AT JUNE 30, 1998 AND 1997
Total assets of the Association were $609.4 million at June 30, 1998,
compared to $548.9 million at June 30, 1997, representing an increase of $60.5
million, or 11.0%. The growth was primarily attributable to increases in loans,
which was partially offset by decreases in investment and mortgage-backed
securities. The increase was funded from an increase in deposits and repurchase
agreements. The changes in the balance sheets and the factors that caused the
changes are discussed below.
Investment and Mortgage-Backed Securities. Total investment and mortgage-
backed securities decreased $8.1 million, or 3.3%, from $247.6 million at
June 30, 1997 to $239.5 million at June 30, 1998. The decrease was the result of
the Association investing funds obtained through sales and maturities of
investment securities to partially fund loan growth.
At June 30, 1998 the Association's mortgage-backed securities portfolio was
comprised primarily of agency-issued securities. The net unrealized gain on
these securities totaled $2.5 million at June 30, 1998. Of the $207.9 million
mortgage-backed securities, $190.1 million, or 91.4%, are classified as
available-for-sale, however, the Association does not anticipate the need to
sell these securities in the near future. Management's strategy emphasizes
investment in securities guaranteed by the U.S. Government and its agencies in
order to minimize credit risk. The investment strategy also includes purchasing
an established level of variable rate mortgage-backed securities with monthly
and annually adjusting interest rates in order to minimize interest rate risk.
These securities provide the Association a continued cash flow stream through
principal paydowns and help reduce the Association's exposure to interest rate
risk. In addition, the Association had approximately $990,000, or 0.5% of
mortgage-related securities, consisting of privately-backed CMOs at June 30,
1998. Privately-backed CMOs carry more risk than government-backed CMOs due to
slightly higher credit risk. While many private issues carry insurance or
guarantees against credit losses to ensure "AAA" market rating, the insurance is
not for 100% of the principal as is the implicit guarantee associated with
government-backed CMOs. The reward for investing in private label product is
the yield premium versus comparable government-backed CMOs. Investment
securities totaled $31.6 million at June 30, 1998 and included U.S. government
and government agency securities as well as a small portfolio of municipal
securities. During 1998, the Association elected to liquidate its position in a
mutual fund which had been underperforming for an extended period. The fund
invested primarily in mortgage-backed securities backed by the U.S. government
or its agencies. The position was sold at a loss of $174,000.
At June 30, 1997, the Association's mortgage-backed and investment
securities were comprised of $202.7 million in available-for-sale securities and
$44.9 million in held-for-maturity securities.
Loans. Loans increased from $285.2 million at June 30, 1997 to
$353.0 million at June 30, 1998. Average loans comprised 55.7% of interest-
earning assets in 1998 compared to 51.6% in 1997. Real estate loans increased
$56.7 million, or 23.7%, from $239.8 million at June 30, 1997 to $296.6 million
at June 30, 1998. The increase in one- to four-family loans represented
$52.4 million, or 92.4%, of the increase in real estate loans as the Association
continued to increase its core lending product. At June 30, 1998, one- to four-
family loans of $268.0 million represented 73.8% of gross loans. The increase in
real estate loans reflects the Association's expansion efforts into Mahoning
County as well as the decrease in long-term interest rates in 1998 which led to
an overall increase in loan demand due to significant refinancing activity.
Consumer loans increased $14.4 million, or 29.0%, from $49.7 million at
June 30, 1997 to $64.1 million at June 30, 1998. The increases were primarily
due to management's increased emphasis on originating consumer loans, which
resulted in a $9.7 million increase in automobile loans and a $4.7 million
increase in other loans.
Deposits and Borrowings. The Association's deposits are obtained primarily
from individuals and businesses in its primary market area. Total deposits
increased $22.6 million, or 5.5%, from $412.9 million at June 30, 1997 to
$435.5 million at June 30, 1998. The growth was primarily in certificates of
deposits, which increased $12.8 million,
42
<PAGE>
or 5.2% during the period and money market accounts which increased $10.9
million, or 18.9%. Repurchase agreements increased $44.4 million, or 277.7%,
from $16.0 million at June 30, 1997 to $60.4 million at June 30, 1998, due to
the Association's arbitrage positions taken during the year.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
General. Net income for the year ended June 30, 1998 increased by $1.9
million or 83.1% from $2.2 million for the year ended June 30, 1997 to $4.1
million for the year ended June 30, 1998. The increase was primarily due to a
decrease in noninterest expense, due to the one-time special assessment to
recapitalize the SAIF, which was recorded in fiscal 1997, as well as the
increase in net interest income and noninterest income, including an increase in
gains on sales of securities. The increase in net income was partially offset
by increases in the provision for loan losses and federal income tax expense.
Net Interest Income. Net interest income is the largest component of the
Association's net income, and consists of the difference between interest income
generated on interest-earnings assets and interest expense incurred on interest-
bearing liabilities. Net interest income is primarily affected by the volume,
interest rates and composition of interest-earning assets and interest-bearing
liabilities.
Net interest income increased approximately $1.5 million, or 9.6%, from
$15.5 million in 1997 to $17.0 million in fiscal 1998. The primary component of
this change was a $3.9 million, or 17.7%, increase in interest income on loans.
The increase in interest income on loans consisted of a $3.9 million increase
due to increased average volume in the loan portfolio and a $32,000 decrease due
to decreasing average interest rates. The increase in interest income of $4.1
million was partially offset by a $2.6 million, or 11.3%, increase in interest
expense, primarily due to the $2.1 million increase in repurchase agreements.
Average loans outstanding during fiscal 1998 increased $47.8 million, or
17.8%, compared to fiscal 1997, while average mortgage-backed securities
increased $12.5 million, or 6.6%, compared to the prior year. The increase in
average loans reflects the Association's expansion efforts into Mahoning County,
the decrease in long term interest rates in 1998 which led to an overall
increase in loan demand due to significant refinancing activity and the
continued growth in the consumer automobile loan portfolio based on successful
relationship development with dealers in the Association's local market. In
fiscal 1998, the Association experienced increases in yield on assets and cost
of liabilities of 15 and 12 basis points, resulting in the $4.1 million increase
in interest income and $2.6 million increase in interest expense. Net interest
margin increased three basis points from 2.97% in 1997 to 3.00% in 1998. The
Association's average interest rate spread increased three basis points from
2.52% in 1997 to 2.55% in 1998.
The tables appearing elsewhere in this discussion provide a more detailed
analysis of the changes in average balances, yields/rates and net interest
income identifying that portion of change in average volume versus that portion
due to change in average rates. See "--Average Balances, Interest Rates and
Yields," and "--Rate/Volume Analysis of Net Interest Income."
Provision for Loan Losses. The provision for loan losses is based on
management's regular review of the loan portfolio, which considers factors such
as past experience, prevailing general economic conditions and considerations
applicable to specific loans, such as the ability of the borrower to repay the
loan and the estimated value of the underlying collateral, as well as changes in
the size and growth of the loan portfolio.
The provision for loan losses increased $1.2 million from $590,000 for 1997
to $1.8 million for 1998. At June 30, 1998, the allowance for loan losses
represented 0.85% of loans, net of unearned and deferred income, compared to
0.60% at June 30, 1997. The increased provision and resulting increased
allowance for loan losses was due to several factors including an increase in
the level of consumer loan charge-offs, the approximately 25% growth in total
loans, the continued trend of increased non-performing loans over the
Association's historical levels as well as local economic conditions including
significant recent layoffs at GM's Lordstown plant caused by a strike at two of
GM's other facilities. The strike which affected these facilities has
subsequently been settled and the majority of the striking workers have returned
to full employment. Management considered the evaluation of the local economic
conditions and the increase in the level of consumer loan charge-offs as
significant factors in evaluating the allowance for loan losses. While
43
<PAGE>
nonperforming loans have increased in the last two years over historical levels,
the Association's level of nonperforming loans is not above peers. The increase
in nonperforming loans is due primarily to increases in nonperforming real
estate loans which have historically resulted in a relatively low level of
charge-offs. The increase in nonperforming consumer loans and charge-offs is
due to the increase in nonperforming loans and charge-offs from indirect
automobile lending. Both the increase in nonperforming loans and the charge-
offs are a result of increases in consumer bankruptcy filings, which is a
national trend. In an effort to reduce the level of nonperforming consumer
loans and charge-offs, management has implemented more aggressive collection
efforts than have historically been utilized. Management believes the allowance
for loan losses is adequate to absorb losses; however, future additions to the
allowance may be necessary based on changes in economic conditions. In
addition, the OTS, as an integral part of its examination process, periodically
reviews the Association's allowance for loan losses. Such agency may require
the Association to make additional provisions for loan losses based on judgments
different from those of management.
Noninterest Income. The Association experienced a $1.3 million, or 294.5%,
increase in noninterest income during 1998. The increase was primarily due to
sales of securities which generated net gains of $135,000 in 1998, resulting in
an increase of $1.1 million over the loss on sale of securities of $934,000
recognized in fiscal 1997. The increase was due to management's decision to
restructure a portion of its investment portfolio which occurred in 1997. The
restructuring was accomplished by selling assets in the investment portfolio
that were underperforming as compared to the rest of the portfolio and using the
proceeds to fund additional loans. In addition, service charges provided an
increase in noninterest income of $156,000, or 16.8% from $929,000 in fiscal
1997 to $1.1 million in fiscal 1998, due to the increase in the average balance
of deposit accounts.
Noninterest Expense. Noninterest expense decreased $1.5 million, or 12.8%,
primarily due to the special assessment to recapitalize the SAIF recorded in
fiscal 1997. Salaries and benefits increased $607,000, or 12.5%, for 1998,
compared to 1997 due primarily to the staffing requirements for opening two new
offices. The construction in progress at June 30, 1998 represented minor
remodeling projects which will not significantly impact operating expenses in
future periods. The Association expects that salaries and benefits may increase
after the Conversion, primarily as a result of the adoption of various employee
benefit plans contemplated in connection with the Conversion. See "Management of
the Association--Benefit Plans." In addition, noninterest expense may increase
in future periods as a result of the possible renovation or reconstruction of
the Association's main office, the cost of which is currently estimated to be up
to $15.0 million. See "Business of the Association--Properties." Other expense
includes professional fees, advertising, deposit account expense, telephone,
stationery and printing as well as other miscellaneous expense accounts. There
were no significant changes to any category of expense included within other
expenses.
Income Taxes. The provision for income taxes totaled $2.5 million in
fiscal 1998 compared to $1.2 million in fiscal 1997, due to the increase in
income before income taxes. The effective tax rate was 38.0% for fiscal 1998 as
compared to 35.3% for fiscal 1997.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
General. Net income for the year ended June 30, 1997 decreased by $1.9
million or 46.4% from $4.1 million for the year ended June 30, 1996 to $2.2
million for the year ended June 30, 1997. The decrease was primarily due to
the increase in noninterest expense, due to the special assessment to
recapitalize the SAIF recorded in 1997, and the provision for loan losses and
the decrease in noninterest income, which was partially offset by increases in
net interest income and a decrease in federal income tax expense.
Net Interest Income. Net interest income increased approximately $906,000,
or 6.2%, from $14.6 million in 1996 to $15.5 million in 1997. In fiscal 1997,
the Association experienced an increased yield on assets of three basis points
and a decreased cost of funds of one basis point. Interest income increased by
$2.0 million, primarily due to increased interest earning assets and, to a
lesser extent, due to the increase in weighted average yields. Interest expense
increased $1.1 million due to increases in average interest bearing liabilities
which was slightly offset by the modest one basis point decrease in the weighted
average cost of funds.
The primary component of the increase in interest income was a $1.7
million, or 8.6%, increase in interest income on loans. Average loans
outstanding during fiscal 1997 increased $20.2 million, or 8.2% compared to
fiscal
44
<PAGE>
1996, while average investment and mortgage-backed securities decreased $2.8
million, or 1.1%, compared to the prior year. The increase in interest income on
loans consisted of a $1.7 million increase due to increased average volume in
the loan portfolio and an $86,000 increase due to rising average interest rates
in the loan portfolio. The increase in interest income was also due to a
$559,000 increase in interest income on securities which was partially offset by
a $319,000 decrease in interest income on mortgage-backed securities. The
increase in interest income on securities and decrease in interest income on
mortgage-backed securities were substantially due to the changes in the average
balance of the respective portfolios.
The increase in interest income was partially offset by a $1.1 million, or
5.0%, increase in interest expense, primarily on NOW and money market accounts
and FHLB advances. Interest expense on NOW and money market accounts increased
both due to a $14.9 million increase in the average balance of NOW and money
market accounts and a 43 basis point increase in the weighted average rate paid
on NOW and money market accounts from 2.77% in 1996 to 3.20% in 1997, as part of
management's strategy to increase core deposit accounts In addition, interest
expense on repurchase agreements increased $480,000 as the Association utilized
retail repurchase agreements as a source of funding in 1997. During 1997, the
Association experienced a $5.9 million increase in the balance of average
certificates, while reducing the weighted average rate paid on those deposits by
eleven basis points, resulting in a modest overall increase of $86,000 in
interest expense on certificates.
The tables appearing elsewhere in this report provide a more detailed
analysis of the changes in average balances, yields/rates and net interest
income identifying that portion of change in average volume versus that portion
due to change in average rates. See "Average Balances, Interest Rates and
Yields," and "Rate/Volume Analysis of Net Interest Income."
Provision for Loan Losses. The provision for loan losses increased from
$238,000 in 1996 to $590,000 in 1997. The increase was based on management's
evaluation of the loan portfolio, primarily the significant growth in the
portfolio of automobile loans, which increased by 38% during the period and
which, due to the increase in potential credit risk, necessitated an increase in
the provision for loan losses. Management also considered an increase in
delinquencies, the market conditions during the period and the size and mix of
the loan portfolio. At June 30, 1997, the allowance for loan losses represented
0.60% of loans, net of unearned and deferred income, compared to 0.49% at June
30, 1996.
During fiscal year 1997, the Association adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan," and SFAS No. 118 which require the carrying value of an impaired
loan be determined by calculating the present value of estimated future cash
flows discounted using the loan's effective interest yield. The adoption of
these pronouncements did not have a significant impact on the Association's
financial statements.
Noninterest Income. The Association experienced a $776,000, or 63.6%,
decrease in noninterest income during 1997. The decrease was primarily due to
increases in losses on the sale of securities as the Association continued its
strategy to use the sale of securities as a source of funding to support loan
growth and to increase the yield on earnings assets by shifting assets from
lower yielding securities to higher yielding loans. The decrease in noninterest
income was slightly offset by a $126,000 increase in service charges, from
$803,000 for fiscal 1996 to $929,000 for fiscal 1997, an increase of 15.7%. The
increase was due to the increase in the average balance of deposit accounts.
Noninterest Expense. Noninterest expense increased $2.8 million, or 30.1%,
primarily due to the assessment to recapitalize the SAIF recorded in 1997. The
SAIF assessment represented 65.7 basis points of deposits held as of March 31,
1995, and amounted to $2.5 million, which was paid in October 1996. Occupancy
and equipment expense increased by $136,000, or 10.4%, in fiscal 1997, due to
the conversion to a new computer system in October 1996. Other expense includes
professional fees, advertising, deposit account expense, telephone, stationery
and printing as well as other miscellaneous expense accounts. There were no
significant changes to any category of expense included within other accounts.
Income Taxes. The provision for income taxes totaled $1.2 million in
fiscal 1997 compared to $2.3 million in fiscal 1996. The decrease was primarily
the result of a decrease in pretax income.
45
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Association's liquidity, primarily represented by cash and
cash equivalents, is a result of its operating, investing and financing
activities. These activities are summarized below for the years ended June 30,
1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1998 1997
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net income..................................................... $ 4,072 $ 2,224
Adjustments to reconcile net income to net cash from
Operating activities......................................... 2,699 2,233
-------- --------
Net cash from operating activities............................. 6,771 4,457
Net cash used in investing activities.......................... (60,522) (24,762)
Net cash from financing activities............................. 53,662 19,504
-------- --------
Net change in cash and cash equivalents........................ (89) (801)
Cash and cash equivalents at beginning of period............... 6,757 7,558
-------- --------
Cash and cash equivalents at end of period..................... $ 6,668 $ 6,757
======== ========
</TABLE>
The Association's sources of funds include customer deposits, other
borrowings including FHLB advances and repurchase agreements, loan and mortgage-
backed securities repayments and other funds provided by operations. The
Association also has the ability to borrow additional funds from the FHLB of
Cincinnati. The Association maintains investments in liquid assets based upon
management's assessment of (i) the Association's need for funds, (ii) expected
deposit flows, (iii) the yields available on short-term liquid assets, and (iv)
the objectives of the Association's asset/liability management program. The OTS
requires savings associations to maintain minimum levels of liquid assets. OTS
regulations currently require the Association to maintain an average daily
balance of liquid assets equal to at least 4.0% of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. At June 30, 1998, the Association's regulatory liquidity ratio was
9.4% compared to 13.0% at June 30, 1997. At June 30, 1998 and 1997, the
Association had commitments to originate loans or fund outstanding lines of
credit totaling $23.9 million and $13.9 million, respectively. The Association
considers its liquidity sufficient to meet its outstanding short- and long-term
needs. The Association expects to be able to fund or refinance, on a timely
basis, its material commitments and long-term liabilities.
Capital Resources. Federally insured savings institutions, such as the
Association, are required to meet a 1.5% tangible capital requirement, a 4.0%
leverage ratio (core capital to risk weighted assets) requirement, a 4.0%
leverage ratio (core capital to adjusted total assets) requirement and an 8.0%
risk-based capital requirement. At June 30, 1998, the Association exceeded
these requirements with tangible capital ratio of 9.5%, a core capital to risk
weighted assets ratio of 20.9%, a core capital to adjusted total assets of 9.5%
and a risk-based capital ratio of 21.8%. See "Regulatory Capital Compliance"
for the Association's pro forma capital levels as a result of the Offerings.
YEAR 2000 ISSUES
Introduction. Similar to other financial institutions, the operations of
the Association are particularly sensitive to potential problems arising from
the inability of many existing computer hardware and software systems and
associated applications to process accurately information relating to any two-
digit "date field" entries referring to the year 2000 and beyond. Many existing
systems are constructed to read such entries as referring to dates beginning
with "19," rather than "20." This set of issues is generally referred to as the
"Year 2000" problem. The FFIEC, through the bank regulatory agencies, has
issued compliance guidelines requiring financial institutions to develop and
implement plans for addressing Year 2000 issues relevant to their operations.
State of Readiness. The Association has implemented a detailed Year 2000
plan, as required by the FFIEC guidelines, to evaluate Year 2000 compliance of
its computer systems and the equipment which supports the operations of the
Association. Also included in this Year 2000 plan is a detailed review of the
readiness of the Association's service
46
<PAGE>
providers, vendors, major fund providers, major borrowers and companies with
which the Association has material investments. As of October 15, 1998, the
Association has met all current target objectives of the Year 2000 plan, and
management believes that it will continue to meet all future target objectives
in accordance with the terms of the plan.
Like many financial institutions, the Association relies upon computers for
the daily conduct of its business and for data processing generally. As part of
its regular upgrading of computer systems, the Association installed a new core
computer system in 1996. The new system has been developed by one of the
leading national vendors of data processing services for banks. The vendor of
the new core system is executing its Year 2000 readiness plan in cooperation
with the Association and has certified that the system is Year 2000 compliant.
Management expects the new core banking system to be Year 2000 compliant.
In addition to its core computer system, the Association is reliant on
financial accounting and mortgage loan origination systems that are computer-
based, and thus vulnerable to the Year 2000 issues. The Association has also
installed new financial accounting, mortgage loan origination and mortgage loan
servicing systems which are Year 2000 compliant as part of its computer upgrade.
As a result of the new core computer system and the new financial
accounting, mortgage loan origination and mortgage loan servicing systems,
management believes that it has resolved the Year 2000 issues with respect to
the most critical computer systems and applications. Management expects to
begin the testing or remediation phase with respect to its computer systems and
other equipment that is Year 2000 sensitive, which includes equipment containing
embedded microprocessors or other technology related to the recognition of dates
by December 31, 1998. The Association expects to complete its Year 2000
conversion by June 30, 1999.
Because of the substantial progress made by the Association towards its
Year 2000 conversion, the Association does not anticipate that any additional
significant changes will be required or that the Year 2000 issue will pose
significant operational problems for the Association. However, if the necessary
changes are not made or completed in a timely fashion or unanticipated problems
arise, the Year 2000 issue may take longer for the Association to address and
may have a material impact on the Association's financial condition and results
of operations.
The Association receives periodic updates from its third party service
providers on the status of their progress in remediation and testing. These
providers are also subject to Year 2000 compliance examinations by the federal
bank regulatory agencies. While these updates do not rise to the level of
certifications or warranties, they do indicate what management believes to be
satisfactory progress toward a timely resolution of the Year 2000 issue by these
providers.
In addition to its extensive interaction with major service providers, the
Association has had initial communications with other vendors, major fund
providers, major borrowers and companies with which the Association has material
investments, to evaluate their Year 2000 compliance plans and state of readiness
and to determine the extent to which the Association's systems may be affected
by the failure of others to remediate their own Year 2000 issues. To date,
however, the Association has received only preliminary feedback from such
parties and has not independently confirmed any information received from other
parties with respect to Year 2000 issues. As such, there can be no assurance
that such other parties will complete their Year 2000 conversion in a timely
fashion or will not suffer a Year 2000 business disruption that may adversely
affect the Association's financial condition and results of operations.
Costs to Address the Year 2000 Issue. The new computer systems were
installed as a result of management's desire to keep the Association competitive
by ensuring that its systems take advantage of recent advances in technology.
The system conversions were made in 1996 for business reasons that were
unrelated to the Year 2000 issues and did not contribute to the direct cost of
Year 2000 compliance. Nevertheless, these system replacements are all Year 2000
compliant and therefore automatically address that issue. The additional costs
to achieve Year 2000 compliance are currently estimated to be $300,000, and are
not expected to have a material financial impact on the Association. The
Association intends to fund such costs from its operations. However, as the
Association progresses with its Year 2000 conversion and implements the
necessary changes to its systems, certain additional costs may be identified.
There can be no assurance that such additional costs will not have a material
adverse effect on the Association's financial condition and results of
operations.
47
<PAGE>
Risks of Year 2000 Issues. To date, the Association has not identified any
system which presents a material risk of not being Year 2000 ready in a timely
fashion or for which a suitable alternative cannot be implemented. However, as
the Association progresses with its Year 2000 conversion, the Association may
identify systems which do present a material risk of Year 2000 disruption. Such
disruption may include, among other things, the inability to process and
underwrite loan applications, to credit deposits and withdrawals from customer
accounts, to credit loan payments or track delinquencies, to properly reconcile
and record daily activity or to engage in similar normal banking activities.
Additionally, if the Association's commercial customers are not Year 2000
compliant and suffer adverse effects on their operations, their ability to meet
their obligations to the Association could be adversely affected. The failure
of the Association to identify systems which require Year 2000 conversion that
are critical to the Association's operations or the failure of the Association
or others with which the Association does business to become Year 2000 ready in
a timely manner could have a material adverse impact on the Association's
financial condition and results of operations. Moreover, to the extent that the
risks posed by the Year 2000 problem are pervasive in data processing and
transmission and communications services worldwide, the Association cannot
predict with any certainty that its operations will remain materially unaffected
after January 1, 2000 or on dates preceding this date at which time post-January
1, 2000 dates become significant within the Association's systems.
Contingency Plans. The Association has two types of contingency plans:
Remediation and Business Interruption. Remediation Plans are designed to
mitigate the risks associated with the failure to successfully complete
renovation, validation and implementation of mission-critical systems. Business
Interruption Plans are plans of action to ensure the ability of the Association
to continue functioning as a business entity in the event of unanticipated
systems failures at critical dates prior to, on, and after the Year 2000.
Remediation Plans: The Association's Year 2000 conversion is expected to
-----------------
be completed prior to any potential disruption to the Association's business.
However, the Association has developed Year 2000 remediation contingency plans
for mission-critical systems. These plans would be invoked in the event of
anticipated failures of particular Year 2000 projects or sub-projects. Such
plans involve the designation of alternate vendors to back up systems and would
essentially constitute replacement of the current Year 2000 remediation path
with an alternate one. Remediation plans will be built in succeeding stages of
detail and this process may, if management deems appropriate, be halted at any
point where the success of the base project is clearly predictable. The
Association expects to complete testing of its systems by March 31, 1999. If
the results of testing of the Association's systems are not satisfactory, the
remediation contingency plans will then be invoked for mission-critical systems.
Business Interruption Plans: These plans would be invoked if unanticipated
---------------------------
Year 2000 problems occur in production, similar to scenarios in Disaster
Recovery Plans. The Association has targeted the essential functions that may
be adversely affected, and has developed specific responses, ranging from the
printing out of records from the core banking system prior to January 1, 2000,
to ensure that a hard copy of the data is available in the event of a failure,
to preparations for failures of voice and data communications through the use of
manual posting and courier services, as well as ensuring that branches can
process off-line for a period of time. Teams will be established for
mobilization in case of emergencies that threaten the viability of the
Association, and require that certain resources be available immediately for
utilization. The Association will continue to fine-tune these plans, train
staff to carry them out, and test them. Staff will be trained to follow the
plans, in conjunction with the Association's Year 2000 team, as they are trained
to follow disaster recovery plans in the event of a disaster.
The discussion above contains certain forward-looking statements. The
costs of the Year 2000 conversion, the date which the Association has set to
complete such conversion and the possible risks associated with the Year 2000
issue are based on the Association's current estimates and are subject to
various uncertainties that could cause the actual results to differ materially
from the Association's expectations. Such uncertainties include, among others,
the success of the Association in identifying systems that are not Year 2000
compliant, the nature and amount of programming required to upgrade or replace
each of the affected systems, the availability of qualified personnel,
consultants and other resources, and the success of the Year 2000 conversion
efforts of others.
48
<PAGE>
RECENT ACCOUNTING DEVELOPMENTS
Recent pronouncements by the Financial Accounting Standards Board ("FASB")
will have an impact on financial statements issued in subsequent periods. Set
forth below are summaries of such pronouncements.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," was issued in 1996. It revises the
accounting for transfers of financial assets, such as loans and securities, and
for distinguishing between sales and secured borrowings. SFAS No. 125 was
originally effective for some transactions occurring after December 31, 1996,
and was effective for others in 1998. SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125," which was issued in
December 1996, defers for one year the effective date of provisions relating to
securities lending, repurchase agreements and other similar transactions. The
impact of partial adoption in 1997 was not material to the 1997 financial
statements and the impact of the complete adoption in 1998 was not material to
the 1998 financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general-purpose financial statements. This Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Income tax
effects must also be shown. This Statement is effective for fiscal years
beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement is effective for financial statements for periods beginning after
December 15, 1997.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 addresses the accounting for
derivative instruments and certain derivative instruments embedded in other
contracts, and hedging activities. The statement standardizes the accounting
for derivative instruments by requiring that an entity recognize those items as
assets or liabilities in the statement of financial position and measure them at
fair value. This statement is effective for all fiscal years beginning after
June 15, 1999. Management will adopt SFAS No. 133 in the quarter beginning
October 1, 1998 and will elect to reclassify all held to maturity securities to
available for sale, as allowed by SFAS No. 133.
These statements are not expected to have a material effect on the
Association's consolidated financial position or results of operations.
IMPACT ON 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 results of operations
primarily in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of the
Association are monetary in nature. Therefore, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services. The
liquidity, maturity structure and quality of the Association's assets and
liabilities are critical to the maintenance of acceptable performance levels.
49
<PAGE>
BUSINESS OF THE COMPANY
GENERAL
The Company was organized in August 1998 at the direction of the Board of
Directors of the Association for the purpose of becoming a holding company to
own all of the outstanding capital stock of the Association. Upon consummation
of the Conversion, it is anticipated that the Association will become a wholly-
owned subsidiary of the Company and that the Company will be a savings and loan
holding company regulated by the OTS. See "Regulation--Holding Company
Regulation."
The Company is currently not an operating company. Following the
Conversion, in addition to directing, planning and coordinating the business
activities of the Association, the Company will initially invest net proceeds it
retains primarily in mortgage-backed and mortgage-related securities and other
investment-grade marketable securities. In addition, the Company intends to
fund the loan to the ESOP to enable the ESOP to subscribe for 8% of the Common
Stock issued in connection with the Conversion, including shares issued to the
Foundation; however, a third-party lender may be utilized to lend funds to the
ESOP. See "Use of Proceeds." In the future, the Company may acquire or
organize operating subsidiaries, including other financial institutions and
financial services companies. There are presently no agreements, understandings
or plans for an expansion of the Company's operations. Initially, the Company
will neither own nor lease any property from any third party, but will instead
use the premises, equipment and furniture of the Association. At the present
time, the Company does not intend to employ any persons other than certain
officers of the Association, who will not be separately provided cash
compensation by the Company. The Company may utilize the support staff of the
Association from time to time, if needed. Additional employees will be hired as
appropriate to the extent the Company expands its business in the future.
BUSINESS OF THE ASSOCIATION
GENERAL
The Association is a community-oriented savings institution which was
originally organized in 1922 as an Ohio-chartered savings and loan association,
and converted to a federally-chartered savings and loan association in 1936.
The Association's principal business consists of the acceptance of retail
deposits from the general public in its primary market area, consisting of those
areas surrounding its full-service branch offices, and investing those deposits,
together with funds generated from operations and borrowings, primarily in one-
to four-family residential mortgage loans, automobile and home equity loans and,
to a much lesser extent, multi-family and commercial real estate loans,
construction loans, commercial loans, and passbook savings loans. The
Association originates all of its loans for investment. Management may consider
in the future selling long-term, fixed-rate mortgage loans in an effort to
better manage interest rate risk and add flexibility to balance sheet management
policy. The Association also invests in government issued and sponsored
mortgage-backed securities, securities issued by the U.S. Government and
agencies thereof, and other investments permitted by applicable laws and
regulations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Management Strategy." The Association's revenues are
derived principally from the interest on its mortgage and consumer loans and
mortgage-backed and investment securities. The Association's primary sources of
funds are retail savings deposits and, to a lesser extent, advances from the
FHLB of Cincinnati and reverse repurchase agreements.
PRIMARY MARKET AREA
Headquartered in Trumbull County, Ohio, the Association has been, and
intends to continue to be, a community-oriented financial institution offering a
variety of financial services to meet the needs of the communities it serves.
The Association currently operates eleven full-service banking facilities and
two loan origination centers in Trumbull and Mahoning Counties of Ohio. See
"--Properties." The Association's primary lending and deposit gathering area is
concentrated around the areas where its full-service banking facilities are
located which the Association generally considers to be its primary market area.
50
<PAGE>
Warren is located in northeastern Ohio, in proximity to Youngstown, Ohio
and approximately halfway between the cities of Cleveland, Ohio and Pittsburgh,
Pennsylvania. The Association's primary market area is characterized by a
higher current unemployment rate than in both Ohio and the United States. For
1998, through May, the primary market area continues to have a higher
unemployment rate of 5.0%, as compared to Ohio at 4.2% and the United States at
3.9%. In Warren, the unemployment rate was 9.3% in January 1998. Overall, the
primary market area's population decreased by 1.5% from 1990 to 1997, while
Ohio's population increased by 3.4% and the United States' population increased
by 7.7% for the same period. Median household income in the primary market area
has increased by 19.6% from 1990 to 1997, while it has increased by 26.0% and
30.8% in Ohio and the United States, respectively, over the same period.
According to the Youngstown/Warren Regional Chamber of Commerce, major employers
in the Youngstown/Warren metropolitan area include Delphi Packard Electric
Systems, General Motors and HM Health Systems. See "Risk Factors--Risks
Associated with Economic Conditions in the Association's Primary Market Area."
COMPETITION
The Association faces significant competition both in making loans and in
attracting deposits. The State of Ohio has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Association, all of which are
competitors of the Association to varying degrees. The Association's
competition for loans comes principally from savings banks, savings and loan
associations, commercial banks, mortgage banking companies, credit unions,
insurance companies and other financial service companies. Its most direct
competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks and credit unions. The
Association faces additional competition for deposits from non-depository
competitors such as the mutual fund industry, securities and brokerage firms and
insurance companies. Competition may also increase as a result of the lifting
of restrictions on the interstate operations of financial institutions. There
are approximately seventeen different financial institutions with operations in
Trumbull and Mahoning counties.
LENDING ACTIVITIES
Loan Portfolio Composition. The types of loans that the Association may
originate are subject to federal and state laws and regulations. Interest rates
charged by the Association on loans are affected principally by the demand for
such loans, the supply of money available for lending purposes and the rates
offered by its competitors. These factors are, in turn, affected by general and
economic conditions, monetary policies of the federal government, including the
Board of Governors of the Federal Reserve System ("FRB"), legislative tax
policies and governmental budgetary matters.
The Association's loan portfolio primarily consists of first mortgage loans
secured by one- to four-family residences, most of which are located in its
primary market area. At June 30, 1998, the Association's total loans receivable
were $363.2 million, of which $268.0 million were one- to four-family
residential mortgage loans, or 73.7% of total loans receivable. At such date,
the remainder of the loan portfolio consisted of $4.5 million of multi-family
loans, or 1.2% of total loans receivable; $8.6 million of commercial real estate
loans, or 2.4% of total loans receivable; $6.3 million of construction loans, or
1.7% of total loans receivable; $9.2 million of home equity loans, or 2.5% of
total loans receivable; $2.6 million of commercial loans, or 0.7% of total loans
receivable; and $64.1 million of consumer loans, or 17.6% of total loans
receivable, consisting of $52.9 million of automobile loans and $11.2 million of
other consumer loans. The Association has not sold loans in recent years and
had no loans held for sale at each of the five years ended June 30, 1998. At
June 30, 1998, 37.4% of the Association's real estate mortgage loans had
adjustable interest rates, most of which were indexed to the one year Constant
Maturity Treasury ("CMT") Index.
51
<PAGE>
The following table sets forth the composition of the Association's loan
portfolio in dollar amounts and in percentages of the respective portfolios at
the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 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>
Real estate mortgage loans:
One- to four-family.................... $267,950 73.77% $215,549 73.92% $202,697 78.14%
Multi-family........................... 4,482 1.23 2,293 0.79 1,397 0.54
Commercial real estate................. 8,626 2.37 6,789 2.33 7,159 2.76
Construction........................... 6,301 1.73 5,376 1.84 2,515 0.97
Home equity............................ 9,189 2.53 9,822 3.37 6,531 2.52
-------- ------ -------- ------ -------- ------
Total real estate mortgage loans..... 296,548 81.64 239,829 82.25 220,299 84.93
Consumer loans:
Automobiles............................ 52,847 14.55 43,172 14.80 31,234 12.04
Other(1)............................... 11,243 3.10 6,521 2.24 6,675 2.57
-------- ------ -------- ------ -------- ------
Total consumer loans................. 64,090 17.65 49,693 17.04 37,909 14.61
Commercial loans......................... 2,586 0.71 2,068 0.71 1,188 0.46
-------- ------ -------- ------ -------- ------
Total loans receivable................... 363,224 100.00% 291,590 100.00% 259,396 100.00%
====== ====== ======
Less:
Net deferred loan origination fees..... 1,319 1,316 1,517
Loans in process....................... 5,866 3,339 1,837
Allowance for loan losses.............. 3,027 1,723 1,259
-------- -------- --------
Loans receivable, net.................... $353,012 $285,212 $254,783
======== ======== ========
<CAPTION>
AT JUNE 30,
-----------------------------------------------
1995 1994
-----------------------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-----------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate mortgage loans:
One- to four-family.................... $185,270 76.15% $185,039 83.32%
Multi-family........................... 1,515 0.62 1,719 0.77
Commercial real estate................. 8,516 3.50 7,063 3.18
Construction........................... 1,859 0.76 2,363 1.06
Home equity............................ 4,309 1.77 1,545 0.70
-------- ------ -------- ------
Total real estate mortgage loans..... 201,469 82.80 197,729 89.03
Consumer loans:
Automobiles............................ 32,212 13.24 14,679 6.61
Other(1)............................... 8,262 3.40 7,863 3.54
-------- ------ -------- ------
Total consumer loans................. 40,474 16.64 22,542 10.15
Commercial loans......................... 1,358 0.56 1,813 0.82
-------- ------ -------- ------
Total loans receivable................... 243,301 100.00% 222,084 100.00%
====== ======
Less:
Net deferred loan origination fees..... 1,228 1,776
Loans in process....................... 1,221 1,693
Allowance for loan losses.............. 1,186 1,034
-------- --------
Loans receivable, net.................... $239,666 $217,581
======== ========
</TABLE>
__________
(1) Other consumer loans consist of home equity lines of credit and secured and
unsecured personal loans.
52
<PAGE>
Loan Originations. The Association's mortgage lending activities are
conducted primarily by its loan personnel operating at its executive and ten
other full-service branch offices and its two loan origination centers. All
loans originated by the Association are underwritten by the Association pursuant
to the Association's policies and procedures. The Association originates both
adjustable-rate and fixed-rate mortgage loans, commercial loans and consumer
loans. The Association's ability to originate fixed- or adjustable-rate loans
is dependent upon the relative customer demand for such loans, which is affected
by the current and expected future level of interest rates. It is the general
policy of the Association to retain all loans originated in its portfolio.
During the years ended June 30, 1998, 1997 and 1996, the Association
originated $105.2 million, $49.9 million and $54.6 million of one- to four-
family and home equity loans, respectively, and $33.5 million, $31.6 million and
$18.7 million of consumer loans, respectively. During the three years ended
June 30, 1998, the Association neither sold nor purchased any loans, and no
loans were held for sale at June 30, 1998.
The following tables set forth the Association's loan originations and
principal repayments for the periods indicated. All loans originated by the
Association are held for investment. The Association neither purchased nor sold
any loans during these periods.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
--------------------------------------------------
1998 1997 1996
-------------- --------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Total loans receivable(1):
Balance outstanding at beginning of period........... $288,251 $257,559 $242,080
Loans originated(2):
Real estate mortgage loans:
One- to four-family and home equity.............. 105,184 49,913 54,644
Multi-family and commercial real estate.......... 4,515 5,494 316
Construction..................................... 7,882 6,415 3,127
Consumer loans(3)................................... 33,457 31,610 18,683
Commercial loans.................................... 62 92 87
-------- -------- --------
Total loans originated........................... 151,100 93,524 76,857
Less:
Principal repayments............................... 79,466 61,330 60,762
Change in loans in process(4)...................... 2,527 1,502 616
-------- -------- --------
Total loans receivable at end of period............... $357,358 $288,251 $257,559
======== ======== ========
</TABLE>
____________________
(1) Total loans receivable does not include unearned discounts, deferred loan
fees and the allowance for loan losses.
(2) Amounts for each period include loans in process at period end.
(3) Consists primarily of originations of automobile loans.
(4) Represents change in loans in process, which primarily represent undisbursed
funds on construction loans, from first day to last day of the period.
53
<PAGE>
Loan Maturity and Repricing. The following table shows the contractual
maturity of the Association's loan portfolio at June 30, 1998. The table does
not include prepayments or scheduled principal amortization. Prepayments and
scheduled principal amortization on mortgage loans totaled $79.3 million, $61.3
million, and $60.8 million for the years ended June 30, 1998, 1997 and 1996,
respectively. All loans originated by the Association are held for investment.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-------------------------------------------------------------------
REAL TOTAL
ESTATE LOANS
MORTGAGE CONSUMER COMMERCIAL RECEIVABLE
-------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Amounts due:
Within one year......................... $ 10,971 $ 1,114 $1,662 $ 13,747
-------- ------- ------ --------
After one year:
More than one year to three years..... 2,879 11,859 63 14,801
More than three years to five years... 8,682 34,390 64 43,136
More than five years to 10 years...... 27,670 7,380 328 35,378
More than 10 years to 20 years........ 95,294 9,137 470 104,901
More than 20 years.................... 151,052 209 - 151,261
-------- ------- ------ --------
Total due after June 30, 1999............ 296,548 64,089 2,587 349,477
--------
Total amount due.................... 363,224
--------
Less:
Net deferred loan origination fees.... 1,319
Loans in process.................... 5,866
Allowance for loan losses........... 3,027
--------
Loans receivable, net.................... $353,012
========
</TABLE>
54
<PAGE>
The following table sets forth at June 30, 1998, the dollar amount of total
loans receivable contractually due after June 30, 1999, and whether such loans
have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER JUNE 30, 1999
------------------------------------------------
FIXED ADJUSTABLE TOTAL
----------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate mortgage loans................ $180,267 $105,310 $285,577
Consumer loans............................ 53,737 9,238 62,975
Commercial loans.......................... 105 821 926
-------- -------- --------
Total loans............................. $234,109 $115,369 $349,478
======== ======== ========
</TABLE>
One- to Four-Family Lending. The Association currently offers both fixed-
rate and adjustable-rate mortgage ("ARM") loans with maturities up to 30 years
secured by one- to four-family residences, substantially all of which are
located in the Association's primary market area. One- to four-family mortgage
loan originations are generally obtained from the Association's in-house loan
representatives, from existing or past customers, through advertising, and
through referrals from local builders, real estate brokers and attorneys. At
June 30, 1998, the Association's one- to four-family mortgage loans totaled
$268.0 million, or 73.8%, of total loans. Of the one- to four-family mortgage
loans outstanding at that date, 63.2% were fixed-rate mortgage loans and 36.8%
were ARM loans.
The Association currently offers fixed-rate one- to four-family mortgage
loans with terms of up to 30 years. These loans have generally been priced
competitively with current market rates for such loans. The Association
currently offers a number of ARM loans with terms of up to 30 years and interest
rates which adjust every year from the outset of the loan or which adjust
annually after a three, five or seven year initial fixed period. The interest
rates for the Association's ARM loans are indexed to the one year U.S. Treasury
Index. The Association's ARM loans generally provide for periodic (not more
than 2%) and overall (not more than 6%) caps on the increase or decrease in the
interest rate at any adjustment date and over the life of the loan.
The origination of adjustable-rate one- to four-family mortgage loans, as
opposed to fixed-rate one- to four-family mortgage loans, helps reduce the
Association's exposure to increases in interest rates. However, adjustable-rate
loans generally pose credit risks not inherent in fixed-rate loans, primarily
because as interest rates rise, the underlying payments of the borrower rise,
thereby increasing the potential for default. Periodic and lifetime caps on
interest rate increases help to reduce the risks associated with adjustable-rate
loans but also limit the interest rate sensitivity of such loans.
The Association currently originates all one- to four-family mortgage loans
for its own portfolio. Management may consider in the future selling long-term,
fixed-rate one- to four-family mortgage loans in an effort to better manage
interest rate risk. Generally, the Association originates one- to four-family
residential mortgage loans in amounts up to 97% of the appraised value or
selling price of the property, whichever is lower, securing the loan. Private
mortgage insurance ("PMI") may be required for such loans with a loan-to-value
("LTV") ratio of greater than 85%. One- to four-family mortgage loans
originated by the Association generally include due-on-sale clauses which
provide the Association with the contractual right to deem the loan immediately
due and payable in the event the borrower transfers ownership of the property
without the Association's consent. Due-on-sale clauses are an important means
of adjusting the yields on the Association's fixed-rate one- to four-family
mortgage loan portfolio. The Association requires fire, casualty, and, in
required cases, flood insurance on all properties securing real estate loans
made by the Association.
Commercial Lending. The Association also originates on a very limited
basis commercial loans in the form of term loans and lines of credit to small-
and medium-sized businesses operating in the Association's primary market
55
<PAGE>
area. Since commercial loans are made on such an infrequent basis, the
Association handles each such loan request on an individual basis. At June 30,
1998, the Association had $2.6 million of commercial loans, which amounted to
0.7% of the Association's total loans.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment or other income,
and which are secured by real property whose value tends to be more easily
ascertainable, commercial loans are of higher risk and typically are made on the
basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment
of commercial loans may be substantially dependent on the success of the
business itself. Further, any collateral securing such loans may depreciate
over time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
Consumer Lending. Consumer loans at June 30, 1998 amounted to $64.1
million, or 17.6% of the Association's total loans, and consisted primarily of
new and used automobile loans, and to a lesser extent, secured and unsecured
personal loans. Such loans are generally originated in the Association's
primary market area and generally are secured by real estate, deposit accounts,
personal property and automobiles. Secured personal loans are generally secured
by personal assets. Unsecured personal loans generally may not exceed $10,000
and must be approved by an executive officer of the Association. In recent
years, the Association has increased its emphasis on the origination of new and
used automobile loans. Such loans are only available to Ohio and Pennsylvania
residents. Approximately half of the Association's automobile loans are made on
used vehicles; the Association will generally not make a loan on a vehicle
manufactured before 1991. The average automobile loan is for $13,000. The
Association originates automobile loans through an automobile dealer network,
primarily composed of new car dealers located in the Association's suggested
retail price on new automobiles and 100% of the average retail value of used
cars. The typical loan term is sixty-six months. At June 30, 1998, personal
loans (both secured and unsecured) totaled $2.0 million, or 0.6% of the
Association's total loans and 3.1% of consumer loans; and automobile loans
totaled $52.8 million, or 14.5% of total loans and 82.5% of consumer loans.
The Association also offers a variable rate home equity line of credit
which extends a credit line based on the applicant's income and equity in the
home. Generally, the credit line, when combined with the balance of the prior
mortgage liens, may not exceed 90% of the appraised value of the property at the
time of the loan commitment. Home equity lines of credit are secured by a
mortgage on the underlying real estate. The Association holds the first
mortgage on a substantial majority of the properties securing such lines of
credit. The Association presently charges no origination fees for these loans.
A borrower is required to make monthly payments of principal and interest.
Generally, the interest rate charged is the prime rate of interest (as published
in The Wall Street Journal) plus up to 0.49%. The interest rate adjusts when
the prime rate adjusts. At June 30, 1998, the Association had outstanding home
equity lines of credit of $9.2 million, against total available credit lines of
$21.6 million.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one- to four-family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, collections on these loans are dependent on the borrower's
continuing financial stability and, therefore, are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Finally, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans in the event of a default.
Loan Approval Procedures and Authority. The Board of Directors of the
Association establishes the lending policies and loan approval limits of the
Association. The Board of Directors has established the Loan Committee (the
"Committee") of the Board which considers and approves all loans within its
designated authority as established by the Board. In addition, the Board of
Directors has authorized certain officers of the Association (the "designated
officers") to consider and approve all loans within their designated authority
as established by the Board.
The Board of Directors has authorized the following persons and groups of
persons to approve loans up to the amounts indicated: one- to four-family
mortgage loans up to $200,000 may be approved by any of the designated officers;
one- to four-family mortgage loans in excess of $200,000 and up to $300,000 may
be approved by two of the
56
<PAGE>
designated officers; one- to four-family mortgage loans in excess of $300,000
must be approved by the Board of Directors. Home equity loans and lines of
credit up to $200,000 may be approved by any of the designated officers. Home
equity loans and lines of credit over $200,000 must be approved by the Board of
Directors. Multi-family and commercial real estate loans less than $100,000 may
be approved by the Lending Division; any multi-family and commercial real estate
loan greater than $100,000 must be approved by the Board of Directors.
Construction loans are subject to the approval limits applicable to the type of
property being constructed. Consumer loans may be approved by certain officers
up to $50,000, and the President must approve loans in excess of $50,000 to
$100,000. Consumer loans over $100,000 must approved by the Board of Directors.
Commercial loans up to $50,000 may be approved by any member of the Commercial
Loan Committee; commercial loans up to $100,000 must be approved by two members
of that committee; commercial loans up to $250,000 must be approved by the
Commercial Loan Committee and one member of the Board of Directors of the
Association, and commercial loans in excess of $250,000 must be approved by the
Board of Directors.
With respect to all loans originated by the Association, upon receipt of a
completed loan application from a prospective borrower, a credit report is
ordered and certain other information is verified by an independent credit
agency. If necessary, additional financial information may be required. An
appraisal of real estate intended to secure a proposed loan generally is
required to be performed by the Association's "in-house" appraisers or outside
appraisers approved by the Association. The Board annually approves independent
appraisers used by the Association. The Association's policy is to obtain
hazard insurance on all mortgage loans and flood insurance when necessary and
the Association may require borrowers to make payments to a mortgage escrow
account for the payment of property taxes and insurance premiums.
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED
Delinquencies, Classified Assets and Real Estate Owned. Reports listing
all delinquent accounts are generated and reviewed by management on a monthly
basis and the Board of Directors performs a monthly review of all loans or
lending relationships delinquent 30 days or more. The procedures taken by the
Association with respect to delinquencies vary depending on the nature of the
loan, period and cause of delinquency and whether the borrower is habitually
delinquent. When a borrower fails to make a required payment on a loan, the
Association takes a number of steps to have the borrower cure the delinquency
and restore the loan to current status. The Association generally sends the
borrower a written notice of non-payment after the loan is first past due. The
Association's guidelines provide that telephone, written correspondence and/or
face-to-face contact will be attempted to ascertain the reasons for delinquency
and the prospects of repayment once a loan becomes 60 days past due. When
contact is made with the borrower at any time prior to foreclosure, the
Association will attempt to obtain full payment, offer to work out a repayment
schedule with the borrower to avoid foreclosure or, in some instances, accept a
deed in lieu of foreclosure. In the event payment is not then received or the
loan not otherwise satisfied, additional letters and telephone calls generally
are made. Once the loan becomes 90 days past due, the Association notifies the
borrower in writing that if the loan is not brought current within two weeks,
the Association will commence foreclosure proceedings against any real property
that secured the loan. If a foreclosure action is instituted and the loan is
not brought current, paid in full, or refinanced before the foreclosure sale,
the property securing the loan generally is sold at foreclosure and, if
purchased by the Association, becomes real estate owned.
Federal regulations and the Association's internal policies require that
the Association utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Association currently
classifies problem and potential problem assets as "Substandard," "Doubtful" or
"Loss" assets. An asset is considered Substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets include those characterized by
the distinct possibility that the Association 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. Assets which do
not currently expose the Association to a sufficient degree of risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
57
<PAGE>
When the Association classifies one or more assets, or portions thereof, as
Substandard or Doubtful, it is required to establish an allowance for possible
loan losses in an amount deemed prudent by management unless the loss of
principal appears to be remote. When the Association classifies one or more
assets, or portions thereof, as Loss, it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified or to charge off such amount.
The Association's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the OTS which can
order the establishment of additional general or specific loss allowances. The
OTS, in conjunction with the other federal banking agencies, recently adopted an
interagency policy statement on the allowance for loan and lease losses. The
policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation guidelines. Generally, the policy statement
recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; that management has analyzed all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
While the Association believes that it has established an adequate allowance for
possible loan losses, there can be no assurance that regulators, in reviewing
the Association's loan portfolio, will not request the Association to materially
increase at that time its allowance for possible loan losses, thereby negatively
affecting the Association's financial condition and earnings at that time.
Although management believes that adequate specific and general loan loss
allowances have been established, future provisions are dependent upon future
events such as loan growth and portfolio diversification and, as such, further
additions to the level of specific and general loan loss allowances may become
necessary.
The Association reviews and classifies its assets on a quarterly basis and
the Board of Directors reviews the results of the reports on a quarterly basis.
The Association classifies its assets in accordance with the management
guidelines described above. At June 30, 1998, the Association had $1.6 million,
or 0.27%, of assets designated as Substandard, consisting of primarily mortgage
loans secured by single-family owner-occupied residences. Assets classified as
Doubtful totaled $231,000, consisting of automobile loans, and assets classified
as Loss totaled $100,000 at June 30, 1998. At June 30, 1998, the Association
had $933,000, or 0.15%, of assets designated as Special Mention, consisting
primarily of automobile loans. At June 30, 1998, these classified assets
totaled $2.8 million, representing 0.77% of loans receivable.
58
<PAGE>
The following tables set forth delinquencies in the Association's loan
portfolio past due 30 days or more:
<TABLE>
<CAPTION>
AT JUNE 30, 1998 At June 30, 1997
-------------------------------------------------------------------------------------------
30-89 DAYS 90 DAYS OR MORE 30-89 DAYS 90 DAYS OR MORE
--------------------- ---------------------- -------------------- -------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- --------- -------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans......... 39 $1,298 59 $1,673 51 $1,380 82 $1,767
Consumer loans..................... 138 1,287 58 470 108 1,053 87 713
Commercial loans................... - - - - - - - -
--- ------ --- ------ ----- ------ ---- ------
Total delinquent loans(1)........ 177 $2,585 117 $2,143 159 $2,433 169 $2,480
=== ====== === ====== ===== ====== ==== ======
Delinquent loans to total loans(1). 0.73% 0.60% 0.85% 0.86%
====== ====== ====== ======
<CAPTION>
AT JUNE 30, 1996
----------------------------------------------
30-89 DAYS 90 DAYS OR MORE
--------------------- ---------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
--------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate mortgage loans......... (2) $ 939 (2) $ 825
Consumer loans..................... (2) 588 (2) 200
Commercial loans................... (2) 140 (2) 101
------ ------
Total delinquent loans(1)........ $1,667 $1,126
====== ======
Delinquent loans to total loans(1). 0.66% 0.44%
====== ======
</TABLE>
____________________
(1) Total loans represent gross loans receivable less deferred loan fees and
loans in process.
(2) Information not available.
59
<PAGE>
Nonperforming Assets. The following table sets forth information regarding
nonperforming loans and REO. At June 30, 1998, the Association had no troubled-
debt restructured loans within the meaning of SFAS 15, and no REO properties.
It is the general policy of the Association to cease accruing interest on loans
90 days or more past due when, in management's opinion, the collection of all or
a portion of the loan principal has become doubtful and to fully reserve for all
previously accrued interest. For the years ended June 30, 1998, 1997, 1996,
1995 and 1994 the amount of additional interest income that would have been
recognized on non-accrual loans if such loans had continued to perform in
accordance with their contractual terms was $94,000, $172,000, $109,000, $88,000
and $59,000, respectively.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming loans (1):
Real estate mortgage loans............................. $1,673 $1,767 $ 825 $ 665 $ 516
Consumer loans......................................... 470 713 200 256 64
Commercial loans....................................... - - 101 71 151
------ ------ ------ ----- -----
Total nonperforming loans............................. 2,143 2,480 1,126 992 731
------ ------ ------ ----- -----
Real estate owned, net.................................. - - - - 140
------ ------ ------ ----- -----
Total nonperforming assets............................ $2,143 $2,480 $1,126 $ 992 $ 871
====== ====== ====== ===== =====
Nonperforming loans as a percent of total loans (2)..... 0.60% 0.86% 0.44% 0.41% 0.33%
Nonperforming assets as a percent of total assets(3).... 0.35 0.45 0.22 0.21 0.18
</TABLE>
__________
(1) Nonperforming loans represents non-accrual loans. The Association had no
loans past due greater than 90 days still accruing.
(2) Loans represent loans receivable, net, excluding the allowance for loan
losses.
(3) Nonperforming assets consist of nonperforming loans and REO.
Nonperforming loans totaled $2.1 million as of June 30, 1998, and included
59 mortgage loans with an aggregate balance of $1.7 million and $470,000 in
consumer loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained through provisions for loan
losses based on management's on-going evaluation of the risks inherent in its
loan portfolio in consideration of the trends in its loan portfolio, the
national and regional economies and the real estate market in the Association's
primary lending area. The allowance for loan losses is maintained at an amount
management considers adequate to cover estimated losses in its loan portfolio
which are deemed probable and estimable based on information currently known to
management. The Association's loan loss allowance determinations also
incorporate factors and analyses which consider the potential principal loss
associated with the loan, costs of acquiring the property securing the loan
through foreclosure or deed in lieu thereof, the periods of time involved with
the acquisition and sale of such property, and costs and expenses associated
with maintaining and holding the property until sale and the costs associated
with the Association's inability to utilize funds for other income producing
activities during the estimated holding period of the property.
As of June 30, 1998, the Association's allowance for loan losses was $3.0
million, or 0.9% of total loans and 141.3% of nonperforming loans as compared to
$1.7 million, or 0.6%, of total loans and 69.5% of nonperforming loans as of
June 30, 1997. The increased allowance for loan losses was due to several
factors including an increase in the level of consumer loan charge-offs, the
approximately 25% growth in total loans, the continued trend of increased non-
performing loans over the Association's historical levels as well as local
economic conditions including significant recent layoffs at GM's Lordstown plant
caused by a strike at two of GM's other facilities. The strike which affected
these facilities has subsequently been settled and the majority of the striking
workers have returned to full employment. The Association had total
nonperforming loans of $2.1 million at June 30, 1998, and nonperforming loans to
total loans of 0.6%. The Association will continue to monitor and modify its
allowance for loan losses as conditions dictate. Management believes that,
based on information currently available, the Association's allowance for loan
losses is sufficient to cover losses inherent in its loan portfolio at this
time. Based upon the Association's recent increased emphasis in consumer
lending, the Association expects to increase its allowance for loan losses over
future periods depending upon the then current conditions. However, no
assurances can be given that the Association's level of
60
<PAGE>
allowance for loan losses will be sufficient to cover future loan losses
incurred by the Association or that future adjustments to the allowance for loan
losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. In addition, the
OTS, as an integral part of its examination process, periodically reviews the
Association's allowance for loan losses. Such agency may require the Association
to make additional provisions for estimated loan losses based upon judgments
different from those of management.
The following table sets forth activity in the Association's allowance for
loan losses for the periods set forth in the table.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED JUNE 30,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period......... $ 1,723 $1,259 $ 1,186 $ 1,034 $ 1,087
Provision for loan losses.............. 1,779 590 238 313 360
Charge-offs:
Real estate mortgage loans:
One- to four-family................. 32 - - - 50
Commercial real estate.............. - - - - 325
Consumer............................. 484 138 236 205 75
Commercial........................... - - - - 11
------- ------ ------- ------- -------
Total charge-offs.................. 516 138 236 205 461
Recoveries:
Real estate mortgage loans:
One- to four-family................. 3 3 - 12 -
Consumer............................. 38 9 71 32 10
Commercial........................... - - - - 38
------- ------ ------- ------- -------
Total recoveries................... 41 12 71 44 48
------- ------ ------- ------- -------
Balance at end of period............... $ 3,027 $1,723 $ 1,259 $ 1,186 $ 1,034
======= ====== ======= ======= =======
Allowance for loan losses as a percent
of loans(1)......................... 0.85% 0.60% 0.49% 0.49% 0.47%
Allowance for loan losses as a percent
of nonperforming loans(2)........... 141.25 69.48 111.81 119.56 141.45
Net charge-offs as a percent
of average loans.................... 0.15 0.05 0.07 0.07 0.20
</TABLE>
______________
(1) Loans receivable, net, excluding the allowance for loan losses.
(2) Nonperforming loans consist of all nonaccrual loans and all other loans 90
days or more past due.
61
<PAGE>
The following tables set forth the Association's percent of allowance for
loan losses to total allowance and the percent of loans to total loans in each
of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------ --------------------------------
PERCENT OF PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
------ --------- ----------- ------ --------- ----------- ------ --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans....$1,458 48.17% 81.64% $ 911 52.87% 82.25% $ 836 66.40% 84.86%
Consumer loans................ 901 29.77 17.65 432 25.07 17.04 275 21.84 14.62
Commercial loans.............. 9 0.30 0.71 7 0.41 0.71 11 0.87 0.52
Unallocated................... 659 21.76 - 373 21.65 - 137 10.89 -
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for loan
losses................$3,027 100.00% 100.00% $1,723 100.00% 100.00% $1,259 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
At June 30,
--------------------------------------------------------------------------------
1995 1994
--------------------------------------- --------------------------------------
PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
--------- ---------- ----------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans.... $ 779 65.68% 82.74% $839 81.14% 88.62%
Consumer loans................ 286 24.11 16.63 145 14.02 10.49
Commercial loans.............. 12 1.01 0.63 6 0.58 0.89
Unallocated................... 109 9.20 - 44 4.26 -
------ ------ ------ ------ ------ ------
Total allowance for loan
losses................ $1,186 100.00% 100.00% $1,034 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
62
<PAGE>
Real Estate Owned. At June 30, 1998, the Association had no REO in its
portfolio. When the Association does acquire property through foreclosure or
deed in lieu of foreclosure, it is initially recorded at fair value of the
related assets at the date of foreclosure, less costs to sell. Any initial loss
is recorded as a charge to the allowance for loan losses before being
transferred to REO. Thereafter, if there is a further deterioration in value,
the Association provides for a specific valuation allowance and charges
operations for the diminution in value.
INVESTMENT ACTIVITIES
The Board of Directors of the Association sets the investment policy and
procedures of the Association. This policy generally provides that investment
decisions will be made based on the safety of the investment, liquidity
requirements of the Association and, to a lesser extent, potential return on
the investments. In pursuing these objectives, the Association considers the
ability of an investment to provide earnings consistent with factors of quality,
maturity, marketability and risk diversification. While the Board of Directors
has final authority and responsibility for the securities investment portfolio,
the Association has established an Investment Committee comprised of the Chief
Executive Officer, the Chief Financial Officer and at least one member of the
Board of Directors to supervise the Association's investment activities. A
chief investment officer is appointed annually to oversee daily investment
activities. The Association's Investment Committee meets quarterly and
evaluates all investment activities for safety and soundness, adherence to the
Association's investment policy, and assurance that authority levels are
maintained.
The Association currently does not participate in hedging programs,
interest rate swaps, or other activities involving the use of off-balance sheet
derivative financial instruments. Similarly, the Association does not invest in
mortgage-related securities which are deemed to be "high risk," or purchase
bonds which are not rated investment grade.
Mortgage-Backed Securities. The Association currently purchases mortgage-
backed securities in order to: (i) generate positive interest rate spreads with
minimal administrative expense; and (ii) lower its credit risk as a result of
the guarantees provided by FHLMC, FNMA, and GNMA. The Association invests in
mortgage-backed securities issued or guaranteed by FNMA, FHLMC and GNMA. At
June 30, 1998, mortgage-backed securities totaled $207.9 million, or 34.1%, of
total assets, of which $190.1 million was classified as available-for-sale. At
June 30, 1998, 29.1% of the mortgage-backed securities were backed by
adjustable-rate loans and 70.9% were backed by fixed-rate loans. The mortgage-
backed securities portfolio had coupon rates ranging from 4.7% to 10.25% and had
a weighted average yield of 6.75% at June 30, 1998. The estimated fair value of
the Association's mortgage-backed securities at June 30, 1998, was $208.0
million, which is $2.5 million more than the amortized cost of $205.6 million.
Mortgage-backed securities are created by the pooling of mortgages and
issuance of a security with an interest rate which is less than the interest
rate on the underlying mortgage. Mortgage-backed securities typically represent
a participation interest in a pool of single-family or multi-family mortgages,
although the Association focuses its investments on mortgage-backed securities
backed by single-family mortgages. The issuers of such securities (generally
U.S. Government agencies and government-sponsored enterprises, including FNMA,
FHLMC and GNMA) pool and resell the participation interests in the form of
securities to investors such as the Association and guarantee the payment of
principal and interest to investors. Mortgage-backed securities generally yield
less than the loans that underlie such securities because of the cost of payment
guarantees and credit enhancements. In addition, mortgage-backed securities are
usually more liquid than individual mortgage loans and may be used to
collateralize certain liabilities and obligations of the Association.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater than estimated prepayments over the life of the security, which
may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby reducing the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities or in the event such securities are redeemed by the issuer. In
addition, the market value of such securities may be adversely affected by
changes in interest rates. The Association estimates prepayments for its
mortgage-backed securities at purchase to ensure that prepayment assumptions are
reasonable considering the underlying collateral for the mortgage-backed
securities at issue and current mortgage interest rates and to determine the
yield and estimated maturity of its mortgage-backed security portfolio excluding
FHLB stock. Of the Association's $207.9 million mortgage-backed securities
portfolio at June 30, 1998, $715,000 with a weighted average yield of 6.23% had
contractual maturities within five years and $207.2 million with a weighted
average yield of 6.75% had contractual maturities over five years. However, the
actual maturity of a mortgage-backed security may be less than its stated
maturity due to prepayments of the underlying mortgages.
63
<PAGE>
Prepayments that are faster than anticipated may shorten the life of the
security and may result in a loss of any premiums paid and thereby reduce the
net yield on such securities. Although prepayments of underlying mortgages
depend on many factors, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Association may be subject to reinvestment risk
because, to the extent that the Association's mortgage-backed securities prepay
faster than anticipated, the Association may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate.
Investment Securities. At June 30, 1998, the Association's investment
securities portfolio totaled $31.6 million, of which $21.1 million were
classified as available for sale. Such portfolio primarily consists of short-
to medium-term (maturities of one to five years) U.S. Treasury and agency
securities.
The following table sets forth the composition of the Association's
investment and mortgage-backed securities portfolios in dollar amounts and in
percentages at the dates indicated:
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------------------------------
1998 1997 1996
----------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
--------- ----------- -------- ---------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Government agencies.............................. $ 15,797 6.60% $ 33,678 13.60% $ 25,012 10.00%
Obligations of states and political subdivisions...... 853 0.36 838 0.34 -
FHLB stock............................................ 4,415 1.84 4,893 1.98 4,563 1.82
Marketable equity securities.......................... - - 2,980 1.20 2,920 1.17
-------- ------ -------- ------ -------- ------
Total investment securities.......................... 21,065 8.80 42,389 17.12 32,495 12.99
-------- -------- --------
Mortgage-backed securities:
GNMA............................................... 37,714 15.75 39,823 16.09 31,075 12.43
FNMA............................................... 50,518 21.09 57,888 23.38 63,959 25.57
FHLMC.............................................. 100,898 42.13 60,891 24.60 72,092 28.83
Other mortgage-backed securities................... 990 0.41 1,686 0.68 2,555 1.02
-------- ------ -------- ------ -------- ------
Total mortgage-backed securities................... 190,120 79.38 160,288 64.75 169,681 67.85
-------- ------ -------- ------ -------- ------
Total securities available for sale................... 211,185 88.18 202,677 81.87 202,176 80.84
-------- -------- --------
HELD TO MATURITY:
U.S. Treasury securities.............................. 6,005 2.52 14,005 5.66 11,984 4.79
U.S. Government agencies.............................. 4,147 1.73 4,239 1.71 6,000 2.40
Obligations of states and political subdivisions...... 364 0.15 405 0.16 446 0.18
-------- ------ -------- ------ -------- ------
Total investment securities.......................... 10,516 4.40 18,649 7.53 18,430 7.37
-------- -------- --------
Mortgage-backed securities:
GNMA................................................. 1,512 0.63 1,943 0.78 2,386 0.95
FNMA................................................. 16,267 6.79 24,283 9.82 27,102 10.84
-------- ------ -------- ------ -------- ------
Total mortgage-backed securities................... 17,779 7.42 26,226 10.60 29,488 11.79
-------- ------ -------- ------ -------- ------
Total securities held to maturity..................... 28,295 11.82 44,875 18.13 47,918 19.16
-------- ------ -------- ------ -------- ------
Total securities...................................... $239,480 100.00% $247,552 100.00% $250,094 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
64
<PAGE>
The following table sets forth at the dates indicated certain information
regarding the amortized cost and market values of the Association's investment
and mortgage-backed securities.
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------ ------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
-------------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Government agencies.............................. $ 15,734 $ 15,797 $ 34,012 $ 33,678 $ 25,938 $ 25,012
Obligations of states and political subdivisions...... 826 853 825 838 - -
FHLB stock............................................ 4,415 4,415 4,893 4,893 4,563 4,563
Marketable equity securities.......................... - - 3,216 2,980 3,216 2,920
-------- -------- -------- -------- -------- --------
Total investment securities.......................... 20,975 21,065 42,946 42,389 33,717 32,495
-------- -------- -------- -------- -------- --------
Mortgage-backed securities:
GNMA.............................................. 37,355 37,714 39,493 39,823 31,507 31,075
FNMA.............................................. 49,959 50,518 57,604 57,888 65,065 63,959
FHLMC............................................. 99,494 100,898 60,893 60,891 73,428 72,092
Other mortgage-backed securities.................. 987 990 1,655 1,686 2,465 2,555
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities................... 187,795 190,120 159,645 160,288 172,465 169,681
-------- -------- -------- -------- -------- --------
Total securities available for sale................... $208,770 $211,185 $202,591 $202,677 $206,182 $202,176
======== ======== ======== ======== ======== ========
HELD TO MATURITY:
U.S.Treasury securities............................... $ 6,005 $ 6,014 $ 14,005 $ 13,951 $ 11,984 $ 12,061
U.S. Government agencies.............................. 4,147 4,181 4,239 4,236 6,000 5,932
Obligations of states and political subdivisions...... 364 396 405 439 446 472
-------- -------- -------- -------- -------- --------
Total investment securities.......................... 10,516 10,591 18,649 18,626 18,430 18,465
-------- -------- -------- -------- -------- --------
Mortgage-backed securities:
GNMA................................................. 1,512 1,561 1,943 1,993 2,386 2,324
FNMA................................................. 16,267 16,367 24,283 24,180 27,102 26,597
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities................... 17,779 17,928 26,226 26,173 29,488 28,921
-------- -------- -------- -------- -------- --------
Total securities held to maturity..................... $ 28,295 $ 28,519 $ 44,875 $ 44,799 $ 47,918 $ 47,386
======== ======== ======== ======== ======== ========
</TABLE>
65
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Association's
securities portfolio, excluding FHLB stock.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
---------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
------------------------ --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Government agencies....................... $ 9,575 6.36% $ 6,222 5.96% $ - -%
Obligations of state and political subdivisions - - 429 6.85 424 7.05
Mortgage-backed securities:
GNMA....................................... - - - - - -
FNMA....................................... - - - - 2,972 6.84
FHLMC...................................... - - - - 17,647 6.68
Other mortgage-backed securities........... - - - - - -
------- - ------- - ------- -
Total securities available for sale... $ 9,575 6.36 $ 6,651 6.02 $21,043 6.71
======= ======= =======
HELD TO MATURITY:
U.S. Treasury securities....................... $ 6,005 5.73 $ - - $ - -
U.S. Government agencies....................... - - 4,147 6.17 - -
Obligations of state and political subdivisions 40 6.80 161 6.80 163 6.80
Mortgage-backed securities:
GNMA........................................ - - - - 1,462 7.88
FNMA........................................ - - 710 6.23 4,174 6.78
------- ------- -------
Total securities held to maturity........ $ 6,045 5.74 $ 5,018 6.20 $ 5,799 7.06
======= ======== ========
Total securities............................... $15,620 6.12 $11,669 6.10 $26,842 6.79
======= ======= =======
<CAPTION>
AT JUNE 30, 1998
----------------------------------------------
MORE THAN TEN YEARS TOTAL
----------------------- --------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
-------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Government agencies....................... $ - -% $ 15,797 6.20%
Obligations of state and political subdivisions - - 853 6.95
Mortgage-backed securities:
GNMA....................................... 37,714 7.09 37,714 7.09
FNMA....................................... 47,546 6.32 50,518 6.35
FHLMC...................................... 83,251 6.79 100,898 6.77
Other mortgage-backed securities........... 990 10.04 990 10.04
------- --------
Total securities available for sale... 169,501 6.74 $206,770 6.70
======= ========
HELD TO MATURITY:
U.S. Treasury securities....................... - - $6,005 5.73
U.S. Government agencies....................... - - 4,147 6.17
Obligations of state and political subdivisions - - 364 6.80
Mortgage-backed securities:
GNMA........................................ 50 7.22 1,512 7.86
FNMA........................................ 11,383 6.77 16,267 6.75
------- --------
Total securities held to maturity........ 11,433 6.77 $ 28,295 6.51
======= ========
Total securities............................... 180,934 6.74 $235,065 6.68
======= ========
</TABLE>
66
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan repayments, cash flows generated from operations
(primarily cash basis net income) and FHLB advances are the primary sources of
the Association's funds for use in lending, investing and for other general
purposes.
Deposits. The Association offers a variety of deposit accounts with a
range of interest rates and terms. The Association's deposit accounts consist
of savings, retail checking/NOW accounts, business checking accounts, money
market accounts, club accounts and certificate of deposit accounts. The
Association offers jumbo certificates and also offers Individual Retirement
Accounts ("IRAs") and other qualified plan accounts.
At June 30, 1998, the Association's deposits totaled $435.5 million, or
81.3%, of interest-bearing liabilities. For the year ended June 30, 1998, the
average balance of core deposits totaled $169.3 million, or 40.3% of total
average deposits. At June 30, 1998, the Association had a total of $260.0
million in certificates of deposit, of which $167.8 million had maturities of
one year or less reflecting the shift in deposit accounts from savings accounts
to shorter-term certificate accounts that has occurred in recent years.
Although the Association has a significant portion of its deposits in core
deposits, management monitors activity on the Association's core deposits and,
based on historical experience and the Association's current pricing strategy,
believes it will continue to retain a large portion of such accounts. The
Association is not limited with respect to the rates it may offer on deposit
products.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Association's deposits are obtained predominantly from the
areas in which its branch offices are located. The Association relies primarily
on customer service and long-standing relationships with customers to attract
and retain these deposits; however, market interest rates and rates offered by
competing financial institutions affect the Association's ability to attract and
retain deposits. The Association uses traditional means of advertising its
deposit products, including radio and print media and generally does not solicit
deposits from outside its primary market area. While jumbo certificates are
accepted by the Association, and may be subject to preferential rates, the
Association does not actively solicit such deposits as such deposits are more
difficult to retain than core deposits. The Association's policies do not
permit the use of brokered deposits.
67
<PAGE>
The following table presents the deposit activity of the Association for
the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
----------------------------------------------
1998 1997 1996
------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance............................. $412,934 $391,715 $376,541
Net deposits (withdrawals).................... 2,579 2,538 (3,154)
Interest credited on deposit accounts......... 19,949 18,681 18,328
-------- -------- --------
Total increase in deposit accounts............ 22,528 21,219 15,174
-------- -------- --------
Ending balance.............................. $435,462 $412,934 $391,715
======== ======== ========
</TABLE>
At June 30, 1998, the Association had outstanding $53.2 million in
certificate of deposit accounts in amounts of $100,000 or more, maturing as
follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- -------------------------------------------- ---------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less........................ $ 5,374 6.24%
Over three through six months............... 10,585 6.17
Over six through 12 months.................. 17,735 5.91
Over 12 months.............................. 19,531 5.64
-------
Total..................................... $53,225 5.89
=======
</TABLE>
68
<PAGE>
The following table sets forth the distribution of the Association's
deposit accounts at June 30, 1998 and the distribution of the average deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented.
<TABLE>
<CAPTION>
AT JUNE 30, 1998 FOR THE YEAR ENDED JUNE 30, 1998
------------------------------ --------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE AVERAGE OF TOTAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------- -------- -------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand.......... $ 5,217 1.20% -% $ 4,560 1.08% -%
NOW and money market................ 102,875 23.62 3.51 95,871 22.80 3.44
Savings............................. 67,401 15.48 2.24 68,945 16.40 2.41
Certificates of deposit............. 259,969 59.70 5.88 251,130 59.72 5.93
-------- ------ -------- ------
Total deposits.................. $435,462 100.00% 4.69 $420,506 100.00% 4.72
======== ====== ======== ======
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1997 FOR THE YEAR ENDED JUNE 30, 1996
------------------------------- ----------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
AVERAGE OF TOTAL AVERAGE AVERAGE OF TOTAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------- -------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand.......... $ 3,681 0.92% -% $ 3,033 0.79% -%
NOW and money market................ 84,388 21.15 3.20 70,183 18.27 2.77
Savings............................. 72,132 18.08 2.47 77,953 20.29 2.58
Certificates of deposit............. 238,859 59.86 5.87 232,955 60.65 5.98
-------- ------ -------- ------
Total deposits.................. $399,060 100.00% 4.64 $384,124 100.00% 4.66
======== ====== ======== ======
</TABLE>
The following table presents, by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM JUNE 30, 1998
---------------------------------------------------------------------------
LESS THAN ONE TO TWO TWO TO THREE THREE TO FOUR FOUR TO FIVE OVER FIVE TOTAL AT JUNE
ONE YEAR YEARS YEARS YEARS YEARS YEARS 30, 1998
--------- ---------- ------------ ------------- ------------ --------- -------------
(DOLLARS IN THOUSANDS)
Certificate accounts:
<S> <C> <C> <C> <C> <C> <C> <C>
0 to 4.00%...................... $ 1,241 $ 1,503 $ 71 $ 19 $ - $ - $ 2,834
4.01 to 5.00%................... 15,072 969 681 2,006 41 414 19,183
5.01 to 6.00%................... 109,434 29,629 13,664 3,022 1,017 4,110 160,876
6.01 to 7.00%................... 25,359 18,244 3,268 1,646 569 10,415 59,501
7.01 to 8.00%................... 3,160 759 20 - - - 3,939
8.01 to 9.00%................... 3,036 56 - 22 6 - 3,120
Over 9.01%...................... 10,516 - - - - - 10,516
-------- -------- ------- ------ ------ ------- ------
$167,818 $51,160 $17,704 $6,715 $1,633 $14,939 $259,969
Total at June 30, 1998...... ======== ======= ======= ====== ====== ======= ========
</TABLE>
69
<PAGE>
Borrowings. The Association's policy has been to utilize borrowings as an
alternative and/or less costly source of funds. The Association obtains
advances from the FHLB of Cincinnati, which are collateralized by the capital
stock of the FHLB of Cincinnati held by the Association, and certain mortgage
loans of the Association. The Association also borrows funds through reverse
repurchase agreements with the FHLB of Cincinnati and primary broker/dealers.
Advances from the FHLB of Cincinnati are made pursuant to several different
credit programs, each of which has its own interest rate and maturity. The
maximum amount that the FHLB of Cincinnati will advance to member institutions,
including the Association, for purposes of other than meeting withdrawals,
fluctuates from time to time in accordance with the policies of the FHLB of
Cincinnati and the OTS. The maximum amount of FHLB of Cincinnati advances
permitted to a member institution generally is reduced by borrowings from any
other source. At June 30, 1998, the Association's FHLB of Cincinnati advances
totaled $44.8 million, representing 8.1% of total liabilities.
During the year ended June 30, 1998, the Association continued to borrow
funds from primary broker/dealers. The borrowings are collateralized by
designated mortgage-backed securities and investment securities. The total of
these borrowings at June 30, 1998, was $60.4 million, representing 11.0% of
total liabilities. The Association has the right to freely substitute
collateral as long as the margin is at least 95% of all outstanding borrowings,
including accrued interest. The Association has used these repurchase
agreements in arbitrage strategies, using the funds to purchase a mix of fixed
and adjustable rate mortgage-backed securities, to generate a spread of
approximately 100 to 120 basis points, as well as to help reduce the
Association's interest rate risk. See "Management's Discussion and Analysis of
Financial Condition and Results of OperationsManagement Strategy."
The Association also has an available overnight line-of-credit with the
FHLB of Cincinnati for a maximum of $20.0 million. There was no fee for the
line-of-credit for the year ended June 30, 1998. The Association may continue
to increase borrowings in the future to fund asset growth. To the extent it
does so, the Association may experience an increase in its cost of funds.
The following table sets forth certain information regarding the
Association's borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
JUNE 30,
----------------------------------------------
1998 1997 1996
------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding...................................... $ 52,396 $68,596 $68,615
Maximum amount outstanding at any
month-end during the period..................................... 65,705 87,001 88,054
Balance outstanding at end of period............................. 44,820 58,398 76,078
Weighted average interest rate during the period................. 5.83% 5.76% 5.79%
Weighted average interest rate at end of period.................. 5.71% 5.84% 5.70%
Repurchase agreements:
Average balance outstanding...................................... $ 45,044 $ 8,470 $ -
Maximum amount outstanding at any
MONTH-END during the period..................................... 60,430 16,000 -
Balance outstanding at end of period............................. 60,430 16,000 -
Weighted average interest rate during the period................. 5.76% 5.67% -%
Weighted average interest rate at end of period.................. 5.69% 5.60% -%
Total borrowings:
Average balance outstanding...................................... $ 97,440 $77,066 $68,615
Maximum amount outstanding at any
month-end during the period..................................... 109,089 87,001 88,054
Balance outstanding at end of period............................. 105,250 74,398 76,078
Weighted average interest rate during the period................. 5.80% 5.75% 5.79%
Weighted average interest rate at end of period.................. 5.70% 5.79% 5.70%
</TABLE>
70
<PAGE>
PROPERTIES
The Association conducts its business through an executive and 10 other
full-service branch offices. The Association currently is considering plans to
renovate or rebuild its main office, which includes its administrative offices.
The Board of Directors is currently considering options presented to it by an
outside consultant, which range from renovation of the existing facility to
razing the existing facility and building a new office at that location. The
cost of renovation or rebuilding is currently estimated to be up to $15.0
million, exclusive of land acquisition costs.
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE
YEAR OF PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION JUNE 30, 1998
- ----------------------------- ------------- ------------ --------------- ------------------
<S> <C> <C> <C> <C>
EXECUTIVE/MAIN/BRANCH OFFICE:
185 East Market St.
Warren, OH 44482............. Owned 1940 N/A $353,581
BRANCH OFFICES AND LOAN CENTERS:
201 Elm Road NE
Warren, OH 44483............. Leased 1970 2002 8,128
8226 East Market Street
Warren, OH 44484............. Leased 1973 2004 35,051
4460 Mahoning Ave NW
Warren, OH 44483............. Owned 1976 N/A 376,401
325 S. High Street
Cortland, OH 44410........... Owned 1979 N/A 167,281
7290 Sharon Warren Rd.
Brookfield, OH 44403......... Owned 1981 N/A 144,813
Village Center Plaza,
Unit 530
6002 Warren-Youngstown Rd.
Niles, OH 44446.............. Leased 1986 2006 237,358
8228 East Market St.
Warren, OH 44484
(Loan Center)................ Leased 1994 2003 154,682
2104 Niles Cortland Rd, SE
Warren, OH 44484
(Inside Super Kmart)......... Leased 1995 2000 202,796
2790 Mahoning Ave NW
Warren, OH 44483............. Leased 1995 1999 3,009
486 Boardman Canfield Rd.
Youngstown, OH 44512......... Leased 1996 2001 118,082
5220 Mahoning Avenue, Suite A
Youngstown, OH 44515......... Leased 1997 2002 99,647
45 Manor Drive, Suite 400
Canfield, OH 44406
(Loan Center)................ Leased 1998 2003 57,579
</TABLE>
71
<PAGE>
The Association also owns an office building located at 159 E. Market
Street in Warren, Ohio, which is partially occupied by four commercial business
tenants. The Association presently receives aggregate annual rental income of
approximately $101,000 from its tenants. The largest tenant has a lease which
expires in December 1999, with a three year option to renew. The other leases
expire in the years 2000 and 2001.
LEGAL PROCEEDINGS
The Association is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the financial condition and results of operations of the
Association.
PERSONNEL
As of June 30, 1998, the Association had 150 full-time employees and 25
part-time employees. The employees are not represented by a collective
bargaining unit and the Association considers its relationship with its
employees to be good. See "Management of the Association--Benefit Plans" for a
description of certain compensation and benefit programs offered to the
Association's employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Association will report their income on a
June 30 fiscal year basis using the accrual method of accounting and will be
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. The Association has been audited
by the IRS for the 1992 and 1993 tax years.
Bad Debt Reserve. Historically, savings institutions such as the
Association which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrifts") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
are deducted in arriving at their taxable income. The Association's deductions
with respect to "qualifying real property loans," which are generally loans
secured by certain interest in real property, were computed using an amount
based on the Association's actual loss experience, or a percentage equal to 8%
of the Association's taxable income, computed with certain modifications and
reduced by the amount of any permitted addition to the non-qualifying reserve.
Due to the Association's loss experience, the Association generally recognized a
bad debt deduction equal to 8% of taxable income.
In August 1996, the provisions repealing the above thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Association has
previously recorded a deferred tax liability equal to the bad debt recapture and
as such, the new rules will have no effect on net income or federal income tax
expense. For taxable years beginning after December 31, 1995, the Association's
bad debt deduction will be equal to net charge-offs. The new rules allow an
institution to suspend the bad debt reserve recapture for the 1996 and 1997 tax
years if the institution's lending activity for those years is equal to or
greater than the institution's average mortgage lending activity for the six
taxable years preceding 1996. For this purpose, only home purchase and home
improvement loans are included and the institution can elect to have the tax
years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-
72
<PAGE>
1988 bad debt reserves continue to be subject to a provision of present law
referred to below that require recapture in the case of certain excess
distributions to shareholders.
Distributions. To the extent that the Association makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Association's taxable income. Non-dividend distributions include
distributions in excess of the Association's current and accumulated earnings
and profits, distributions in redemption of stock, and distributions in partial
or complete liquidation. However, dividends paid out of the Association's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Association's bad debt reserve. Thus, any dividends to the Company that would
reduce amounts appropriated to the Association's bad debt reserve and deducted
for federal income tax purposes would create a tax liability for the
Association. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Association makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 34% corporate income
tax rate (exclusive of state and local taxes). See "Regulation" and "Dividend
Policy" for limits on the payment of dividends of the Association. The
Association does not intend to pay dividends that would result in a recapture of
any portion of its bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt
reserve deduction claimed by the Association over the deduction that would have
been allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Association currently has none. AMTI is increased
by an amount equal to 75% of the amount by which the Association's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses).
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association own more
than 20% of the stock of a corporation distributing a dividend then 80% of any
dividends received may be deducted.
OHIO TAXATION
The Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 and
(ii) 0.582% times taxable net worth. Under these alternative measures of
computing tax liability, the states to which a taxpayer's adjusted total net
income and adjusted total net worth are apportioned or allocated are determined
by complex formulas. The minimum tax is $50 per year.
A special litter tax is also applicable to all corporations, including the
Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Ohio corporation franchise tax law is scheduled to change markedly as a
consequence of legislative reforms enacted July 1, 1997. Tax liability,
however, continues to be measured by both net income and net worth. In general,
tax liability will be the greater of (i) 5.1% on the first $50,000 of computed
Ohio taxable income and 8.5% of computed
73
<PAGE>
Ohio taxable income in excess of $50,000 or (ii) 0.40% of taxable net worth.
Under these alternative measures of computing tax liability, the states to which
total net income and total net worth will be apportioned or allocated will
continue to be determined by complex formulas, but the formulas change. The
minimum tax will still be $50 per year and maximum tax liability as measured by
net worth will be limited to $150,000 per year. The special litter taxes remain
in effect. Various other changes in the tax law may affect the Company.
The Association is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporation franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of the
Association's apportioned book net worth, determined in accordance with GAAP,
less any statutory deduction. This rate of tax is scheduled to decrease in each
of the years 1999 and 2000. As a "financial institution," the Association is
not subject to any tax based upon net income or net profits imposed by the State
of Ohio.
DELAWARE TAXATION
As a Delaware holding company not earning income in Delaware, the Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual franchise tax to the State of Delaware.
REGULATION
GENERAL
The Association is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the FDIC, as the deposit
insurer. The Association is a member of the FHLB System. The Association's
deposit accounts are insured up to applicable limits by the SAIF managed by the
FDIC. The Association must file reports with the OTS and the FDIC concerning
its activities and financial condition in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS and the FDIC to test the Association's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Association and their
operations. Assuming that the holding company form of organization is utilized,
the Company, as a savings and loan holding company, will also be required to
file certain reports with, and otherwise comply with the rules and regulations
of the OTS and of the SEC under the federal securities laws.
Certain of the regulatory requirements applicable to the Association and to
the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings associations set
forth in this Prospectus do not purport to be complete descriptions of such
statutes and regulations and their effects on the Association and the Company
and is qualified in its entirety by reference to such statutes and regulations.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal associations
may engage. In particular, many types of lending authority for federal
associations, e.g., commercial, non-residential real property loans and consumer
loans, are limited to a specified percentage of the institution's capital or
assets.
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<PAGE>
Loans-to-One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Association's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At June 30, 1998, the Association's largest aggregate
amount of loans-to-one borrower consisted of a $3.4 million real estate loan
for a community development project.
Qualified Thrift Lender Test. The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to qualify as a "domestic building and loan association"
as that term is defined in the Code or maintain at least 65% of its "portfolio
assets" (total assets less: (i) specified liquid assets up to 20% of total
assets; (ii) intangibles, including goodwill; and (iii) the value of property
used to conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
and related securities) in at least 9 months out of each 12-month period. A
savings association that fails the QTL test must either convert to a bank
charter or operate under certain restrictions. As of June 30, 1998, the
Association met the QTL test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered as "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice to, but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net earnings for the previous
four quarters. Any additional capital distributions would require prior OTS
approval. In the event the Association's capital fell below its capital
requirements or the OTS notified it that it was in need of more than normal
supervision, the Association's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
The OTS has proposed amendments to its capital distribution regulations
which could conform OTS regulations to the existing requirements of other
banking agencies, as well as simplify the existing OTS regulations. These
proposed rules would eliminate the requirement of notifying the OTS when cash
dividends of a certain amount will be paid for institutions that will remain at
least adequately capitalized. However, applications for capital distributions
will be required for all distributions over a specified amount. Notices will
still be required for distributions that would reduce the amount of or retire
common or preferred stock, or debt instruments included in the capital and for
all capital distributions by savings associations in a holding company
structure.
Liquidity. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage (currently 4%) of its net withdrawable deposit accounts
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet these liquidity requirements. The Association's average liquidity ratio
for the month ended June 30, 1998 was 9.40%, which exceeded the applicable
requirements. The Association has never been subject to monetary penalties for
failure to meet its liquidity requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of OperationsLiquidity and Capital
Resources."
Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the Association's
latest quarterly Thrift Financial Report. The assessments paid by the
Association for the year ended June 30, 1998 totaled $124,000.
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Branching. OTS regulations permit federally-chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations.
Transactions with Related Parties. The Association's authority to engage
in transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. A savings association
also is prohibited from extending credit to any affiliate engaged in activities
not permitted for a bank holding company and may not purchase the securities of
an affiliate (other than a subsidiary).
Section 22(h) of the FRA restricts a savings association with respect to
loans to directors, executive officers, and principal stockholders. Under
Section 22(h), loans to directors, executive officers and stockholders who
control, directly or indirectly, 10% or more of voting securities of a savings
association, and certain related interests of any of the foregoing, may not
exceed, together with all other outstanding loans to such persons and affiliated
entities, the savings association's total capital and surplus. Section 22(h)
also prohibits loans above amounts prescribed by the appropriate federal banking
agency to directors, executive officers, and shareholders who directly or
indirectly control 10% or more of voting securities of a stock savings
association, and their respective related interests, unless such loan is
approved in advance by a majority of the board of directors of the savings
association. Any "interested" director may not participate in the voting. The
loan amount (which includes all other outstanding loans to such person) as to
which such prior board of director approval is required, is the greater of
$25,000 or 5% of capital and surplus or any loans over $500,000. Further,
pursuant to Section 22(h), loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions to other persons except for extensions of credit made
pursuant to a benefit or compensation program that is widely available to the
institution's employees and does not give preference to insiders over other
employees. Section 22(g) of the FRA places additional limitations on loans to
executive officers.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establish criminal penalties for
certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
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<PAGE>
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholder's equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs") and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards institutions generally must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. In addition, the OTS prompt corrective action regulation provides that a
savings institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action." The OTS has proposed to amend its capital
regulations so that the leverage requirement is identical to the above prompt
corrective standard to avoid "undercapitalized" status.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk
would be measured by the decline in the net portfolio value of its assets (i.e.,
the difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half
of the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director
of the OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has postponed indefinitely the date that the
component will first be deducted from an institution's total capital.
At June 30, 1998, the Association met each of its capital requirements, in
each case on a fully phased-in basis. See "Regulatory Capital Compliance" for a
table which sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, the Association's historical
amounts and percentages at June 30, 1998, and pro forma amounts and percentages
based upon the issuance of the shares within the Estimated Price Range and
assuming that a portion of the net proceeds are retained by the Company.
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PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has a total
risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less
than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of
a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Assessment rates for SAIF member institutions currently range from 0
basis points to 27 basis points. The FDIC is authorized to raise the assessment
rates in certain circumstances. The FDIC has exercised this authority several
times in the past and may raise insurance premiums in the future. If such
action is taken by the FDIC, it could have an adverse effect on the earnings of
the Association. The Association's assessment rate for the year ended June 30,
1998 was 0.006% of assessable deposits.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
COMMUNITY REINVESTMENT ACT
Federal Regulation. Under the Community Reinvestment Act, as amended
("CRA"), as implemented by OTS regulations, a savings association has a
continuing and affirmative obligation consistent with its safe and sound
operation 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 its examination of a savings
institution, 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 by such institution. The FIRREA amended the CRA to require the OTS
to provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system, which replaced the five-tiered numerical
rating system. The Association's latest CRA rating received from the OTS was
"Outstanding."
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FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for
member institutions. The Association, as a member of the FHLB, is required to
acquire and hold shares of capital stock in the FHLB in an amount at least equal
to 1% of the aggregate principal amount of its unpaid residential mortgage loans
and similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Association was in
compliance with this requirement with an investment in FHLB stock at June 30,
1998 of $4.4 million. FHLB advances must be secured by specified types of
collateral and all long-term advances may only be obtained for the purpose of
providing funds for residential housing finance. At June 30, 1998, the
Association had $44.8 million in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended June 30, 1998, 1997 and 1996,
dividends from the FHLB to the Association amounted to approximately $352,000,
$330,000 and $261,000, respectively. If dividends were reduced, the
Association's net interest income would likely also be reduced. Further, there
can be no assurance that the impact of recent or future legislation on the FHLBs
will not also cause a decrease in the value of the FHLB stock held by the
Association.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$47.8 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $47.8 million, the
reserve requirement is $1.4 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Association is in
compliance with the foregoing requirements. Because required reserves must be
maintained in the form of either vault cash, a non-interest-bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal Reserve
Board, the effect of this reserve requirement is to reduce the Association's
interest-earning assets. FHLB System members are also authorized to borrow from
the Federal Reserve "discount window," but Federal Reserve Board regulations
require institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
HOLDING COMPANY REGULATION
The Company, if utilized, will be a non-diversified unitary savings and
loan holding company within the meaning of the HOLA. As such, the Company will
be required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. The Association must notify the OTS 30 days before
declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Association continues to be a QTL. See
"--Federal Savings Institution Regulation--Qualified Thrift Lender Test" for a
discussion of the QTL requirements. Upon any non-supervisory acquisition by the
Company of another savings association, the Company would become a multiple
savings and loan holding company (if the acquired institution is held as a
separate subsidiary) and would be subject to extensive limitations on the types
of business activities in which it could engage. The HOLA limits the activities
of a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC
Act"), subject to the prior approval of the OTS, and to other activities
authorized by OTS
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regulation. Previously proposed legislation would have treated all savings and
loan holding companies as bank holding companies and limit the activities of
such companies to those permissible for bank holding companies.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS; from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring more than 5% of a company engaged in activities other than those
authorized for savings and loan holding companies by the HOLA; or acquiring or
retaining control of a depository institution that is not insured by the FDIC.
In evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant to
the Conversion. The Company's Common Stock has been registered with the SEC
under the Exchange Act. The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of the Company may
be resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
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MANAGEMENT OF THE COMPANY
DIRECTORS OF THE COMPANY
The Board of Directors of the Company is divided into three classes, each
of which contains one-third of the Board. The directors shall be elected by the
stockholders of the Company for staggered three year terms, or until their
successors are elected and qualified. One class of directors, consisting of
Messrs. Paul Watson, William Watson and Steven Lewis, has a term of office
expiring at the first annual meeting of stockholders, a second class, consisting
of Messrs. Thomas Humphries, Robert McGeough and Robert Grace, has a term
expiring at the second annual meeting of stockholders and a third class,
consisting of Messrs. George Gentithes and E. Jeffrey Rossi, has a term of
office expiring at the third annual meeting of stockholders. It is currently
intended that Directors of the Company will receive no additional fees for their
services as Directors of the Company.
EXECUTIVE OFFICERS OF THE COMPANY
The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names.
<TABLE>
<CAPTION>
NAME POSITION(S) HELD WITH THE COMPANY
- ---- ---------------------------------
<S> <C>
Paul A. Watson Chairman of the Board of Directors
Steven R. Lewis President and Chief Executive Officer
Richard K. Smith Vice President - Treasurer
Mary Ann Roberts Corporate Secretary
</TABLE>
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, retirement or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers,
Directors or other personnel has received remuneration from the Company.
Information concerning the principal occupations, employment and other
information concerning the directors and officers of the Company during the past
five years is set forth under "Management of the Association--Biographical
Information."
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MANAGEMENT OF THE ASSOCIATION
DIRECTORS OF THE ASSOCIATION
The Directors of the Company are also Directors of the Association. Upon
consummation of the Conversion, the current Directors of the Association will
become Directors of the stock-chartered Association. The following table sets
forth certain information regarding the Board of Directors of the Association.
<TABLE>
<CAPTION>
POSITION(S) HELD DIRECTOR TERM
NAME AGE(1) WITH THE ASSOCIATION SINCE EXPIRES
----- ------ --------------------- -------- -------
<S> <C> <C> <C> <C>
Paul A. Watson 66 Chairman of the Board of Directors 1983 2001
George J. Gentithes 65 Director 1989 2000
Robert P. Grace 59 Director 1996 2001
Thomas M. Humphries 53 Director 1990 1999
Steven R. Lewis 40 Director, President and Chief 1998 2001
Executive Officer
Robert S. McGeough 67 Director 1973 1999
E. Jeffrey Rossi 45 Director 1994 2000
William W. Watson 71 Director 1993 2001
</TABLE>
___________________
(1) As of June 30, 1998.
EXECUTIVE OFFICERS OF THE ASSOCIATION WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Association who are not also directors.
<TABLE>
<CAPTION>
POSITION(S) HELD
NAME AGE(1) WITH THE ASSOCIATION
---- ------ ---------------------
<S> <C> <C>
David J. Jenkins 60 Vice President-Lending Operations
R. Patrick Wilkinson 50 Vice President-Retail Division
Richard K. Smith 40 Vice President-Treasurer
Brian Hoopes 40 Vice President - Bank Systems
Mary Ann Roberts 57 Secretary
</TABLE>
__________________________
(1) As of June 30, 1998.
The executive officers of the Association are elected annually and will
hold office in the converted Association until the annual meeting of the Board
of Directors of the Association held immediately after the first annual meeting
of stockholders of the Association subsequent to Conversion, and until their
successors are elected and qualified or until death, resignation, retirement or
removal by the Board of Directors. Officers are re-elected by the Board of
Directors annually.
BIOGRAPHICAL INFORMATION
DIRECTORS OF THE ASSOCIATION
Paul A. Watson is Chairman of the Board of Directors of the Association.
Mr. Watson was elected to the Board of Directors of the Association in 1983 and
has been Chairman of the Board since 1997. Prior to his retirement on December
31, 1996, Mr. Watson served as President and Chief Executive Officer of the
Association since 1983. Mr. Watson is the brother of Mr. William Watson, a
director of the Association.
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George J. Gentithes has served as a Director of the Association since 1989.
Mr. Gentithes was owner and Chief Executive Officer of the Rapid Poulson Textile
Service from 1976 until 1989, when he became a consultant for Clean Textile
Service until 1994. He is currently a consultant for T.F. Industries, located
in Warren, Ohio.
Robert P. Grace has served as a Director of the Association since 1996.
Mr. Grace is Vice President and Chief Financial Officer of Salem Label Co.,
Salem, Ohio. Prior to assuming that position in May 1995, Mr. Grace was a
principal in the accounting firm of Packer, Thomas & Co., since 1993, and was a
partner in the accounting firm Ernst & Young from 1977 to 1993. Mr. Grace is a
certified public accountant.
Thomas M. Humphries has served on the Association's Board of Directors
since 1990. Mr. Humphries is currently President of the Youngstown-Warren
Regional Chamber of Commerce. Prior to taking that position in 1998, Mr.
Humphries was a General Manager with Sprint Corp., a telecommunications
corporation located in Warren, Ohio.
Steven R. Lewis, a certified public accountant, is President and Chief
Executive Officer of the Association. Mr. Lewis has been employed by the
Association since 1983. He served as Vice President and Treasurer of the
Association from 1985 until his promotion to Executive Vice President in 1995.
He was elected President and Chief Executive Officer in 1997, and became a
Director of the Association in January 1998. Mr. Lewis has a B.S. degree in
Accounting from the University of Akron, and has an M.B.A. from Cleveland State
University.
Robert S. McGeough has served as a Director of the Association since 1973.
Mr. McGeough was a partner with the law firm of Hoppe, Frey, Hewitt & Milligan
from 1970 until 1997, when he became of counsel to the firm Harrington, Hoppe &
Mitchell, located in Warren, Ohio. Harrington, Hoppe & Mitchell serves as the
Association's legal counsel.
E. Jeffrey Rossi joined the Association's Board of Directors in 1994. Mr.
Rossi is principal of E.J. Rossi & Company, located in Youngstown and Warren,
Ohio, where he is a life and health insurance broker. Mr. Rossi holds B.A. and
J.D. degrees from The Catholic University of America. He is the immediate past
Chairman of the Board of HM Health Services.
William W. Watson has served as a Director of the Association since 1993.
Prior to his retirement in 1991, Mr. Watson served as President of Trumbull
Savings and Loan Association. Mr. Watson is the brother of Mr. Paul Watson, a
director of the Association.
EXECUTIVE OFFICERS OF THE ASSOCIATION WHO ARE NOT DIRECTORS
David J. Jenkins has been employed by the Association since 1969. From
1969 until 1982, Mr. Jenkins held various positions with the Association. In
1982, he was named Vice President-Secretary. He currently is responsible for
overseeing all lending functions of the Association.
R. Patrick Wilkinson has been with the Association since 1973. He served
in various positions until he was named Vice President of the Retail Division in
1987. His responsibilities are primarily to plan, develop and implement
policies and procedures in support of the Association's retail function,
including branch operations and general services.
Richard K. Smith, a certified public accountant, joined the Association in
1990 as Assistant Vice President-Financial. In January 1995, he was named Vice
President-Treasurer. His primary areas of responsibility are overseeing
financial and regulatory reporting, investment policy, interest rate risk policy
and internal controls. Mr. Smith has Bachelor of Science degrees in Accounting
and Industrial Management from the University of Akron.
Brian E. Hoopes joined the Association in August 1998 as Vice President-
Banking Systems. He was previously employed with Michelin Tire Corporation for
the past 18 years in positions responsible for electronic data processing and
financial operations. His most recent position there was Project Manager for
the installation of a new financial software package in North America.
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Mary Ann Roberts has been with the Association since 1975. In 1981 she
accepted the position of Executive Administrative Assistant. In August 1998 she
was named the Corporate Secretary of the Association.
MEETINGS AND COMMITTEES OF THE BOARDS OF DIRECTORS OF THE ASSOCIATION AND THE
COMPANY
The Association's Board of Directors meets weekly and may have additional
special meetings as may be called in the manner specified in the Bylaws. During
the year ended June 30, 1998, the Board held fifty-two meetings. For the year
ended June 30, 1998, no Director attended fewer than 75% in the aggregate of the
total number of meetings of the Board or Committees on which such Director
served.
The Board of Directors of the Association has established the following
committees:
The Executive Committee consists of Messrs. Paul Watson, McGeough,
Gentithes and Lewis. This committee acts upon such items that demand immediate
attention between meetings of the Board of Directors. The committee meets on an
as-needed basis and met one time in fiscal 1998.
The Audit Committee consists of Messrs. Gentithes, Grace, Humphries and
Rossi. The committee meets quarterly with the Internal Auditor to review
material findings and general status, as well as to review proposed regulatory
changes with regard to their impact on the Association.
Additionally, the Board has established the following committees composed
of directors and/or management: the Loan Committee, the Asset Classification
Committee, the Human Resources Committee, the Long-Range Planning Committee, the
Proxy Committee, the Pension and 401(k) Committee, the Investment Committee, the
Technology Committee, the Asset Liability Committee, the CRA Committee, the
Environmental Risk Committee, the Commercial Loan Committee and the Second
Review Committee.
The Board of Directors of the Company has established the following
committees: the Audit Committee, consisting of Messrs. Gentithes, Grace,
Humphries and Rossi; and the Compensation Committee consisting of Messrs.
McGeough, Rossi, Gentithes and Humphries.
COMPENSATION OF DIRECTORS
All outside Directors of the Association receive an annual retainer of
$6,000. In addition, each outside director receives a fee of $300 ($350 for the
Chairman of the Board) for each regular and special Board meeting which they
attend. All outside Directors of the Association receive a fee of $90 ($150 in
the case of the Audit Committee and the Asset Classification Committee) for each
committee meeting attended.
DIRECTORS EMERITUS
Pursuant to the Association's Bylaws, no person seventy-five years of age
shall be eligible for election, reelection, appointment or reappointment to the
Board of Directors, and no director shall serve as such beyond the annual
meeting of the Association immediately following the director becoming seventy-
two years of age. Any Director who retires because of such age limitation is
eligible to be elected as advisor or emeritus director. Directors emeritus have
no vote and receive fees as determined by resolution of the Directors of the
Association. There is currently one director emeritus who receives an annual
retainer of $6,600.
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EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the cash
compensation paid by the Association as well as certain other compensation paid
or accrued for services rendered in all capacities during the fiscal year ended
June 30, 1998, to the Chief Executive Officer. No other executive officers of
the Association received salary and bonus in excess of $100,000.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
----------------------------------------------------------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
POSITIONS YEAR SALARY($) BONUS($) ($)(2) ($) (#) ($) ($)(3)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven R. Lewis............ 1998 $120,162 $12,480 - - - - $2,603
President and Chief
Executive Officer
</TABLE>
_________________________
(1) Under Annual Compensation, the column titled "Salary" includes amounts
deferred by the Chief Executive Officer under the Association's 401(k) Plan.
(2) For 1998, there were no (a) perquisites over the lesser of $50,000 or 10% of
the individual's total salary and bonus for the year; (b) payments of above-
market preferential earnings on deferred compensation; (c) payments of
earnings with respect to long-term incentive plans prior to settlement or
maturation; (d) tax payment reimbursements; or (e) preferential discounts on
stock. For 1998, the Association had no restricted stock or stock-related
plans in existence.
(3) Other compensation includes the Association's matching contribution under
the Association's 401(k) Plan.
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EMPLOYMENT AGREEMENTS
Upon the Conversion, the Association and the Company intend to enter into
employment agreements with Mr. Lewis (the "Executive") (collectively, the
"Employment Agreements"). The Employment Agreements are subject to the review
and approval of the OTS and may be amended as a result of such OTS review.
Review of compensation arrangements by the OTS does not indicate, and should not
be construed to indicate, that the OTS has passed on the merits of such
arrangements. The Employment Agreements are intended to ensure that the
Association and the Company will be able to maintain a stable and competent
management base after the Conversion. The continued success of the Association
and the Company depends to a significant degree on the skills and competence of
Mr. Lewis. The Association does not currently hold "key man" life insurance on
Mr. Lewis or any other executive officer.
The Employment Agreements provide for a three-year term. The Association
Employment Agreement provides that, commencing on the first anniversary date and
continuing on each anniversary date thereafter, the Board of Directors may
extend the agreement for an additional year so that the remaining term shall be
three years, unless written notice of non-renewal is given by the Board of
Directors after conducting a performance evaluation of the Executive. The terms
of the Company Employment Agreement shall be extended on a daily basis, unless
written notice of non-renewal is given by the Board of Directors. The
Employment Agreements provide that the Executive's base salary will be reviewed
annually. The base salary which will be effective for such Employment
Agreements for Mr. Lewis will be $150,000. In addition to the base salary, the
Employment Agreements provide for, among other things, participation in stock
benefits plans and other fringe benefits applicable to executive personnel. The
agreements provide for termination by the Association or the Company for cause,
as defined in the Employment Agreements, at any time. In the event the
Association or the Company chooses to terminate the Executive's employment for
reasons other than for cause, or in the event of the Executive's resignation
from the Association and the Company upon: (i) failure to re-elect the
Executive to his current offices; (ii) a material change in the Executive's
functions, duties or responsibilities; (iii) a relocation of the Executive's
principal place of employment by more than 30 miles; (iv) a material reduction
in the benefits and perquisites being provided to the Executive into the
Employment Agreement, unless consented to by the Executive; (v) liquidation or
dissolution of the Association or the Company; or (vi) a breach of the agreement
by the Association or the Company, the Executive or, in the event of death, his
beneficiary would be entitled to receive an amount equal to the remaining base
salary payments due to the Executive for the remaining term of the Employment
Agreement and the contributions that would have been made on the Executive's
behalf to any employee benefit plans of the Association and the Company during
the remaining term of the agreement. The Association and the Company would also
continue and pay for the Executive's life, health, and dental coverage for the
remaining term of the Agreement. Upon any termination of the Executive, the
Executive is subject to a one year non-competition agreement.
Under the Employment Agreements, if involuntary termination or under
certain circumstances, voluntary termination follows a change in control of the
Association or the Company, the Executive or, in the event of the Executive's
death, his beneficiary, would be entitled to a severance payment equal to the
greater of: (i) the payments due for the remaining terms of the agreement; or
(ii) three times the average of the five preceding taxable years' annual
compensation. The Association and the Company would also continue the
Executive's life, health and dental coverage for thirty-six months.
Notwithstanding that both the Association and Company Employment Agreements
provide for a severance payment in the event of a change in control, the
Executive would only be entitled to receive a severance payment under one
agreement.
Payments to the Executive under the Association's Employment Agreement will
be guaranteed by the Company in the event that payments or benefits are not paid
by the Association. Payment under the Company's Employment Agreement would be
made by the Company. All reasonable costs and legal fees paid or incurred by
the Executive pursuant to any dispute or question of interpretation relating to
the Employment Agreements shall be paid by the Association or Company,
respectively, if the Executive is successful on the merits pursuant to a legal
judgment, arbitration or settlement. The Employment Agreements also provide
that the Association and Company shall indemnify the Executive to the fullest
extent allowable under Federal and Delaware law, respectively. In the event of
a change in control of the Association or the Company, the total amount of
payments due under the Agreements, based solely on the base salary to be paid to
Mr. Lewis effective upon consummation of the Conversion excluding any benefits
under any employee benefit plan which may be payable, would be approximately
$450,000.
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CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Association and the Company intend to enter into two-
year Change in Control Agreements (the "CIC Agreements") with five executive
officers of the Association, none of whom will be covered by employment
contracts. Commencing on the first anniversary date and continuing on each
anniversary thereafter, the Association CIC Agreements may be renewed by the
Board of Directors of the Association for an additional year. The Company CIC
Agreements shall be extended on a daily basis unless written notice of non-
renewal is given by the Board of Directors. The CIC Agreements will provide
that in the event involuntary termination or, in certain circumstances,
voluntary termination follows a change in control of the Company or the
Association, the officer would be entitled to receive a severance payment equal
to two times the officer's average annual compensation for the five most recent
taxable years preceding termination. The Company and the Association would also
continue and pay for the officer's life and health coverage for 24 months
following termination. In the event of a change in control of the Company or
the Association, the total payments that would be due under the CIC Agreements,
based solely on the current annual compensation paid to the officers covered by
the CIC Agreements and excluding any benefits under any employee benefit plan
which may be payable, would be approximately $702,000.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Association's Board of Directors intends to, upon Conversion, establish
the First Federal Savings and Loan Association of Warren Employee Severance
Compensation Plan ("Severance Plan") which will provide eligible employees with
severance pay benefits in the event of a change in control of the Association or
the Company following Conversion. Management personnel with Employment
Agreements or CIC Agreements are not eligible to participate in the Severance
Plan. Generally, employees are eligible to participate in the Severance Plan if
they have completed at least one year of service with the Association. The
Severance Plan vests in each participant a contractual right to the benefits
such participant is entitled to thereunder. Under the Severance Plan, in the
event of a change in control of the Association or the Company, eligible
employees who are terminated from or terminate their employment within one year
(for reasons specified under the Severance Plan), will be entitled to receive a
severance payment. If the participant, whose employment has terminated, has
completed at least one year of service, the participant will be entitled to a
cash severance payment equal to one-twelfth of annual compensation for each year
of service up to a maximum of 100% of annual compensation. Such payments may
tend to discourage takeover attempts by increasing costs to be incurred by the
Association in the event of a takeover. The Severance Plan is an unfunded plan
that will be paid out of retained earnings.
INSURANCE PLANS
All full-time employees of the Association, upon completion of the
applicable introductory period, are covered as a group for comprehensive
hospitalization, including major medical and long-term disability insurance.
Life insurance is also provided to employees and directors.
BENEFIT PLANS
Retirement Plan. The Association sponsors a defined benefit pension plan
known as the First Federal Savings and Loan Association of Warren Defined
Benefit Pension Plan ("Retirement Plan"). The Retirement Plan is intended to
satisfy the tax qualification requirements of Section 401(a) of the Code.
Employees are eligible to participate in the Retirement Plan on the April 1
or October 1 coincident with or otherwise next following the later of an
employee's 21/st/ birthday and the one year anniversary of the employee's date
of employment, regardless of the number of hours of service credited. The
Retirement Plan defines "Employee" as any individual employed by the Association
or its affiliates or any leased employee who is deemed to be an employee under
Section 414(n) of the Code but excludes any person who is an independent
contractor.
The Retirement Plan provides for a normal retirement benefit to
participants upon retirement at or after the later of (i) attainment of age 65
or (ii) the fifth anniversary of initial participation in the plan. The annual
normal retirement benefit for a participant under the Retirement Plan equals 45%
of a participant's "Average Monthly
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Compensation" (as defined in the plan) plus 16% of the participant's "Average
Monthly Compensation" in excess of one-twelfth "Covered Compensation" (as
defined in the plan). However, if projected years of service to normal
retirement age are less than twenty-five, the percentage of Average Monthly
Compensation and the excess percentage will be reduced by one-twenty-fifth for
each year of service less than twenty-five.
A participant may also become eligible to receive an early retirement
benefit upon the (i) attainment of age 60; and (ii) completion of 15 years of
service. Early retirement benefits are generally calculated in the same manner
as a participant's normal retirement benefits but may be actuarially reduced if
paid prior to the participant's "Normal Retirement Date" (as defined by the
plan). Participants generally become vested in their benefits under the
Retirement Plan upon completing at least five years of Service.
The plan generally pays benefits in the form of a straight life annuity
with respect to unmarried participants and in the form of a joint and 50%
survivor annuity (with the spouse as designated beneficiary) for married
participants. Other forms of benefit payments, including a lump sum, are
available under the Retirement Plan.
The following table sets forth the estimated annual benefits payable under
the Retirement Plan upon a participant's retirement at age 65 under the most
advantageous plan provisions available at various levels of compensation and
years of service. Covered compensation under the Retirement Plan basically
includes the base salary for participants, and does not consider any cash bonus
amounts. The benefits listed in the table below for the Retirement Plan are not
subject to a deduction for social security benefits or any other offset amount.
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE ---------------------------------------------------------------
COMPENSATION 15 20 25 30 35 40
- ------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 20,000 $ 5,400 $ 7,200 $ 9,000 $ 9,000 $ 9,000 $ 9,000
30,000 8,100 10,800 13,500 13,500 13,500 13,500
50,000 13,500 18,000 22,500 22,500 22,500 22,500
75,000 21,102 28,137 35,171 35,171 35,171 35,171
100,000 30,252 40,337 50,421 50,421 50,421 50,421
150,000 48,552 64,737 80,921 80,921 80,921 80,921
200,000 52,212 69,617 87,021 87,021 87,021 87,021
250,000 52,212 69,617 87,021 87,021 87,021 87,021
300,000 52,212 69,617 87,021 87,021 87,021 87,021
and over (1)
</TABLE>
- -----------
(1) Under current law, the final average compensation for computing benefits
under the Retirement Plan cannot exceed $160,000 (indexed for inflation).
The approximate years of service, as of June 30, 1998, for the named
executive officer is as follows:
<TABLE>
<CAPTION>
NAMED EXECUTIVE OFFICER YEARS OF SERVICE
----------------------- ----------------
<S> <C>
Steven R. Lewis 14
</TABLE>
401(k) Plan. The Association also sponsors the First Federal Savings and
Loan Association of Warren 401(k) Savings Plan ("401(k) Plan"), a tax-qualified
profit sharing and salary reduction plan under Sections 401(a) and 401(k) of the
Code. Generally, employees other than employees who are collective bargaining
unit employees and employees who are non-resident aliens become eligible to
participate in the 401(k) Plan upon the attainment of age 21 and the completion
of one year of service. Under the 401(k) Plan, participants may make salary
reduction contributions equal to 2% to 12% of their compensation or the legally
permissible limit (currently $10,000). The Association matches of the
compensation deferred by a participant with respect to amounts deferred up to 4%
of annual compensation.
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Participants are always 100% vested in their salary reduction
contributions. Participants become 100% vested in Association matching
contributions after the completion of five years of service with the
Association. A participant who terminates employment due to death, disability,
or retirement immediately becomes fully vested in the Association's matching
contributions credited to his or her account regardless of the participant's
years of service. A participant's vested portion of his or her 401(k) Plan
account is distributable from the 401(k) Plan upon the termination of the
participant's employment, death, disability or retirement. In addition, a
participant may be eligible for hardship withdrawals and loans under the 401(k)
Plan. Any distribution made to a participant prior to the participant's
attainment of age 59 is subject to a 10% excise tax in addition to federal
income taxes. The Board of Directors may at any time discontinue the
Association's contributions to employee accounts. For the years ended June 30,
1998, 1997 and 1996, the Association's matching contributions to the 401(k) Plan
were $56,000, $52,000 and $48,000, respectively.
The 401(k) Plan currently permits participants to invest their 401(k) Plan
account balances in several types of investment funds. In connection with the
Conversion, the Association has amended the 401(k) Plan to permit plan
participants to invest their account balances in Company Common Stock through an
employer stock fund (the "Employer Stock Fund.") The Employer Stock Fund will
be invested primarily in shares of Common Stock. Participants may use their
subscription rights to purchase stock in the Conversion but may not purchase
more than $250,000 in aggregate value of the Common Stock in the Conversion
(subject to the maximum overall purchase liability). A participant's ability to
divert all or some of his vested account to purchase Common Stock in the
Offering will be dependent upon such individual being an Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member. The trustee may
follow the voting directions of 401(k) Plan participants investing in the
Employer Stock Fund; provided that the trustee determines such voting is
consistent with its fiduciary duties.
ESOP. In connection with the Conversion, the Association also intends to
implement an employee stock ownership plan ("ESOP"). An ESOP is a tax-qualified
retirement plan designed to invest primarily in employer securities. The
Association will make contributions to the ESOP on behalf of all ESOP
participants. The ESOP will provide eligible employees with the opportunity to
receive a Association funded retirement benefit based on the value of the Common
Stock. The Association anticipates that the eligibility requirements for the
ESOP will be similar to those of the 401(k) Plan.
The ESOP intends to purchase 8.0% of the Common Stock issued in connection
with the Conversion, including shares issued to the Foundation. As part of the
Conversion and in order to fund the ESOP's purchase of the Common Stock to be
issued in the Conversion, the ESOP intends to borrow funds from the Company
equal to 100% of the aggregate purchase price of the Common Stock to be
purchased by the ESOP. Alternatively, the Company and Association may choose to
fund the ESOP's purchase of stock through a loan from a third party financial
institution. The Common Stock purchased by the ESOP with the loan proceeds will
serve as collateral for the loan, as described below. Based on the sale of
6,709,135 shares or 9,077,065 shares at the minimum and maximum of the Estimated
Price Range, and the issuance of shares to the Foundation, the amount of the
loan to the ESOP would be $5.8 million or $7.8 million, respectively (or
$9.0 million if the Estimated Price Range is increased by 15%). The term of the
ESOP loan will be 15 years and the trustee will repay the loan principally from
the Company's or the Association's contributions to the ESOP in fifteen equal
annual installments of principal. The Association may use matching contributions
made with respect to ESOP participants' 401(k) salary reduction contributions
and other discretionary contributions to meet the ESOP loan obligations.
Additionally, any dividends that may be paid on unallocated stock held by the
ESOP will also be used to repay the ESOP loan. Subject to receipt of any
necessary regulatory approvals or opinions, the Association may make additional
contributions to the ESOP for repayment of the loan or to reimburse the Company
for contributions made by it. The interest rate for the loan is expected to be
at or near the prime rate, which currently is 8.0%.
Shares of Common Stock purchased by the ESOP with the loan proceeds will
initially be pledged as collateral for the loan, and will be held in a suspense
account until released for allocation among participants as the loan is repaid.
The trustee will release the pledged shares annually from the suspense account
in an amount proportional to the repayment of the ESOP loan for each plan year.
The released shares will then be allocated to the accounts of ESOP participants
as follows: First, for each eligible ESOP participant, a portion of the shares
released for the plan year will
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be allocated to a special "matching" account under the ESOP equal in value to
the amount of matching contribution, if any, and/or if applicable, that such
participant would be entitled to under the terms of the 401(k) Plan for the plan
year. Second, the remaining shares which have been released for the plan year
will be allocated to each eligible participant's general ESOP account based on
the ratio of each such participant's base compensation to the total base
compensation of all eligible ESOP participants. Participants will vest in their
ESOP account at a rate of 20% annually commencing after the completion of two
years of service, with 100% vesting upon the completion of six years of service.
Participants will also become fully vested in their accounts if their service
terminates due to death, retirement, disability, or upon the occurrence of a
change in control. The ESOP may reallocate forfeitures among remaining
participants, in the same proportion as contributions. Benefits under the ESOP
will become payable upon death, retirement, early retirement, or separation from
service. The annual contributions to the ESOP are not fixed, so benefits payable
under the ESOP cannot be estimated.
In connection with the establishment of the ESOP, the Board of Directors
will appoint a Committee of the Board of Directors and officers of the
Association to administer the ESOP (the "ESOP Committee"). The Association
anticipates that this Committee will appoint an unrelated trustee for the ESOP
and the 401(k) Plan Employer Stock Fund prior to the Conversion. The ESOP
Committee may instruct the trustee regarding investment of funds contributed to
the ESOP and the 401(k) Plan Employee Stock Fund. The ESOP trustee, subject to
its fiduciary duties, must vote all allocated shares held in the ESOP in
accordance with the instructions of the participating employees. Subject to its
fiduciary duties under ERISA, the trustee will vote unallocated shares and
allocated shares for which participants provide no instructions in a manner
calculated to most accurately reflect the instructions it has received from
participants regarding the allocated stock for which it has received
instructions.
Stock Option Plan. Following the Conversion, the Board of Directors of the
Company intends to adopt a stock-based benefit plan which would provide for the
granting of options to purchase Common Stock to certain individuals. Currently,
the Company anticipates granting stock options under a single Stock Option Plan
covering full-time employees and outside directors of the Company and its
affiliates. However, it is possible that the Company may establish a separate
option plan solely for outside directors. At a meeting of stockholders of the
Company following the Conversion, which under applicable regulations may not be
held earlier than six months after the completion of the Conversion, the Board
of Directors intends to present the Stock Option Plan to stockholders for
approval. The Company anticipates reserving an amount equal to 10% of the
shares of Common Stock issued in the Conversion, including shares issued to the
Foundation (or 977,500 shares based upon the issuance of 9,775,000 shares), for
issuance under the Stock Option Plan. No specific award determinations have
been made at this date.
The Company intends to design the stock option benefits provided under the
Stock Option Plan to attract and retain qualified personnel in key positions,
provide officers and key employees with a proprietary interest in the Company as
an incentive to contribute to the success of the Company and reward key
employees for outstanding performance. The Company may condition the granting
or vesting of stock options on the achievement of individual or Company-wide
performance goals, including the achievement by the Company or the Association
of specified levels of net income, asset growth, return on equity or other
specific financial performance goals. The Company anticipates that the Stock
Option Plan will provide for the grant of: (i) options for employees to
purchase the Company's Common Stock intended to qualify as incentive stock
options under Section 422 of the Code ("Incentive Stock Options"); (ii) options
for all participants that do not qualify as Incentive Stock Options ("Non-
Statutory Stock Options"); and (iii) Limited Rights (discussed below) which
participants may exercise only upon a change in control of the Association or
the Company. Unless sooner terminated, the Stock Option Plan will be in effect
for a period of ten years from the earlier of adoption by the Board of Directors
or approval by the Company's stockholders. If such plan is adopted within one
year after Conversion, OTS regulations provide that no individual officer or
employee of the Association may receive more than 25% of the stock options
available under the Stock Option Plan (or any separate plan for officers and
employees) and non-employee directors may not receive more than 5% individually,
or 30% in the aggregate, of the stock options available under the Stock Option
Plan (or any separate plan for directors). The Company intends to grant options
with Limited Rights under the Stock Option Plan at an exercise price equal to
the fair market value of the underlying Common Stock on the date of grant.
Subject to any applicable regulations, upon exercise of Limited Rights in the
event of a change in control, the employee will be entitled to receive a lump
sum cash payment equal to the difference between the exercise price of the
related option and the fair market value of the shares of common stock subject
to the option on the date of exercise of the right in lieu of purchasing the
stock underlying
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the option. The Company anticipates that all options granted contemporaneously
with stockholder approval of the Stock Option Plan will qualify as Incentive
Stock Options to the extent permitted under Section 422 of the Code.
A committee of the Board of Directors will administer the Stock Option Plan
and will determine which officers and employees may receive options and Limited
Rights, whether such options will qualify as Incentive Stock Options, the number
of shares subject to each option, the exercise price of each option, the manner
of exercise of the options and the time when such options become exercisable.
If the Company adopts an option plan in the form described above, an
employee will not realize taxable income upon grant or exercise of any Incentive
Stock Option, provided that the employee does not dispose of the shares received
through the exercise of such option for at least one year after the date the
employee receives the stock in connection with the option exercise and two years
after the date of grant of the option (a "disqualifying disposition"). The
Company may not take a compensation expense deduction with respect to the grant
or exercise of Incentive Stock Options, unless the employee disposes of the
shares in a disqualifying disposition. In the case of a Non-Statutory Stock
Option and in the case of a disqualifying disposition of an Incentive Stock
Option, an employee will be deemed to receive ordinary income upon exercise of
the stock option in an amount equal to the amount by which the fair market value
of the Common Stock on the date of exercise exceeds the exercise price of the
option. The amount of taxable income realized by an optionee upon the exercise
of a Non-Statutory Stock Option or due to a disqualifying disposition of shares
acquired through the exercise of an Incentive Stock Option are a deductible
expense for tax purposes by the Company. Upon the exercise of a Limited Right,
the option holder realizes taxable income equal to the amount paid to him or her
upon exercise of the right and the Company receives a deduction equal to that
same amount.
Stock options under an option plan adopted by the Company would become
vested and exercisable in the manner specified by the committee responsible for
administering the plan, subject to applicable regulations. If the Stock Option
Plan (or any separate plans for employees and directors) is adopted within one
year after the Conversion, awards would become vested and exercisable subject to
applicable OTS regulations, which such regulations require that any awards begin
vesting not earlier than one year from the date of shareholder approval of the
plan and, thereafter, vest at a rate of no more than 20% per year and may not be
accelerated except in case of death or disability. The Company anticipates
options granted in connection with the Stock Option Plan will remain exercisable
for at least three months following the date on which the employee ceases to
perform services for the Association or the Company, except that in the event of
death or disability, in which cases options accelerate and become fully vested
and remain exercisable for up to one year thereafter, or such longer period as
determined by the Company. However, any Incentive Stock Options exercised more
than three months following the date the employee ceases to perform services as
an employee, other than termination due to death or disability, would be treated
for tax purposes as a Non-Statutory Stock Option. The Company also anticipates
that in the event of retirement, if the optionee continues to perform services
as a Director, Director Emeritus or consultant on behalf of the Association, the
Company or an affiliate, unvested options would continue to vest in accordance
with their original vesting schedule until the optionee ceases to serve as a
Director, Director Emeritus or consultant. If the Stock Option Plan is adopted
in the form described above, the Company, if requested by the optionee, could
elect, in exchange for vested options, to pay the optionee, or beneficiary in
the event of death, the amount by which the fair market value of the Common
Stock exceeds the exercise price of the options on the date of the employee's
termination of employment.
All options granted to outside directors under an option plan must, by law,
be Non-Statutory Stock Options and would vest and become exercisable in a manner
specified by the committee, subject to applicable regulations, and would expire
upon the earlier of ten years following the date of grant or one year following
the date the optionee ceases to be a director, director emeritus, advisory
director or consultant. In the event of the death or disability of a
participant, all previously granted options would immediately vest and become
fully exercisable.
Subject to any applicable regulations, the Stock Option Plan (or any
separate plan for employees and directors) described above may be amended
subsequent to the expiration of the one-year period to provide for accelerated
vesting of previously granted options in the event of a change in control of the
Company or the Association. A change in control would be defined in the plan
document and would generally occur when a person or group of persons acting in
concert acquires beneficial ownership of 20% or more of any class of equity
security of the Company or the Association or in the event of a tender or
exchange offer, merger or other form of business combination, sale
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of all or substantially all of the assets of the Company or the Association or
contested election of directors which resulted in the replacement of a majority
of the Board of Directors by persons not nominated by the directors in office
prior to the contested election.
Stock Program. Following the Conversion, the Company intends to establish
the Stock Program which would provide for the grant of stock awards to officers,
employees and non-employee directors of the Association and Company as a method
of providing officers, employees and non-employee directors with a proprietary
interest in the Company in a manner designed to encourage such persons to remain
with the Association. The benefits under the Stock Program may be provided for
under either a separate plan for officers and employees and a separate plan for
outside directors or may be combined with the Stock Option Plan. The Company
intends to present the Stock Program for stockholder approval at a meeting of
stockholders, which pursuant to applicable regulations, the Company may hold no
earlier than six months after the completion of the Conversion.
The Association or Company expects to contribute funds to the Stock Program
to enable such plan to acquire, in the aggregate, an amount equal to 4% of the
shares of Common Stock issued in the Conversion, including shares issued to the
Foundation (or 391,000 shares based upon the issuance of 9,775,000 shares).
The Company will acquire these shares through open market purchases, if
permitted, or from authorized but unissued shares. Although no specific award
determinations have been made at this date, the Company anticipates that it will
provide stock awards to the directors and employees of the Company or
Association or their affiliates to the extent permitted by applicable
regulations. If such plan is adopted within one year after Conversion, OTS
regulations provide that no individual officer or employee of the Association
may receive more than 25% of the stock awards available under the Stock Program
(or any separate plan for officers and employees) and non-employee directors may
not receive more than 5% individually, or 30% in the aggregate, of the stock
awards available under the Stock Program (or any separate plan for directors).
Shares of Common Stock granted pursuant to the Stock Program will be awarded at
no cost to the recipients.
A committee of the Board of Directors will administer the Stock Program.
Stock awards will not be transferable or assignable. The Board intends to
appoint an independent fiduciary to serve as trustee of a trust established
pursuant to the Stock Program. The Company may make allocations and grants to
officers and employees under the Stock Program in the form of non performance-
based grants and/or performance-based grants. The Company may make the granting
or vesting of stock awards under the Stock Program conditioned upon the
achievement of individual or Company-wide performance goals, including the
Company's or Association's achievement of specified levels of net income, return
on assets, return on equity or other specified financial performance goals and
will be subject to applicable regulations. If the Stock Program (or any
separate plans for employees and directors) is adopted within one year after the
Conversion, awards would become vested subject to applicable OTS regulations,
which such regulations require that any awards begin vesting not earlier than
one year from the date of shareholder approval of the plan and, thereafter, vest
at a rate of no more than 20% per year and may not be accelerated except in case
or death or disability.
In the event of death, stock awards will become 100% vested. In the event
of disability, stock awards would be 100% vested upon termination of employment
of an officer or employee, or upon termination of service as a director. In the
event of retirement, if the participant continues to perform services as a
Director, Director Emeritus or consultant on behalf of the Association, the
Company or an affiliate or, in the case of a retiring Director, Director
Emeritus or as a consulting director, unvested stock awards will continue to
vest in accordance with their original vesting schedule until the recipient
ceases to perform such services at which time any unvested stock awards would
lapse.
Subject to any applicable regulations, the Stock Program described above
may be amended subsequent to the expiration of the one-year period to provide
for accelerated vesting of shares granted under the Stock Program in the event
of a change in control of the Association or Company. A change in control,
which will be defined in the plan document, generally occurs when a person or
group of persons acting in concert acquires beneficial ownership of 20% or more
of a class of equity securities of the Company or the Association or in the
event of a tender or exchange offer, merger or other form of business
combination, sale of all or substantially all of the assets of the Company or
the
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Association or contested election of directors which results in the replacement
of a majority of the Board of Directors by persons not nominated by the
directors in office prior to the contested election.
When shares become vested in accordance with the Stock Program described
above, the participants will recognize taxable income equal to the fair market
value of the Common Stock at that time. The Company may take a deduction equal
to that amount for the year in which it becomes taxable to the individual. When
shares become vested and are actually distributed in accordance with the Stock
Program, the participants also receive amounts equal to any accrued dividends
with respect thereto. Prior to vesting, recipients of grants may direct the
voting of the shares awarded to them. Shares not subject to grants and shares
allocated subject to the achievement of performance goals will be voted by the
trustee of the Stock Program in accordance to the directions provided by
individuals with respect to shares subject to grants. Vested shares will be
distributed to recipients as soon as practicable following the day on which they
are vested.
In the event that additional authorized but unissued shares are acquired by
the Stock Program after the Conversion, the interests of existing shareholders
would be diluted. See "Pro Forma Data."
TRANSACTIONS WITH CERTAIN RELATED PERSONS
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In
addition, loans made to a director or executive officer in excess of the greater
of $25,000 or 5% of the Association's capital and surplus (up to a maximum of
$500,000) must be approved in advance by a majority of the disinterested members
of the Board of Directors.
The Association offers directors, officers and full-time employees of the
Association who satisfy certain criteria and the general underwriting standards
of the Association, mortgage loans with interest rates which may be up to 1%
below the rates offered to the Association's other customers, the Employee Loan
Rate ("ELR"). The program also offers a 3/4% interest rate discount on motor
vehicle loans (other than motorcycles). Loan application fees are waived for
all ELR loans. The ELR normally ceases upon termination of employment. Upon
termination of the ELR, the interest rate reverts to the contract rate in effect
at the time that the loan was originated. All other terms and conditions
contained in the original mortgage and note continue to remain in effect. With
the exception of ELR loans, the Association currently makes loans to its
executive officers, directors and employees on the same terms and conditions
offered to the general public. Loans made by the Association to its directors
and executive officers are made in the ordinary course of business, on
substantially the same terms , including collateral, as those prevailing at the
time for comparable transactions with other persons and do not involve more than
the normal risk of collectibility or present other unfavorable features. As of
June 30, 1998, eight of the Association's executive officers or directors had
loans with outstanding balances totaling $862,000 in the aggregate. All such
loans were made by the Association in the ordinary course of business, with no
favorable terms (except for ELR loans) and such loans do not involve more than
the normal risk of collectibility or present unfavorable features.
The Company intends that all transactions between the Company and its
executive officers, directors, holders of 10% or more of the shares of any class
of its Common Stock and affiliates thereof, will contain terms no less favorable
to the Company than could have been obtained by it in arms-length negotiations
with unaffiliated persons and will be approved by a majority of independent
outside directors of the Company not having any interest in the transaction.
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SUBSCRIPTIONS OF EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock that
the executive officers and directors, and their associates, propose to purchase,
assuming shares of Common Stock are issued at the minimum and maximum of the
Estimated Price Range (including shares issued to the Foundation) and that
sufficient shares will be available to satisfy their subscriptions. The table
also sets forth the total expected beneficial ownership of Common Stock as to
all directors and executive officers as a group.
<TABLE>
<CAPTION>
AT THE MAXIMUM
AT THE MINIMUM OF THE
OF THE ESTIMATED ESTIMATED PRICE
PRICE RANGE(1) RANGE(1)
-------------------------- -------------------------
AS A PERCENT AS A PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES ISSUED(2) OF SHARES ISSUED(2)
- ----------------------------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Paul A. Watson..................... $ 525,000 52,500 0.73% 52,500 0.54%
George J. Gentithes................ 600,000 60,000 0.83 60,000 0.61
Robert P. Grace.................... 250,000 25,000 0.35 25,000 0.26
Thomas M. Humphries................ 250,000 25,000 0.35 25,000 0.26
Steven R. Lewis.................... 400,000 40,000 0.55 40,000 0.41
Robert S. McGeough................. 250,000 25,000 0.35 25,000 0.26
E. Jeffrey Rossi................... 400,000 40,000 0.55 40,000 0.41
William W. Watson.................. 375,000 37,500 0.52 37,500 0.38
All directors and executive officers
as a group (12 persons).......... $3,570,000 357,000 4.94% 357,000 3.65%
============ ========== ========= ========== ==========
</TABLE>
______________________
(1) Includes proposed subscriptions, if any, by associates. Does not include
orders by the ESOP. Intended purchases by the ESOP are expected to be 8% of
the shares issued in the Conversion, including shares issued to the
Foundation. Also does not include shares to be contributed to the
Foundation equal to approximately 7.7% of the Common Stock sold, Common
Stock which may be awarded under the Stock Program to be adopted equal to 4%
of the Common Stock issued in the Conversion, including shares issued to the
Foundation, and Common Stock which may be purchased pursuant to options
which may be granted under the Stock Option Plan equal to 10% of the number
of shares of Common Stock issued in the Conversion, including shares issued
to the Foundation.
(2) Includes shares issued to the Foundation.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE ASSOCIATION AND THE OTS HAVE APPROVED THE
PLAN OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE ASSOCIATION
ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS.
SUCH OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT
OF THE PLAN BY SUCH AGENCY.
GENERAL
The Association's Board of Directors, on June 15, 1998, unanimously
adopted, subject to approval by the OTS, the Plan pursuant to which the
Association will be converted from a federally-chartered mutual savings
association to a federally-chartered capital stock savings association. It is
currently intended that all of the outstanding capital stock of the Association
will be held by the Company, which has been incorporated under Delaware law.
The Plan was approved by the OTS, subject to, among other things, approval of
the Plan by the Association's members. The Special Meeting has been called for
this purpose to be held on December 22, 1998.
The Company has applied for and expects to receive the approval from the
OTS to become a savings and loan holding company and to acquire all of the
Common Stock of the Association to be issued in the Conversion. The Company
plans to purchase the shares of issued and outstanding capital stock of the
Association in exchange for 50% of the net proceeds and retain the remaining net
proceeds. The Conversion will be effected only upon completion of the sale of
all of the shares of Common Stock of the Company or the Association, if the
holding company form of organization is not utilized, to be issued pursuant to
the Plan.
The Plan provides that the Board of Directors of the Association may, at
any time prior to the issuance of the Common Stock and for any reason, decide
not to use a holding company form. Such reasons may include possible delays
resulting from overlapping regulatory processing or policies which could
adversely affect the Association's or the Company's ability to consummate the
Conversion and transact its business as contemplated herein and in accordance
with the Association's operating policies. In the event such a decision is
made, the Association will withdraw the Company's registration statement from
the SEC and take steps necessary to complete the Conversion without the Company,
including filing any necessary documents with the OTS. In such event, and
provided there is no regulatory action, directive or other consideration upon
which basis the Association determines not to complete the Conversion, if
permitted by the OTS, the Association will issue and sell the Common Stock of
the Association and subscribers will be notified of the elimination of a holding
company and resolicited (i.e., be permitted to affirm their orders, in which
case they will need to affirmatively reconfirm their subscriptions prior to the
expiration of the resolicitation offering or their funds will be promptly
refunded with interest at the Association's passbook rate of interest; or be
permitted to modify or rescind their subscriptions), and notified of the time
period within which the subscriber must affirmatively notify the Association of
his intention to affirm, modify or rescind his subscription. The following
description of the Plan assumes that a holding company form of organization will
be used in the Conversion. In the event that a holding company form of
organization is not used, all other pertinent terms of the Plan as described
below will apply to the conversion of the Association from the mutual to stock
form of organization and the sale of the Association's common stock.
The Plan provides generally that (i) the Association will convert from a
mutual savings association to a capital stock savings association and (ii) the
Company will offer shares of Common Stock for sale in the Subscription Offering
to the Association's Eligible Account Holders, the ESOP, Supplemental Eligible
Account Holders, and Other Members. Concurrently, and subject to the prior
rights of holders of subscription rights, the Company will offer shares not
subscribed for in the Subscription Offering in a Community Offering with
preference given to natural persons residing in the Association's Local
Community. It is anticipated that all shares not subscribed for in the
Subscription and Community Offerings will be offered for sale by the Company to
the general public in a Syndicated Community Offering. The Association has the
right to accept or reject, in whole or in part, any orders to purchase shares of
the Common Stock received in the Community Offering or in the Syndicated
Community Offering. See "--Community Offering" and "--Syndicated Community
Offering."
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The aggregate price of the shares of Common Stock to be sold in the
Conversion within the Estimated Price Range, currently estimated to be between
$67.1 million and $90.8 million, will be determined based upon an independent
appraisal, prepared by Keller of the estimated pro forma market value of the
Common Stock of the Company. All shares of Common Stock to be sold in the
Conversion will be sold at the same price. The independent appraisal will be
affirmed or, if necessary, updated at the completion of the Subscription and
Community Offerings, if all shares are subscribed for, or at the completion of
the Syndicated Community Offering. The appraisal has been performed by Keller,
a consulting firm experienced in the valuation and appraisal of savings
institutions. See "Stock Pricing" for additional information as to the
determination of the estimated pro forma market value of the Common Stock.
The following is a brief summary of the material aspects of the Conversion.
The summary is qualified in its entirety by reference to the provisions of the
Plan. A copy of the Plan is available for inspection at each branch of the
Association and at the Central Region and Washington, D.C. offices of the OTS.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
General. In furtherance of the Association's long-standing commitment to
its local community, the Association's Plan of Conversion provides for the
establishment of a charitable foundation in connection with the Association's
Conversion. The Plan provides that the Association and the Company establish
the Foundation, which has been incorporated under Delaware law as a non-stock
corporation, and will fund the Foundation with Common Stock of the Company, as
further described below. The Company and the Association believe that the
funding of the Foundation with Common Stock of the Company is a means of
establishing a common bond between the Association and the communities in which
the Association operates and thereby enables such communities to share in the
potential growth and success of the Company and the Association over the long
term. By further enhancing the Association's visibility and reputation in the
communities in which it operates, the Association believes that the Foundation
will enhance the long-term value of the Association's community banking
franchise.
The Foundation will be 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 housing assistance, not-
for-profit medical facilities, community groups and other types of organizations
or projects. Establishment and funding of the Foundation 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 Foundation 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 Foundation,
the Association intends to complete the Conversion without the establishment of
the Foundation. Failure to approve the establishment of the Foundation may
materially affect the pro forma market value of the Common Stock. In such an
event, the Association may establish a new Estimated Price 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."
Purpose of the Foundation. 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 an "Outstanding" CRA rating.
The Foundation is being formed as a complement to the Association's existing
community activities, not as a replacement for such activities. Indeed, the
Association intends to continue to emphasize community lending and community
development activities following the Conversion. However, such activities are
not the Association's sole corporate purpose. The Foundation, conversely, 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 the Association. Since the Association already engages
in community development activities, the Association believes that the
Foundation will enable the Company and the Association to assist their local
community in areas beyond community development and lending. In this regard,
the Board of Directors believes the establishment of a charitable foundation is
consistent with the Association's commitment to community service. The Boards
of Directors of the Association and Company also believe that the funding of the
Foundation with Common Stock of the Company is a means of enabling the
communities in which the Association operates to share in the potential growth
and success of the Company long after completion of the Conversion. The
Foundation accomplishes that goal by providing for continued ties between the
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Foundation and Association, thereby forming a partnership with the Association's
community. The establishment of the Foundation would also enable the Company
and the Association to develop a unified charitable donation strategy and would
centralize the responsibility for administration and allocation of corporate
charitable funds.
Structure of the Foundation. The Foundation has been incorporated under
Delaware law as a non-stock corporation. The Foundation's Board of Directors is
currently comprised of four members, three of whom are individuals elected from
existing directors of the Association. The directors of the Association and
Company who serve on the Board of Directors of the Foundation consist of Messrs.
Paul Watson, Robert McGeough and Steven Lewis, who intend to purchase 52,500,
25,000 and 40,000 shares of Common Stock in the Conversion, respectively, or
0.5%, 0.3% and 0.4%, respectively, or 1.2% in the aggregate of the total number
of shares to be issued in the Conversion, including shares issued to the
Foundation, based upon the maximum of the Estimated Price Range. As required by
the OTS, the fourth director, Mr. Richard P. Cowin, a certified public
accountant in Warren, Ohio, is not a director, officer or employee of the
Company or the Association. On an on-going basis, a Nominating Committee of the
Board of Directors of the Foundation will nominate individuals eligible for
election to the board of directors of the Foundation. The members of the
Foundation, who are comprised of its board members, will elect the directors at
the annual meeting of the Foundation from those nominated by the Nominating
Committee. Only persons serving as directors of the Foundation qualify as
members of the Foundation with voting authority. Directors will be divided into
three classes with each class appointed for three-year terms. The Certificate
of Incorporation of the Foundation provides that the Foundation is organized
exclusively for charitable purposes as set forth in Section 501(c)(3) of the
Code. The Foundation's Certificate of Incorporation further provides that no
part of the net earnings of the Foundation will inure to the benefit of, or be
distributable to, its directors, officers or members. A person who is a
director, officer or employee of the Association, or has the power to direct its
management or policies, or otherwise owes a fiduciary duty to the Association,
and who will also serve as a director or employee of the Foundation would be
subject to the requirements of OTS conflicts of interest regulations.
The authority for the affairs of the Foundation are vested in the Board of
Directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the stated purposes for
which the Foundation is established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's board of directors will
adopt such a policy after establishment of the Foundation. The directors are
also responsible for directing the assets of the Foundation. Pursuant to the
terms of the contribution as mandated by the OTS, all shares of Common Stock
held by the Foundation must be voted in the same ratio as all other shares of
the Company's 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 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 Company's or the Foundation's tax or 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 restriction upon
submission of such opinion(s) by the Company or the Foundation. In the event
that the OTS waived the voting restriction, the directors 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
directors 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 directors of the Foundation to control the voting of
the Common Stock held by the Foundation. Further, there will be no agreements
or understandings with directors 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 Company's stock. As directors of a nonprofit corporation,
directors of the Foundation will at all times be 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 purpose for
which the Foundation is established.
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The Company will provide office space and administrative support services
to the Foundation. Initially, the Foundation is expected to have no employees.
The board of directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation. It is anticipated that
initially such officers will be selected from the board of directors of the
Foundation. Any transaction between the Association and the Foundation will
comply with the affiliate transaction restrictions set forth in Sections 23A and
23B of the Federal Reserve Act, as amended.
The Company and the Association determined to fund the Foundation 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 Company and the Association over the long term. The
funding of the Foundation 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 contribution of stock 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.
The Foundation would receive working capital from any dividends that may be
paid on the Common Stock in the future, and subject to applicable federal and
state laws, 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. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets. In the event that no ready
market for the Common Stock develops after the Offering, the Foundation will
lack a steady and dependable source of funding, which would adversely impact the
Foundation's ability to distribute the minimum amount necessary under the Code.
In such an event, the Company may consider making a cash contribution to the
Foundation to enable it to meet this requirement. As the Common Stock has been
approved for quotation on the Nasdaq National Market, management does not
anticipate that there will be no market for the Common Stock. One of the
conditions imposed on the gift of Common Stock by the 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, 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 or would
otherwise jeopardize the Foundation's capacity to carry out its charitable
purposes. While there may be a 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 directors to sell more
than 5% of its stock in such circumstances. Upon completion of the Conversion
and the contribution of shares to the Foundation immediately following the
Conversion, the Company would have 7,225,000, 8,500,000 and 9,775,000 shares
issued and outstanding at the minimum, midpoint and maximum of the Estimated
Price Range. BECAUSE THE COMPANY WILL HAVE AN INCREASED NUMBER OF SHARES
OUTSTANDING, THE VOTING AND OWNERSHIP INTERESTS OF SHAREHOLDERS IN THE COMPANY'S
COMMON STOCK WOULD BE DILUTED BY 7.1%, AS COMPARED TO THEIR INTERESTS IN THE
COMPANY IF THE FOUNDATION WAS NOT ESTABLISHED. For additional discussion of the
dilutive effect, see "Comparison of Valuation and Pro Forma Information With No
Foundation" and "Pro Forma Data."
Comparison of Valuation and Other Factors Assuming the Foundation Is Not
Established as Part of the Conversion. The Company proposes to capitalize the
Foundation with Common Stock in an amount equal to approximately 7.7% of the
total amount of Common Stock sold in connection with the Conversion. At the
minimum, midpoint, maximum and 15% above the maximum of the Estimated Price
Range, the contribution to the Foundation would equal 515,865, 606,900, 697,935
and 802,625 shares, respectively, which would have a market value of $5.2
million, $6.1 million, $7.0 million and $8.0 million, respectively, based on the
Purchase Price of $10.00 per share. Such contribution, once made, will not be
recoverable by the Company or the Association. As a result of the establishment
of the Foundation, the Estimated Price Range, as estimated by Keller, has
decreased and the amount of stock available for sale in the Offerings has also
correspondingly decreased. The amount of the decrease is 983,365, 1,156,900,
1,330,435 and 1,530,000 shares, or $9.8 million, $11.6 million, $13.3 million
and $15.3 million at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Price Range, respectively. See "Pro Forma Data" and "Comparison
of Valuation and Pro Forma Data Information with No Foundation."
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As a result of the establishment of the Foundation, the Company will
recognize an expense of the full amount of the contribution, which is expected
to be offset in part by a corresponding tax benefit, during the quarter in which
the contribution is made, which is expected to be the second quarter of fiscal
1999. Such expense will reduce earnings and have a material impact on the
Company's earnings for the fiscal year in which it is made. While management
cannot predict earnings for fiscal 1999, it expects that the establishment and
funding of the Foundation will have an adverse impact on the Company's earnings
for the year in which it is made. Assuming a contribution of $7.0 million in
Common Stock in fiscal 1999, based on the maximum of the Estimated Price Range
and assuming a tax rate of 34%, the Company estimates a net tax effected expense
of $4.6 million. If the Foundation had been established at June 30, 1998, the
Association would have recorded a net loss of $534,000, rather than recording
net income of $4.1 million for the year ended June 30, 1998, based on an assumed
tax rate of 34%. Due to the contribution to the Foundation, the Association
expects in the future to reduce the amount of its current charitable
contributions within its community. The Association does not anticipate making
future charitable contributions to the Foundation during the first five years
following the initial contribution to the Foundation.
Tax Considerations. The Company and the Association have been advised by
Crowe, Chizek and Company LLP that the Foundation will qualify as a 501(c)(3)
exempt organization under the Code, and will be classified as a private
foundation rather than a public charity. 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 a request to
the IRS to be recognized as an exempt organization after approval of the
Foundation by the Association's members at the Special Meeting being held to
consider the Conversion. As long as the Foundation files its application for
tax-exempt status within 15 months from the date of its organization, and
provided the IRS approves the application, the effective date of the
Foundation's status as a Section 501(c)(3) organization will be 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
limitations set forth in the Code, and if a saving 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. The Company and the Association believe that the Conversion presents a
unique opportunity to establish and fund a charitable foundation given the
substantial amount of additional capital being raised in the Conversion. In
making such a determination, the Company and the Association considered the
dilutive impact of the Foundation on the amount of Common Stock available to be
offered for sale in the Conversion. See "Comparison of Valuation and Pro Forma
Information with No Foundation." Based on such consideration, the 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 Price Range, the Company would have pro forma consolidated capital of
$128.2 million, or 18.9% of pro forma consolidated assets and the Association's
pro forma tangible, core and risk-based capital ratios would be 13.5%, 13.5% and
30.6%, respectively. See "Regulatory Capital Compliance," "Capitalization," and
"Comparison of Valuation and Pro Forma Information with No Foundation." Thus,
the amount of the contribution will not adversely impact the financial condition
of the Company and the Association and the Company and the Association therefore
believe that the amount of the charitable contribution is reasonable given the
Company and the Association's pro forma capital positions. As such, the Company
and the Association believe that the contribution does not raise safety and
soundness concerns.
The Company and the Association have received an opinion of Crowe, Chizek
and Company LLP that the Company's contribution of its own stock to the
Foundation should not constitute an act of self-dealing, and that the Company
should be entitled to a deduction in the amount of the fair market value of the
stock at the time of the contribution less the nominal par value that the
Foundation is required to pay to the Company for such stock, subject to a
limitation based on 10% of the Company's annual taxable income. The Company,
however, would be able to carry
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forward any unused portion of the deduction for five years following the year in
which the contribution is made for federal tax purposes. Thus, while the Company
expects, based on the midpoint of the Estimated Price Range, to be able to
utilize for federal income tax purposes a charitable contribution deduction of
approximately $1.2 million in fiscal year 1999, the Company is permitted under
the Code to carryover the excess of the total contribution over such 1999
deduction over a five-year period for federal income tax purposes. Assuming the
close of the Offerings at the midpoint of the Estimated Price Range, the Company
estimates that all of the federal tax deduction should be deductible over the
six-year period. 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 contribution was made to fully utilize the carryover related to the excess
contribution. Neither the Company nor the Association expects to make any
further contributions to the Foundation within the first five years following
the initial contribution. After that time, the Company and the Association may
consider future contributions to the Foundation. Any such decisions would be
based on an assessment of, among other factors, the financial condition of the
Company and the Association at that time, the interests of shareholders and
depositors of the Company and the Association, and the financial condition and
operations of the Foundation.
Although the Company and the Association have received an opinion of Crowe,
Chizek and Company LLP that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation as a Section 501(c)(3) exempt organization or that the deduction
will be permitted. In such event, the Company's contribution to the Foundation
would be expensed without tax benefit, resulting in a reduction in earnings in
the year in which the IRS makes such a determination. 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 Certificate 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.
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. Establishment and funding
of the Foundation is subject to the following conditions imposed by the OTS: (i)
the Foundation must 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 must provide annual reports to the OTS
describing grants made and grant recipients; (iv) the Foundation must operate in
accordance with written policies adopted by the board of directors, including a
conflict of interest policy; (v) the Foundation must not engage in self-dealing
and shall comply with all laws necessary to maintain its tax-exempt status; (vi)
any purchases of Common Stock by the Foundation following that Conversion will
be subject to OTS regulations on stock repurchases; (vii) for a period of five
(5) years following the Conversion, one (1) director of the Foundation must be
an individual who is not an officer, director or employee of the Company or the
Association or any affiliate thereof and who preferably has experience with
local community foundations and grant making; (viii) for a period of five (5)
years following the Conversion, one (1) director must be an individual who is a
member of the Board of Directors of the Association or any successor
organization; (ix) the Foundation shall be dedicated to serving and making
grants in the Association's local community and (x) 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 Company's Common Stock on all proposals considered by
stockholders of the Company; provided, however, that the OTS will waive this
voting
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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 Company's or the Foundation's legal and/or tax 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 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 directors 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 directors 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.
In addition, establishment of the Foundation 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 Foundation 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 Foundation, the Association
intends to complete the Conversion without the establishment of the Foundation.
Failure to approve the Foundation may materially increase the pro forma market
value of the Common Stock being offered for sale in the Offerings since the
Valuation Range, as set forth herein, takes into account the dilutive impact of
the issuance of shares to the Foundation. See "Comparison of Valuation and Pro
Forma Information With No Foundation."
PURPOSES OF CONVERSION
The Association, as a federally-chartered mutual savings and loan
association, does not have shareholders and has no authority to issue capital
stock. By converting to the capital stock form of organization, the Association
will be structured in the form used by commercial banks, other business entities
and a growing number of savings institutions. The Conversion will enhance the
Association's ability to access capital markets, expand its current operations,
acquire other financial institutions or branch offices, provide affordable home
financing opportunities to the communities it serves or diversify into other
financial services to the extent allowable by applicable law and regulation.
The Conversion would also position the Association for a conversion to a
commercial bank charter if the Board of the Association chooses to do so in the
future.
The holding company form of organization, if used, would provide additional
flexibility to diversify the Association's business activities through existing
or newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock institutions, as well as other companies. Although there are
no current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Conversion, subject
to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise.
The potential impact of the Conversion upon the Association's capital base
is significant. The Conversion will significantly increase the Association's
capital position to a level whereby the Association will be better positioned to
take advantage of business opportunities and engage in activities which, prior
to Conversion, would have been more difficult for the Association to engage in
and still continue to meet its status as a "well-capitalized" institution. At
June 30, 1998, the Association had total equity, determined in accordance with
GAAP, of $59.4 million, or 9.7% of total assets, which approximated the
Association's regulatory tangible capital at that date of 9.5% of assets. An
institution with a ratio of tangible capital to total assets of greater than or
equal to 5.0% is considered to be "well-capitalized" pursuant to OTS
regulations. Assuming that the Company uses 50% of the net proceeds at the
maximum of the Estimated Price Range to purchase the stock of the Association,
the Association's GAAP capital will increase to $92.0 million or a ratio of GAAP
capital to adjusted assets, on a pro forma basis, of 14.3% after the Conversion.
In the event
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that the holding company form of organization is not utilized and all of the net
Conversion proceeds, at the midpoint of the Estimated Price Range, are retained
by the Association, the Association's ratios of tangible and core capital to
adjusted assets, on a pro forma basis, will both increase to 17.2% after
Conversion. The investment of the net proceeds from the sale of the Common Stock
is expected to provide the Association with additional income to increase
further its capital position. The additional capital may also assist the
Association in offering new programs and expanded services to its customers. See
"Use of Proceeds."
After completion of the Conversion, the unissued common and preferred stock
authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and any required regulatory approval of an
offering, to raise additional equity capital through further sales of
securities, and to issue securities in connection with possible acquisitions.
At the present time, the Company has no plans with respect to additional
offerings of securities, other than the possible issuance of additional shares
upon exercise of Stock Options under the Stock Option Plan or the possible
issuance of authorized but unissued shares to the Stock Program for Stock
Awards. Following the Conversion, the Company will also be able to use stock-
related incentive plans to attract and retain executive and other personnel for
itself and its subsidiaries. See "Management of the Association -- Benefit
Plans."
EFFECTS OF CONVERSION
General. Each depositor in a mutual savings institution has both a deposit
account in the institution and a pro rata ownership interest in the net worth of
the institution based upon the balance in his or her account, which interest may
only be realized in the event of a liquidation of the institution or in the
event the institution declares a capital distribution to depositors, subject to
applicable regulations of the OTS. However, this ownership interest is tied to
the depositor's account and has no tangible market value separate from such
deposit account. Any depositor who opens a deposit account obtains a pro rata
ownership interest in the net worth of the institution without any additional
payment beyond the amount of the deposit. A depositor who reduces or closes his
account receives a portion or all of the balance in the account but nothing for
his ownership interest in the net worth of the institution, which is lost to the
extent that the balance in the account is reduced.
Consequently, mutual savings institution depositors normally have no way to
realize the value of their ownership interest, which has realizable value only
in the unlikely event that the mutual savings institution is liquidated or in
the event the institution declares a capital distribution to depositors, subject
to applicable regulations of the OTS. In such event, the depositors of record
at that time, as owners, would share pro rata in any residual surplus and
reserves after other claims, including claims of depositors to the amounts of
their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL
AGENCY. Certificates are issued to evidence ownership of the capital stock.
The stock certificates are transferable and, therefore, the stock may be sold or
traded if a purchaser is available with no effect on any account the seller may
hold in the institution.
Continuity. While the Conversion is being accomplished, the normal
business of the Association of accepting deposits and making loans will continue
without interruption. The Association will continue to be subject to regulation
by the OTS and the FDIC. After the Conversion, the Association will continue to
provide services for depositors and borrowers under current policies by its
present management and staff. The Directors serving the Association at the time
of Conversion will serve initially as Directors of the Association after the
Conversion. The Directors of the Company will consist initially of individuals
currently serving on the Board of Directors of the Association. All officers of
the Association at the time of Conversion will retain their positions
immediately after Conversion.
Effect on Deposit Accounts. Under the Plan, each depositor in the
Association at the time of Conversion will automatically continue as a depositor
after the Conversion, and each such deposit account will remain the same with
respect to deposit balance, interest rate and other terms. Each such account
will be insured by the FDIC to the same extent as before the Conversion (i.e.,
up to $100,000 per depositor). Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
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Effect on Loans. No loan outstanding from the Association will be affected
by the Conversion, and the amount, interest rate, maturity and security for each
loan will remain as they were contractually fixed prior to the Conversion.
Effect on Voting Rights of Members. At present, all depositors and certain
borrowers of the Association are members of, and have voting rights in, the
Association as to all matters requiring membership action. Upon Conversion,
depositors and borrowers will cease to be members and will no longer be entitled
to vote at meetings of the Association. Upon Conversion, all voting rights in
the Association will be vested in the Company as the sole stockholder of the
Association. Exclusive voting rights with respect to the Company will be vested
in the holders of Common Stock. Depositors and borrowers of the Association
will not have voting rights after the Conversion except to the extent that they
become stockholders of the Company through the purchase of Common Stock.
Tax Effects. The Association has received an opinion from Patton Boggs LLP
with regard to federal income taxation and an opinion from Crowe, Chizek and
Company LLP with regard to Ohio income taxation to the effect that the
Conversion will not be a taxable transaction to the Association, its Eligible
Account Holders, or its Supplemental Eligible Account Holders or the Company,
except as discussed below. See " --Tax Aspects."
Effect on Liquidation Rights. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the extent
of deposit balances) would be paid first. Thereafter, if there were any assets
remaining, depositors would be entitled to such remaining assets, pro rata,
based upon the deposit balances in their deposit accounts immediately prior to
liquidation. In the unlikely event that the Association were to liquidate after
Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain depositors (see
"--Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Association's capital stock. Pursuant to the rules
and regulations of the OTS, a post-Conversion merger, consolidation, sale of
bulk assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
STOCK PRICING
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock must be based on the appraised pro forma market value of the Common
Stock, as determined on the basis of an independent valuation. The Association
and the Company have retained Keller to make such valuation. For its services
in making such appraisal, Keller will receive a fee of $26,000, including out-
of-pocket expenses. The Association and the Company have agreed to indemnify
Keller and its employees and affiliates against certain losses (including any
losses in connection with claims under the federal securities laws) arising out
of its services as appraiser, except where Keller's liability results from its
negligence, willful misconduct or bad faith.
An appraisal has been made by Keller in reliance upon the information
contained in this Prospectus, including the Consolidated Financial Statements.
Keller also considered the following factors, among others: the present and
projected operating results and financial condition of the Company and the
Association and the economic and demographic conditions in the Association's
existing marketing area; certain historical, financial and other information
relating to the Association; a comparative evaluation of the operating and
financial statistics of the Association with those of other similarly situated
publicly-traded savings banks and savings institutions located in the
Association's market area and the Midwest and the Midatlantic areas of the
United States; the aggregate size of the offering of the Common Stock; the
impact of Conversion on the Association's net worth and earnings potential; the
proposed dividend policy of the Company and the Association; and the trading
market for securities of comparable institutions and general conditions in the
market for such securities.
On the basis of the foregoing, Keller has advised the Company and the
Association that, in its opinion, dated August 14, 1998 and updated October 23,
1998, the estimated pro forma market value of the Common Stock being offered for
sale ranged from a minimum of $67.1 million to a maximum of $90.8 million with a
midpoint of $78.9 million. Based upon the Valuation Range and the Purchase
Price of $10.00 per share for the Common Stock established by the Board of
Directors, the Board of Directors has established the Estimated Price Range of
$67.1 million
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to $90.8 million, with a midpoint of $78.9 million, and the Company expects to
sell between 6,709,135 and 9,077,065 shares of Common Stock. The Board of
Directors of the Company and the Association have reviewed the appraisal of
Keller and in determining the reasonableness and adequacy of such appraisal
consistent with OTS regulations and policies, have reviewed the methodology and
reasonableness of the assumptions utilized by Keller in the preparation of such
appraisal. The Estimated Price Range may be amended with the approval of the OTS
(if required), if necessitated by subsequent developments in the financial
condition of the Company or the Association or market conditions generally. The
$10.00 per share price for the Common Stock was based on the consideration of a
number of factors, including the potential after market liquidity of the stock,
Nasdaq National Market listing requirements and other marketing conditions.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK IN
THE OFFERINGS. KELLER DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY THE ASSOCIATION, NOR DID KELLER
VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE ASSOCIATION. THE APPRAISAL
CONSIDERS THE ASSOCIATION AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF THE ASSOCIATION. MOREOVER, BECAUSE SUCH
APPRAISAL IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN
BE GIVEN THAT PERSONS PURCHASING COMMON STOCK IN THE CONVERSION WILL THEREAFTER
BE ABLE TO SELL COMMON STOCK AT PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE
RANGE OF THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE THEREOF. SEE
"RISK FACTORS -- ABSENCE OF MARKET FOR COMMON STOCK."
Following commencement of the Subscription Offering, the maximum of the
Estimated Price Range may be increased up to 15% and the number of shares of
Common Stock to be sold in the Conversion may be increased to 10,438,625 shares
due to regulatory considerations, changes in the market and general financial
and economic conditions, without the resolicitation of subscribers. See
" -- Limitations on Common Stock Purchases" as to the method of distribution and
allocation of additional shares that may be issued in the event of an increase
in the Estimated Price Range to fill unfilled orders in the Subscription
Offering.
If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Association and the Company, after consulting with
the OTS, may terminate the Plan and return all funds promptly with interest at
the Association's passbook rate of interest on payments made by check,
Association draft or money order, extend or hold a new Subscription Offering
and/or Community Offering, establish a new Estimated Price Range, commence a
resolicitation of subscribers or take such other actions as permitted by the OTS
in order to complete the Conversion. In the event that a resolicitation is
commenced, unless an affirmative response is received within a reasonable period
of time, all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the Subscription Offering
would not exceed 45 days unless further extended by the OTS for periods of up to
90 days not to extend beyond December 22, 2000.
If all shares of Common Stock are not sold through the Subscription
Offering or Community Offering, then the Association and the Company expect to
offer the remaining shares in a Syndicated Community Offering which would occur
as soon as practicable following the close of the Subscription Offering but may
commence during the Subscription Offering subject to prior rights of
subscribers. All shares of Common Stock will be sold at the same price per
share in the Syndicated Community Offering as in the Subscription Offering and
Community Offering. See " -- Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, Keller confirms to the Association, the Company and the OTS that,
to the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, would cause Keller to conclude that
the aggregate value of the Common Stock at the Purchase Price is incompatible
with its estimate of the pro forma market value of the Common Stock of the
Company. Any change which would result in an aggregate purchase price which is
below or more than 15% above the Estimated Price Range would be subject to OTS
approval. If such confirmation is not received, the Association may extend the
Conversion, extend, reopen or commence a new Subscription Offering, Community
Offering or Syndicated Community Offering, establish a new Estimated Price Range
and commence a
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resolicitation of all subscribers with the approval of the OTS or take such
other actions as permitted by the OTS in order to complete the Conversion, or
terminate the Plan and cancel the Subscription and Community Offerings and/or
the Syndicated Community Offering. In the event market or financial conditions
change so as to cause the aggregate purchase price of the shares to be below the
minimum of the Estimated Price Range or more than 15% above the maximum of such
range, and the Company and the Association determine to continue the Conversion,
subscribers will be resolicited (i.e., be permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest at the Association's passbook rate of
interest, or be permitted to decrease or cancel their subscriptions). Any change
in the Estimated Price Range must be approved by the OTS. A resolicitation, if
any, following the conclusion of the Subscription Offering would not exceed 45
days unless further extended by the OTS for periods up to 90 days not to extend
beyond December 22, 2000. If such resolicitation is not effected, the
Association will return all funds promptly with interest at the Association's
passbook rate of interest on payments made by check, bank draft or money order.
Copies of the appraisal report of Keller, including any amendments thereto,
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of the Association and the other locations specified under "Additional
Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of
the Subscription Offering, the total number of shares to be issued in the
Conversion may be increased or decreased without a resolicitation of
subscribers, provided that the product of the total number of shares times the
price per share is not below the minimum of the Estimated Price Range or more
than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $10.00 per share and Keller's estimate of the pro forma market
value of the Common Stock to be sold ranging from a minimum of $67.1 million to
a maximum, as increased by 15%, of $104.4 million, the number of shares of
Common Stock expected to be sold in the Conversion is between a minimum of
6,709,135 shares and a maximum, as adjusted by 15%, of 10,438,625 shares. The
actual number of shares sold between this range will depend on a number of
factors and shall be determined by the Association and Company, subject to OTS
approval, if necessary.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Price Range or more than 15% above the maximum of the Estimated Price Range, if
the Plan is not terminated by the Company and the Association after consultation
with the OTS, purchasers will be resolicited (i.e., permitted to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. If the number of shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Price Range to
reflect changes in market or financial condition, persons who subscribed for the
maximum number of shares will not be given the opportunity to subscribe for an
adjusted maximum number of shares, except for the ESOP which will be able to
subscribe for such adjusted amount. See " -- Limitations on Common Stock
Purchases."
In the event the members of the Association approve the establishment of
the Foundation, the number of shares to be issued and outstanding following the
Conversion will be increased by a number of shares equal to approximately 7.7%
of the Common Stock sold in the Conversion. Assuming the sale of shares in the
Offerings at the maximum of the Estimated Price Range, the Company will issue
697,935 shares of its Common Stock from authorized but unissued shares to the
Foundation immediately following the completion of the Conversion. In that
event, the Company will have total shares of Common Stock outstanding of
9,775,000 shares. Of that amount, the Foundation will own 7.1%. Funding the
Foundation with authorized but unissued shares will have the effect of diluting
the ownership and voting interests of persons purchasing shares in the
Conversion by 7.1% since a greater number of shares will be outstanding upon
completion of the Conversion than would be if the Foundation were not
established. See "Pro Forma Data."
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An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net earnings
and stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders of
deposit accounts (as defined by the Plan and described herein) with a balance of
$50 or more as of March 31, 1997 ("Eligible Account Holders"); (2) the ESOP;
(3) holders of deposit accounts with a balance of $50 or more as of September
30, 1998 ("Supplemental Eligible Account Holders"); and (4) members of the
Association, consisting of depositors of the Association as of October 31, 1998,
the Voting Record Date, and borrowers with loans outstanding as of September 8,
1998, other than Eligible Account Holders and Supplemental Eligible Account
Holders ("Other Members"). All subscriptions received will be subject to the
availability of Common Stock after satisfaction of all subscriptions of all
persons having prior rights in the Subscription Offering and to the maximum and
minimum purchase limitations set forth in the Plan of Conversion and as
described below under " --Limitations on Common Stock Purchases."
Deposit accounts which will provide subscription rights to holders thereof
consist of any "savings account," as defined by the Plan of Conversion.
Pursuant to the Plan, noninterest-bearing demand deposit accounts qualify as
"savings accounts."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of
(1) the amount permitted to be purchased in the Community Offering, currently
$250,000 of Common Stock; (2) one-tenth of one percent (.10%) of the total
offering of shares of Common Stock; or (3) fifteen times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is the
amount of the Eligible Account Holder's Qualifying Deposit (defined by the Plan
as any deposit account in the Association with a balance of $50 or more as of
March 31, 1997) and the denominator is the total amount of Qualifying Deposits
of all Eligible Account Holders, in each case on the Eligibility Record Date,
subject to the overall purchase limitation and exclusive of an increase in the
shares issued pursuant to an increase in the Estimated Price Range of up to 15%.
See " --Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights for
a number of shares of Conversion Stock in excess of the total number of such
shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holder. Any shares remaining after that allocation will
be allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each Eligible Account Holder whose subscription remains unsatisfied bears to
the total amount of the Qualifying Deposits of all Eligible Account Holders
whose subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those Eligible
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in less shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also Directors
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or Officers of the Association or their associates will be subordinated to the
subscription rights of other Eligible Account Holders to the extent attributable
to increased deposits in the twelve months preceding March 31, 1997.
Priority 2: Employee Stock Ownership Plan. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by Eligible
Account Holders, the ESOP will receive, without payment therefor, second
priority, nontransferable subscription rights to purchase, in the aggregate, up
to 10% of Common Stock issued in the Conversion, including shares issued to the
Foundation, and any increase in the number of shares of Common Stock to be
issued in the Conversion after the date hereof as a result of an increase of up
to 15% in the maximum of the Estimated Price Range. The ESOP intends to
purchase 8% of the shares to be issued in the Conversion, including shares
issued to the Foundation, or 578,000 shares and 782,000 shares, based on the
minimum and maximum of the Estimated Price Range, respectively. Subscriptions
by the ESOP will not be aggregated with shares of Common Stock purchased
directly by or which are otherwise attributable to any other participants in the
Subscription Offering, including subscriptions of any of the Association's
directors, officers, employees or associates thereof. See "Management of the
Association--Benefit Plans--ESOP."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering, currently $250,000 of Common Stock, one-tenth of one percent
(.10%) of the total offering of shares of Common Stock or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Supplemental Eligible Account Holder's Qualifying
Deposit and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall purchase limitation and
exclusive of an increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%. See "--Limitations on Common Stock
Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each
Supplemental Eligible Account Holder whose subscription remains unsatisfied
bears to the total amount of the Qualifying Deposits of all Supplemental
Eligible Account Holders whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more Supplemental
Eligible Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Supplemental Eligible Account Holders whose subscriptions
are still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his subscription order form all accounts in which he has an
ownership interest. Failure to list an account could result in less shares
being allocated than if all accounts had been disclosed. The subscription
rights received by Eligible Account Holders will be applied in partial
satisfaction to the subscription rights to be received as a Supplemental
Eligible Account Holder.
Priority 4: Other Members. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the ESOP and the Supplemental Eligible Account Holders, each Other Member will
receive, without payment therefor, fourth priority nontransferable subscription
rights to subscribe for Common Stock in the Subscription Offering up to the
greater of the amount permitted to be purchased in the Community Offering,
currently $250,000 of Common Stock, or one-tenth of one percent (.10%) of the
total offering of shares of Common Stock, subject to the overall purchase
limitation and exclusive of an increase in shares issued pursuant to an increase
in the Estimated Price Range of up to 15%.
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In the event that Other Members subscribe for a number of shares of
Conversion Stock which, when added to the shares of Conversion Stock subscribed
for by the Eligible Account Holders, the Employee Plans and the Supplemental
Eligible Account Holders is in excess of the total number of shares of
Conversion Stock being issued, the subscriptions of such Other Members will be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares sufficient
to make his or her total allocation of Conversion Stock equal to the lesser of
100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining after that allocation will be allocated among the subscribing
Other Members whose subscriptions remain unsatisfied pro rata in the same
proportion that the number of votes of a subscribing Other Member on the Voting
Record Date bears to the total votes on the Voting Record Date of all
subscribing Other Members whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more remaining
Other Members, the excess shall be reallocated (one or more times as necessary)
among those remaining Other Members whose subscriptions are still not fully
satisfied on the same principle until all available shares have been allocated
or all subscriptions satisfied.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire at 12:00 noon, December 16, 1998, unless extended for up to 45 days
by the Association or such additional periods with the approval of the OTS.
Subscription rights which have not been exercised prior to the Expiration Date
will become void.
The Association will not execute orders until all shares of Common Stock
have been subscribed for or otherwise sold. If all shares have not been
subscribed for or sold within 45 days after the Expiration Date, unless such
period is extended with the consent of the OTS, all funds delivered to the
Association pursuant to the Subscription Offering will be returned promptly to
the subscribers with interest and all withdrawal authorizations will be
canceled. If an extension beyond the 45 day period following the Expiration
Date is granted, the Association will notify subscribers of the extension of
time and of any rights of subscribers to modify or rescind their subscriptions
and have their funds returned promptly with interest, and of the time period
within which subscribers must affirmatively notify the Association of their
intention to confirm, modify, or rescind their subscription. If an affirmative
response to any resolicitation is not received by the Company from a subscriber,
such order will be rescinded and all subscription funds will be promptly
returned with interest. Such extensions may not go beyond December 22, 2000.
COMMUNITY OFFERING
Concurrent with the Subscription Offering, and subject to prior rights of
holders of subscription rights, the Association has determined to offer shares
to certain members of the general public in a Community Offering. A preference
will be given in the Community Offering to natural persons residing in Trumbull
and Mahoning Counties, subject to the right of the Company to accept or reject
any such orders, in whole or in part, in their sole discretion. Persons
purchasing stock in the Community Offering, together with associates of and
persons acting in concert with such persons, may purchase up to $250,000 of
Common Stock subject to the maximum purchase limitation and exclusive of shares
issued pursuant to an increase in the Estimated Price Range by up to 15%.
See "--Limitations on Common Stock Purchases." This amount may be increased to
up to a maximum of 5% or decreased to less than $250,000 at the sole discretion
of the Company and the Association. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF
COMMON STOCK IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE
ASSOCIATION AND THE COMPANY, IN THEIR SOLE DISCRETION, TO ACCEPT OR REJECT ANY
SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS
SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of subscribers after completion of the Subscription Offering,
such stock will be allocated first to each subscriber whose order is accepted by
the Association, in an amount equal to the lesser of 100 shares or the number of
shares subscribed for by each such subscriber, if possible. Thereafter,
unallocated shares will be allocated among the subscribers whose order remains
unsatisfied on a 100 shares per order basis until all such orders have been
filled or the remaining shares have been allocated.
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SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Webb acting as agent of the Company to assist the
Company and the Association in the sale of the Common Stock. The Company and
the Association have the right to reject orders in whole or in part in their
sole discretion in the Syndicated Community Offering. Neither Webb nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community Offering, however, Webb
has agreed to use its best efforts in the sale of shares in the Syndicated
Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "--Stock Pricing."
Subject to overall purchase limitations, no person, together with any associate
or group of persons acting in concert, will be permitted to subscribe in the
Syndicated Community Offering for more than $250,000 of the Common Stock,
exclusive of an increase in shares issued pursuant to an increase in the
Estimated Price Range of up to 15%; provided, however, that shares of Common
Stock purchased in the Community Offering by any persons, together with
associates of or persons acting in concert with such persons, will be aggregated
with purchases in the Syndicated Community Offering and be subject to an overall
maximum purchase limitation of 1.0% of the shares offered, exclusive of an
increase in shares issued pursuant to an increase in the Estimated Price Range
by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Association's passbook rate of interest from the date
such payment is actually received by the Association until completion or
termination of the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If an order form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Association for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Association for deposit in a segregated
account. Although purchasers' funds are not required to be in their accounts
with selected dealers until the debit date in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company with
the approval of the OTS. Such extensions may not be beyond December 22, 2000.
See "--Stock Pricing" above for a discussion of rights of subscribers, if any,
in the event an extension is granted.
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PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Company and the Association will make reasonable efforts to comply with
the securities laws of all states in the United States in which persons entitled
to subscribe for stock pursuant to the Plan reside. However, the Plan provides
that the Association and the Company are not required to offer stock in the
Subscription Offering to any person who resides in a foreign country or resides
in a state of the United States with respect to which both of the following
apply: (i) a small number of persons otherwise eligible to subscribe for shares
of Common Stock reside in such state; and (ii) the Company or the Association
determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including but not limited to a
request that the Company and the Association or their officers, directors or
trustees register as a broker, dealer, salesman or selling agent, under the
securities laws of such state, or a request to register or otherwise qualify the
subscription rights or Common Stock for sale or submit any filing with respect
thereto in such state. Where the number of persons eligible to subscribe for
shares in one state is small, the Association and the Company will base their
decision as to whether or not to offer the Common Stock in such state on a
number of factors, including the size of accounts held by account holders in the
state, the cost of registering or qualifying the shares or the need to register
the Company, its officers, directors or employees as brokers, dealers or
salesmen.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Association and the Company have engaged Webb as a consultant and
financial advisor in connection with the offering of the Common Stock, and Webb
has agreed to use its best efforts to solicit subscriptions and purchase orders
for shares of Common Stock in the Offerings. Based upon negotiations between
the Association and the Company concerning fee structure, Webb will receive a
management fee of $25,000 and a fee equal to 1.25% of the aggregate Purchase
Price of the shares sold in the Subscription and Community Offerings, up to the
maximum of the Estimated Price Range, excluding shares purchased by directors,
officers, employees and any immediate family member thereof, and any employee
benefit plan of the Company or Association, including the ESOP for which Webb
will not receive a fee. If Common Stock remains available after the
satisfaction of all subscriptions in the Subscription Offering, Webb may enter
into an agreement with other NASD member firms ("Selected Brokers") to assist in
the sale of Common Stock in the Community Offering. If Selected Brokers are
used, Webb will receive commission of no more than 5.5% of the aggregate
purchase price of the Common Stock sold in the Community Offering by the
Selected Brokers, and Webb will pay to the Selected Brokers a portion of the
5.5% commission pursuant to selected dealer agreements. Fees to Webb and to any
other broker-dealer may be deemed to be underwriting fees, and Webb and such
broker-dealers may be deemed to be underwriters. The Company and the
Association have agreed to indemnify Webb for reasonable costs and expenses in
connection with certain claims or liabilities, including certain liabilities
under the Securities Act. Webb has received advances towards its fees. Total
marketing fees to Webb are expected to be $711,000 and $983,000 at the minimum
and the maximum of the Estimated Price Range, respectively. See "Pro Forma
Data" for the assumptions used to arrive at these estimates. The Association
will also reimburse Webb for its out-of-pocket expenses, provided such expenses
(excluding counsel's fees) do not exceed $15,000.
Crowe, Chizek & Company, LLP will perform conversion agent services and
records management services for the Association in the Conversion and will
receive a fee for these services of $30,000, including out-of-pocket expenses.
Directors and executive officers of the Company and Association may
participate in the solicitation of offers to purchase Common Stock. Questions
of prospective purchasers will be directed to executive officers or registered
representatives. Other employees of the Association may participate in the
Offering in ministerial capacities or providing clerical work in effecting a
sales transaction. Such other employees have been instructed not to solicit
offers to purchase Common Stock or provide advice regarding the purchase of
Common Stock. The Company will rely on Rule 3a4-1 under the Exchange Act, and
sales of Common Stock will be conducted within the requirements of Rule 3a4-1,
so as to permit officers, directors and employees to participate in the sale of
Common Stock. No officer, director or employee of the Company or the
Association will be compensated in connection with his participation by the
payment of commissions or other remuneration based either directly or indirectly
on the transactions in the Common Stock.
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PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in accordance
with Rule 15c2-8. Stock order forms and certification forms will only be
distributed with a prospectus.
To purchase shares in the Offerings, an executed stock order form and
certification form with the required payment for each share subscribed for, or
with appropriate authorization for withdrawal from the Association's deposit
account (which may be given by completing the appropriate blanks in the stock
order form), must be physically received by the Association at any of its
offices by Noon, Eastern time, on the Expiration Date. Stock order forms which
are not received by such time or are executed defectively or are received
without full payment (or appropriate withdrawal instructions) are not required
to be accepted. In addition, the Association and Company are not obligated to
accept orders submitted on photocopied or facsimiled stock order forms and will
not accept stock order forms unaccompanied by an executed certification form.
Notwithstanding the foregoing, the Company shall have the right, in its sole
discretion, to permit institutional investors to submit irrevocable orders
together with a legally binding commitment for payment and to thereafter pay for
the shares of Common Stock for which they subscribe in the Community Offering at
any time prior to 48 hours before the completion of the Conversion. The Company
and the Association have the right to waive or permit the correction of
incomplete or improperly executed forms, but do not represent that they will do
so. Once received, an executed stock order form may not be modified, amended or
rescinded without the consent of the Association unless the Conversion has not
been completed within 45 days after the end of the Subscription Offering, unless
such period has been extended.
IMPORTANT: TO ENSURE THAT YOUR SUBSCRIPTION RIGHTS ARE PROPERLY
IDENTIFIED, YOU MUST LIST ALL QUALIFYING DEPOSIT ACCOUNTS AND LOANS, AS OF THE
RESPECTIVE QUALIFYING DATES ON THE STOCK ORDER FORM. PERSONS WHO DO NOT LIST
ALL QUALIFYING DEPOSIT ACCOUNTS AND LOANS MAY BE SUBJECT TO REDUCTION OR
REJECTION OF THEIR SUBSCRIPTION.
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) and/or the Supplemental Eligibility Record Date (September 30, 1998)
and/or the Voting Record Date (October 31, 1998) must list all accounts on the
stock order form giving all names in each account and the account number.
Payment for subscriptions may be made (i) in cash if delivered in person at
any branch office of the Association, (ii) by check, bank draft or money order,
or (iii) by authorization of withdrawal from deposit accounts maintained with
the Association. No wire transfers will be accepted. Interest will be paid on
payments made by cash, check, bank draft or money order at the Association's
passbook rate of interest from the date payment is received until the completion
or termination of the Conversion. If payment is made by authorization of
withdrawal from deposit accounts, the funds authorized to be withdrawn from a
deposit account will continue to accrue interest at the contractual rates until
completion or termination of the Conversion, but a hold will be placed on such
funds, thereby making them unavailable to the depositor until completion or
termination of the Conversion.
If a subscriber authorizes the Association to withdraw the amount of the
purchase price from his deposit account, the Association will do so as of the
effective date of the Conversion. The Association will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization, the certificate will be canceled at the time of the withdrawal,
without penalty, and the remaining balance will earn interest at the
Association's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, 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
at the Purchase Price upon consummation of the Subscription Offering, if all
shares are sold, or upon consummation
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of the Syndicated Community Offering if shares remain to be sold in such
offering; provided, that there is in force from the time of its subscription
until such time, a loan commitment from an unrelated financial institution or
the Company to lend to the ESOP, at such time, the aggregate Purchase Price of
the shares for which it subscribed.
Owners of self-directed IRAs and Qualified Plans may use the assets of such
IRAs and Qualified Plans to purchase shares of Common Stock in the Subscription
Offering and/or Community Offering, provided that such IRAs are not maintained
at the Association. Persons with self-directed IRAs and Qualified Plans
maintained at the Association must have their accounts transferred to an
unaffiliated institution or broker to purchase shares of Common Stock in the
Subscription Offering and/or Community Offering. In addition, the provisions of
ERISA and IRS regulations require that officers, directors and ten percent
shareholders who use self-directed IRA funds and Qualified Plans to purchase
shares of Common Stock in the Subscription Offering and/or Community Offering,
make such purchases for the exclusive benefit of the IRAs and Qualified Plans.
Certificates representing shares of Common Stock purchased will be mailed
to purchasers at the address specified in properly completed stock order forms,
as soon as practicable following consummation of the sale of all shares of
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the OTS conversion regulations
prohibit any person with subscription rights, including the Eligible Account
Holders, the ESOP, the Supplemental Eligible Account Holders and Other Members
of the Association, from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they
are granted and only for his account. Each person exercising such subscription
rights will be required to certify that he is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale or
transfer of such shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
such subscription rights or shares of Common Stock prior to the completion of
the Conversion.
THE ASSOCIATION AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of: 1) the amount permitted to
be purchased in the Community Offering, currently $250,000 of Common
Stock; 2) one-tenth of one percent (.10%) of the total offering of
shares of Common Stock; or 3) fifteen times the product (rounded down
to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Qualifying Deposit of the Eligible
Account Holder and the denominator is the total amount of Qualifying
Deposits of all Eligible Account Holders, in each case on the
Eligibility Record Date subject to the overall maximum purchase
limitation in (8) below and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price
Range of up to 15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10% of the
shares of Common Stock issued in the Conversion, including shares
issued to the Foundation, including shares issued in the event
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of an increase in the Estimated Price Range of 15%, and intends to
purchase 8% of the shares of Common Stock issued in the Conversion,
including shares issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of: 1) the
amount permitted to be purchased in the Community Offering, currently
$250,000 of Common Stock; 2) one-tenth of one percent (.10%) of the
total offering of shares of Common Stock; or 3) fifteen times the
product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by
a fraction of which the numerator is the amount of the Qualifying
Deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in such case on the
Supplemental Eligibility Record Date subject to the overall maximum
purchase limitation in (8) below and exclusive of an increase in the
total number of shares issued due to an increase in the Estimated
Price Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the Subscription
Offering up to the greater of: 1) the amount permitted to be purchased
in the Community Offering, currently $250,000 of Common Stock; or 2)
one-tenth of one percent (.10%) of the total offering of shares of
Common Stock, in each case subject to the overall maximum purchase
limitation in (8) below and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price
Range of up to 15%;
(6) Persons purchasing shares of Common Stock in the Community Offering,
together with associates of and groups of persons acting in concert
with such persons, may purchase in the Community Offering up to
$250,000 of Common Stock, subject to the overall maximum purchase
limitation in (8) below and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price
Range of up to 15%;
(7) Persons purchasing shares of Common Stock in the Syndicated Community
Offering, together with associates of and persons acting in concert
with such persons, may purchase in the Syndicated Offering up to
$250,000 of Common Stock, subject to the overall maximum purchase
limitation in (8) below and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price
Range of up to 15% and, provided further that shares of Common Stock
purchased in the Community Offering by any persons, together with
associates of or persons acting in concert with such persons, will be
aggregated with purchases in the Syndicated Community Offering in
applying the $250,000 purchase limitation;
(8) Except for the ESOP, the overall maximum number of shares of Common
Stock subscribed for or purchased in all categories of the Conversion
by any person, together with associates of or persons acting in
concert with such persons, shall not exceed 1.0% of the shares of
Common Stock offered in the Conversion and exclusive of an increase in
the total number of shares issued due to an increase in the Estimated
Price Range of up to 15%; and
(9) No more than 25% of the total number of shares offered for sale in the
Conversion may be purchased by directors and officers of the
Association and their associates in the aggregate, excluding purchases
by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Association, both the individual amount permitted to be subscribed for and
the overall maximum purchase limitation may be increased to up to a maximum of
5% at the sole discretion of the Company and the Association. If such amount is
increased, subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Association may be, given the
opportunity to increase their subscriptions up to the then applicable limit. In
addition, the Boards of Directors of the Company and the Association may, in
their sole discretion, increase the maximum purchase limitation referred to
above up to 9.99%, provided that orders for shares exceeding 5% of the shares
being offering in the Subscription and Community Offerings shall not
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exceed, in the aggregate, 10% of the shares being offered in the Subscription
and Community Offerings. Requests to purchase additional shares of Common Stock
under this provision will be determined by the Boards of Directors and, if
approved, allocated on a pro rata basis giving priority in accordance with the
priority rights set forth herein.
The overall maximum purchase limitation may not be reduced to less than 1%
but the individual amount permitted to be subscribed for may be reduced by the
Association to less than $250,000 subject to paragraphs (2), (4) and (5) above
without the further approval of members or resolicitation of subscribers. An
individual Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may not purchase individually in the Subscription Offering the
overall maximum purchase limit of 1.0% of the shares offered, but may make such
purchase, together with associates of and persons acting in concert with such
person, by also purchasing in other available categories of the Conversion,
subject to availability of shares and the overall maximum purchase limit for
purchases in the Conversion.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order or priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the amount of Common Stock issued in the Conversion,
including shares issued to the Foundation, at the Adjusted Maximum number of
shares; (ii) in the event that there is an oversubscription by Eligible Account
Holders, to fill unsatisfied subscriptions of Eligible Account Holders,
exclusive of the Adjusted Maximum; (iii) in the event that there is an
oversubscription by Supplemental Eligible Account Holders, to fill unsatisfied
subscriptions of Supplemental Eligible Account Holders, exclusive of the
Adjusted Maximum; (iv) in the event that there is an oversubscription by Other
Members, to fill unsatisfied subscriptions of Other Members exclusive of the
Adjusted Maximum; and (v) to fill unsatisfied subscriptions in the Community
Offering to the extent possible, exclusive of the Adjusted Maximum, with
preference to institutional investors.
The term "associate" of a person is defined to mean: (i) any corporation,
partnership (other than the Association or a majority-owned subsidiary of the
Association) of which such person is an officer, partner or 10% stockholder;
(ii) any trust or other estate in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; provided,
however, such term shall not include any employee stock benefit plan of the
Association in which such person has a substantial beneficial interest or serves
as a trustee or in a similar fiduciary capacity; and (iii) any relative or
spouse of such person, or any relative of such spouse, who either has the same
home as such person or who is a director or officer of the Association.
Directors are not treated as associates of each other solely because of their
Board membership. For a further discussion of limitations on purchases of a
converting institution's stock at the time of Conversion and subsequent to
Conversion, see "Management of the Association--Subscriptions of Executive
Officers and Directors," "--Certain Restrictions on Purchase or Transfer of
Shares After Conversion" and "Restrictions on Acquisition of the Company and the
Association."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Association in its
present mutual form, each depositor would receive his pro rata share of any
assets of the Association remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). Each depositor's pro rata share of such remaining assets would be in
the same proportion as the value of his deposit account was to the total value
of all deposit accounts in the Association at the time of liquidation. After
the Conversion, each depositor, in the event of a complete liquidation, would
have a claim as a creditor of the same general priority as the claims of all
other general creditors of the Association. However, except as described below,
his claim would be solely in the amount of the balance in his deposit account
plus accrued interest. He would not have an interest in the value or assets of
the Association above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Association as of the date of its latest balance
sheet contained in the final Prospectus used in connection with the Conversion.
Each Eligible Account Holder and Supplemental Eligible Account Holder, if he
were to continue to maintain his deposit account at the Association, would be
entitled, on a complete liquidation of the Association after the Conversion, to
an interest in the liquidation account prior to any payment to the
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stockholders of the Association. Each Eligible Account Holder and Supplemental
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account, including regular accounts, transaction
accounts such as NOW accounts, money market deposit accounts, and certificates
of deposit, with a balance of $50 or more held in the Association on March 31,
1997 and September 30, 1998, respectively. Each Eligible Account Holder and
Supplemental Eligible Account Holder will have a pro rata interest in the total
liquidation account based on the proportion that the balance of his Qualifying
Deposits on the Eligibility Record Date or Supplemental Eligibility Record Date,
respectively, bore to the total amount of all Qualifying Deposits of all
Eligible Account Holders and Supplemental Eligible Account Holders in the
Association. For deposit accounts in existence at both dates separate
subaccounts shall be determined on the basis of the Qualifying Deposits in such
deposit accounts on such respective record dates.
If, however, on any annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date, the amount of the
Qualifying Deposit of an Eligible Account Holder or Supplemental Eligible
Account Holder is less than the amount of the Qualifying Deposit of such
Eligible Account Holder or Supplemental Eligible Account Holder as of the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
or less than the amount of the Qualifying Deposits as of the previous annual
closing date, then the interest in the liquidation account relating to such
Qualifying Deposit would be reduced from time to time by the proportion of any
such reduction, and such interest will cease to exist if such Qualifying Deposit
accounts are closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Qualifying
Deposit. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Association.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt by
the Association of either a favorable ruling from the IRS or an opinion with
respect to federal income taxation, and an opinion with respect to Ohio income
taxation, to the effect that the Conversion will not be a taxable transaction to
the Company, the Association, Eligible Account Holders, or Supplemental Eligible
Account Holders except as noted below.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Association has received an opinion of its
counsel, Patton Boggs LLP, to the effect that for federal income tax purposes,
among other matters: (i) the Association's change in form from mutual to stock
ownership will constitute a reorganization under section 368(a)(1)(F) of the
Code and neither the Association nor the Company will recognize any gain or loss
as a result of the Conversion; (ii) no gain or loss will be recognized to the
Association or the Company upon the purchase of the Association's capital stock
by the Company or to the Company upon the purchase of its Common Stock in the
Conversion; (iii) no gain or loss will be recognized by Eligible Account Holders
or Supplemental Eligible Account Holders upon the issuance to them of Deposit
Accounts in the Association in its stock form plus their interests in the
liquidation account in exchange for their deposit accounts in the Association;
(iv) the tax basis of the depositors' accounts in the Association immediately
after the Conversion will be the same as the basis of their deposit accounts
immediately prior to the Conversion; (v) the tax basis of each Eligible Account
Holder's and Supplemental Eligible Account Holder's interest in the liquidation
account will be zero; (vi) no gain or loss will be recognized by Eligible
Account Holders or Supplemental Eligible Account Holders upon the distribution
to them of nontransferable subscription rights to purchase shares of the Common
Stock, provided that the amount to be paid for the Common Stock is equal to the
fair market value of such stock; and (vii) the tax basis to the stockholders of
the Common Stock of the Company purchased in the Conversion will be the amount
paid therefor and the holding period for the shares of Common Stock purchased by
such persons will begin on the date on which their subscription rights are
exercised. Crowe, Chizek and Company LLP has opined that the Conversion will
not be a taxable transaction to the Company, the Association, Eligible Account
Holders or Supplemental Eligible Account Holders for Ohio income tax purposes.
Certain portions of both the federal and the state income tax opinions are based
upon the assumption that the subscription rights issued in connection with the
Conversion will have no value.
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS and the IRS could disagree with
conclusions reached therein. In the event of such disagreement, there can be no
assurance that the IRS would not prevail in a judicial or administrative
proceeding.
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Keller has issued an opinion stating that, pursuant to its valuation,
Keller is of the opinion that the subscription rights do not have any value,
based on the fact that such rights are acquired by the recipients without cost,
are nontransferable and of short duration, and afford the recipients the right
only to purchase the Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the shares of
Common Stock sold in the Community Offering. Such valuation is not binding on
the IRS. If the subscription rights granted to Eligible Account Holders or
Supplemental Eligible Account Holders are deemed to have an ascertainable value,
receipt of such rights could be taxable to those Eligible Account Holders or
Supplemental Eligible Account Holders who receive and/or exercise the
subscription rights in an amount equal to such value and the Association could
recognize gain on such distribution. Eligible Account Holders and Supplemental
Eligible Account Holders are encouraged to consult with their own tax advisor as
to the tax consequences in the event that such subscription rights are deemed to
have an ascertainable value.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by the
Board of Directors of the Association will be final. The Plan provides that the
Association's Board of Directors shall have the discretion to interpret and
apply the provisions of the Plan to particular circumstances and that such
interpretation or application shall be final. This includes any and all
interpretations, applications and determinations made by the Board of Directors
on the basis of such information and assistance as was then reasonably available
for such purpose.
The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-thirds vote of
the Association's Board of Directors. After submission of the proxy materials
to the members, the Plan may be amended by a two-thirds vote of the
Association's Board of Directors at any time prior to the Special Meeting with
the concurrence of the OTS. The Plan may be amended at any time after the
approval of members with the approval of the OTS and no further approval of the
members will be necessary unless otherwise required by the OTS. By adoption of
the Plan, the Association's members will be deemed to have authorized amendment
of the Plan under the circumstances described above.
The establishment of the Foundation 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 creation of the Foundation, the Association
intends to complete the Conversion without the Foundation. Failure to approve
the establishment of the Foundation may materially increase the pro forma market
value of the Common Stock since the Valuation Range, as set forth herein, takes
into account the dilutive impact of the issuance of shares to the Foundation.
In such an event, the Association may establish a new Estimated Price 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."
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion by a
director or an officer of the Association will be subject to a restriction that
the shares not be sold for a period of one year following the Conversion, except
in the event of the death of such director or officer. Each certificate for
restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
such time period of any certificate or record ownership of such shares other
than as provided above is a violation of the restriction. Any shares of Common
Stock issued at a later date as a stock dividend, stock split, or otherwise,
with respect to such restricted stock will be subject to the same restrictions.
The directors and officers of the Association will also be subject to the
insider trading rules promulgated pursuant to the Exchange Act and any other
applicable requirements of the federal securities laws.
Purchases of outstanding shares of Common Stock of the Company by
directors, officers (or any person who was an officer or director of the
Association after adoption of the Plan of Conversion) and their associates
during the three-year period following Conversion may be made only through a
broker or dealer registered with the SEC, except
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with the prior written approval of the OTS. This restriction does not apply,
however, to negotiated transactions involving more than 1.0% of the Company's
outstanding Common Stock or to the purchase of stock pursuant to any stock
option plan to be established after the Conversion.
Unless approved by the OTS, the Company, pursuant to OTS regulations, will
be prohibited from repurchasing any shares of the Common Stock for three years
after the Conversion except: (i) for an offer to all stockholders on a pro rata
basis; or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing, beginning one year following completion of the
Conversion the Company may repurchase its Common Stock so long as: (i) the
repurchases within the following two years are part of an open-market program
not involving greater than 5% of its outstanding capital stock during a twelve-
month period; (ii) the repurchases do not cause the Company to become
undercapitalized; and (iii) the Company provides to the Regional Director of the
OTS no later than 10 days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken and
such program is not disapproved by the Regional Director. In addition, under
current OTS policies, repurchases may be allowed in the first year following
Conversion and in amounts greater than 5% in the second and third years
following Conversion, provided there are valid and compelling business reasons
for such repurchases and the OTS approves such repurchases.
RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE ASSOCIATION
GENERAL
The Association's Plan of Conversion provides for the Conversion of the
Association from the mutual to the stock form of organization and, in connection
therewith, a new Federal Stock Charter and Bylaws to be adopted by members of
the Association. The Plan also provides for the concurrent formation of a
holding company, which form of organization may or may not be utilized at the
option of the Board of Directors of the Association. See "The Conversion--
General." In the event that the holding company form of organization is
utilized, as described below, certain provisions in the Company's Certificate of
Incorporation and Bylaws and in its management remuneration entered into in
connection with the Conversion, together with provisions of Delaware corporate
law, may have anti-takeover effects. In the event that the holding company form
of organization is not utilized, the Association's Stock Charter and Bylaws and
management remuneration entered into in connection with the Conversion may have
anti-takeover effects as described below. In addition, regulatory restrictions
may make it difficult for persons or companies to acquire control of either the
Company or the Association.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of the material
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have
the effect of discouraging a future takeover attempt which is not approved by
the Board of Directors but which individual Company stockholders may deem to be
in their best interests or in which shareholders may receive a substantial
premium for their shares over then current market prices. As a result,
stockholders who might desire to participate in such a transaction may not have
an opportunity to do so. Such provisions will also render the removal of the
current Board of Directors or management of the Company more difficult. The
following description of certain of the provisions of the Certificate of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each case to such Certificate of Incorporation and Bylaws,
which are incorporated herein by reference. See "Additional Information" as to
how to obtain a copy of these documents.
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 beneficially owned by such person in excess of the Limit. Beneficial
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ownership is determined pursuant to Rule 13d-3 of the General Rules and
Regulations promulgated pursuant to the Exchange Act, and includes shares
beneficially owned by such person or any of his affiliates (as defined in the
Certificate of Incorporation), shares which such person or his affiliates have
the right to acquire upon the exercise of conversion rights or options and
shares as to which such person and his affiliates have or share investment or
voting power, but shall not include shares beneficially owned by the ESOP or
directors, officers and employees of the Association or Company or shares that
are subject to a revocable proxy and that are not otherwise beneficially owned,
or deemed by the Company to be beneficially owned, by such person and his
affiliates. The Certificate of Incorporation of the Company further provides
that this provision limiting voting rights may only be amended upon the vote of
80% of the outstanding shares of voting stock (after giving effect to the
limitation on voting rights).
Board of Directors. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the whole
number of members of the Board. Each class shall serve a staggered term, with
approximately one-third of the total number of directors being elected each
year. The Company's Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the directors, but in the
absence of such determination shall be eight. The Certificate of Incorporation
and the Bylaws provide that any vacancy occurring in the Board, including a
vacancy created by an increase in the number of directors or resulting from
death, resignation, retirement, disqualification, removal from office or other
cause, shall be filled for the remainder of the unexpired term exclusively by a
majority vote of the directors then in office. The classified Board is intended
to provide for continuity of the Board of Directors and to make it more
difficult and time consuming for a stockholder group to fully use its voting
power to gain control of the Board of Directors without the consent of the
incumbent Board of Directors of the Company. The Certificate of Incorporation
of the Company provides that a director may be removed from the Board of
Directors prior to the expiration of his term only for cause, upon the vote of
80% of the outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a majority
of the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.
Cumulative Voting, Special Meetings And Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be
called only by the Board of Directors of the Company. The Certificate of
Incorporation also provides that any action required or permitted to be taken by
the stockholders of the Company may be taken only at an annual or special
meeting and prohibits stockholder action by written consent in lieu of a
meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 33,000,000 shares of Common Stock and 3,000,000 shares of Preferred
Stock. The shares of Common Stock and Preferred Stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee Stock Options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
The Company's Board of Directors currently has no plans for the issuance of
additional shares, other than the issuance of additional shares pursuant to the
terms of the Stock Program and upon exercise of Stock Options to be issued
pursuant to the terms of the Stock Option Plan, all of which are to be
established and presented to stockholders at the first annual meeting after the
Conversion.
Stockholder Vote Required to Approve Business Combinations With Interested
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock to
approve certain "Business Combinations," as defined therein, and related
transactions. Under Delaware law, absent this provision, Business Combinations,
including mergers, consolidations and sales of all or substantially all of the
assets of a corporation must, subject to certain exceptions, be approved by the
vote of the holders of only a majority of the outstanding shares of Common Stock
of the Company and any other affected class of stock. Under the
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Certificate of Incorporation, at least 80% approval of shareholders is required
in connection with any transaction involving an Interested Stockholder (as
defined below) except (i) in cases where the proposed transaction has been
approved in advance by a majority of those members of the Company's Board of
Directors who are unaffiliated with the Interested Stockholder and were
directors prior to the time when the Interested Stockholder became an Interested
Stockholder or (ii) if the proposed transaction meets certain conditions set
forth therein which are designed to afford the shareholders a fair price in
consideration for their shares in which case, if a stockholder vote is required,
approval of only a majority of the outstanding shares of voting stock would be
sufficient. The term "Interested Stockholder" is defined to include any
individual, corporation, partnership or other entity (other than the Company or
its subsidiaries) which owns beneficially or controls, directly or indirectly,
10% or more of the voting power of the outstanding shares of voting stock of the
Company. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include (i) any merger or
consolidation of the Company or any of its subsidiaries with or into any
Interested Stockholder or Affiliate (as defined in the Certificate of
Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition to or with any Interested
Stockholder or Affiliate of 25% or more of the assets of the Company or combined
assets of the Company and its subsidiary; (iii) the issuance or transfer to any
Interested Stockholder or its Affiliate by the Company (or any subsidiary) of
any securities the value of which equals or exceeds 25% of the fair market value
of the Common Stock of the Company in exchange for any assets, cash or
securities; (iv) the adoption of any plan for the liquidation or dissolution of
the Company proposed by or on behalf of any Interested Stockholder or Affiliate
thereof; and (v) any reclassification of securities, recapitalization, merger or
consolidation of the Company which has the effect of increasing the
proportionate share of Common Stock or any class of equity or convertible
securities of the Company owned directly or indirectly by an Interested
Stockholder or Affiliate thereof. The directors and executive officers of the
Association are purchasing in the aggregate approximately 3.7% of the shares of
the Common Stock to be issued in the Conversion, including shares to be issued
to the Foundation, at the maximum of the Estimated Price Range. In addition, the
ESOP intends to purchase 8% of the Common Stock issued in connection with the
Conversion, including shares issued to the Foundation. Additionally, if at a
meeting of stockholders following the Conversion stockholder approval of the
proposed Stock Program and Stock Option Plan is received, the Company expects to
acquire 4% of the Common Stock issued in connection with the Conversion,
including shares issued to the Foundation, on behalf of the Stock Program and
expects to issue options to purchase up to 10% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation, under
the Stock Option Plan to directors and executive officers. As a result, at the
maximum of the Estimated Price Range, assuming the Stock Program and Stock
Option Plan is approved by stockholders, directors, executive officers and
employees have the potential to control the voting of approximately 23.3% of the
Company's Common Stock, if the shares held by the ESOP are aggregated with the
shares purchased in the Conversion by management and acquired for award under
the Stock Program and Stock Option Plan, thereby enabling them to prevent the
approval of the transactions requiring the approval of at least 80% of the
Company's outstanding shares of voting stock described hereinabove.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein) to (i) make a tender or exchange
offer for any equity security of the Company, (ii) merge or consolidate the
Company with another corporation or entity, or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company, the Association and the stockholders of the
Company, give due consideration to all relevant factors, including, without
limitation, the social and economic effects of acceptance of such offer on the
Company's customers and the Association's present and future account holders,
borrowers and employees; on the communities in which the Company and the
Association operate or are located; and on the ability of the Company to fulfill
its corporate objectives as a savings and loan holding company and on the
ability of the Association to fulfill the objectives of a federally-chartered
stock savings institution under applicable statutes and regulations. By having
these standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then market
price of any equity security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of the
outstanding voting stock
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entitled to vote (after giving effect to the provision limiting voting rights)
is required to amend or repeal certain provisions of the Certificate of
Incorporation, including the provision limiting voting rights, the provisions
relating to approval of certain business combinations, calling special meetings,
the number and classification of directors, director and officer indemnification
by the Company and amendment of the Company's Bylaws and Certificate of
Incorporation. The Company's Bylaws may be amended by its Board of Directors, or
by a vote of 80% of the total votes eligible to be voted at a duly constituted
meeting of stockholders.
Certain Bylaw Provisions. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Employment Agreements, CIC Agreements, Employee Severance
Compensation Plan, Stock Program or Stock Option Plan to be established may also
discourage takeover attempts by increasing the costs to be incurred by the
Association and the Company in the event of a takeover. See "Management of the
Association--Employment Agreements."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of the Company and
that otherwise is in the best interest of all stockholders.
THE FOUNDATION
If approved by the members of the Association, upon completion of the
Conversion, the Foundation will own 7.1% of the total shares of the Company's
Common Stock outstanding. Such shares will be owned solely by the Foundation;
however, pursuant to the terms of the contribution as mandated by the OTS, the
shares of Common Stock held by the Foundation must be voted in the same ratio as
all other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company. In the event the OTS were to waive this
restriction, the Foundation's board of directors would exercise sole voting
power over such shares and would no longer be subject to the restriction.
However, the OTS could impose additional conditions at that time on the
composition of the board of directors of the Foundation or which would otherwise
relate to the control of the Common Stock held by the Foundation. See "The
Conversion--Establishment of the Foundation--Regulatory Conditions Imposed
on the Foundation." If a waiver of the voting restriction were granted by the
OTS and no further conditions were imposed on the Foundation at that time, with
the Foundation's shares combined with shares purchased directly by officers and
directors of the Company, shares held by the Stock Program trust, and shares
held by the ESOP trust, the aggregate of such shares could exceed 20% of the
Company's outstanding Common Stock, which could enable management to defeat
stockholder proposals requiring 80% approval. Consequently, in the event the
voting restriction was waived, the potential voting control might preclude
takeover attempts that certain stockholders deem to be in their best interest,
and might tend to perpetuate management. However, since the ESOP shares are
allocated to all eligible employees of the Association, and any unallocated
shares will be voted by an independent trustee, and because the Stock Program
and Stock Option Plan must first be approved by stockholders no sooner than six
months following completion of the Conversion, and
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awards under such proposed plans may be granted to employees other than
executive officers and Directors, management of the Company does not expect to
have voting control of all shares covered by the ESOP and other stock-based
benefit plans.
DELAWARE CORPORATE LAW
The state of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such Person became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by certain employee stock plans; (iii) any business
combination with an Interested Stockholder that is approved by the Board of
Directors and by a two-thirds vote of the outstanding voting stock not owned by
the Interested Stockholder; and (iv) certain business combinations that are
proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the Board of Directors. A corporation may exempt itself from the requirements
of the statute by adopting an amendment to its Certificate of Incorporation or
Bylaws electing not to be governed by Section 203. At the present time, the
Board of Directors does not intend to propose any such amendment.
RESTRICTIONS IN THE ASSOCIATION'S NEW CHARTER AND BYLAWS
Although the Board of Directors of the Association is not aware of any
effort that might be made to obtain control of the Association after the
Conversion, the Board of Directors believes that it is appropriate to adopt
certain provisions permitted by federal regulations to protect the interests of
the converted Association and its stockholders from any hostile takeover. Such
provisions may, indirectly, inhibit a change in control of the Company, as the
Association's sole stockholder. See "Risk Factors--Provision Which May
Discourage Takeover Attempts."
The Association's Federal Stock Charter will contain a provision whereby
the acquisition of or offer to acquire beneficial ownership of more than 10% of
the issued and outstanding shares of any class of equity securities of the
Association by any person (i.e., any individual, corporation, group acting in
concert, trust, partnership, joint stock company or similar organization),
either directly or through an affiliate thereof, will be prohibited for a period
of five years following the date of completion of the Conversion. Any stock in
excess of 10% acquired in violation of the Federal Stock Charter provision will
not be counted as outstanding for voting purposes. This limitation shall not
apply to any transaction in which the Association forms a holding company
without a change in the respective beneficial ownership interests of its
stockholders other than pursuant to the exercise of any dissenter or appraisal
rights. In the event that holders of revocable proxies for more than 10% of the
shares of the Common Stock of the Company seek, among other things, to elect
one-third or more of the Company's Board of Directors, to cause the Company's
stockholders to approve the acquisition or corporate reorganization of the
Company or to exert a continuing influence on a material aspect of the business
operations of the Company, which actions could indirectly result in a change in
control of the Association, the Board of Directors of the Association will be
able to assert this provision of the Association's Federal Stock Charter against
such holders. Although the Board of Directors of the Association is not
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currently able to determine when and if it would assert this provision of the
Association's Federal Stock Charter, the Board of Directors, in exercising its
fiduciary duty, may assert this provision if it were deemed to be in the best
interests of the Association, the Company and its stockholders. It is unclear,
however, whether this provision, if asserted, would be successful against such
persons in a proxy contest which could result in a change in control of the
Association indirectly through a change in control of the Company. Finally, for
five years, stockholders will not be permitted to call a special meeting of
stockholders relating to a change of control of the Association or a charter
amendment or to cumulate their votes in the election of directors. Furthermore,
the staggered terms of the Board of Directors could have an anti-takeover effect
by making it more difficult for a majority of shares to force an immediate
change in the Board of Directors since only one-third of the Board is elected
each year. The purpose of these provisions is to assure stability and
continuity of management of the Association in the years immediately following
the Conversion.
Although the Association has no arrangements, understandings or plans at
the present time, except as described in "Description of Capital Stock of the
Company--Preferred Stock," for the issuance or use of the shares of
undesignated Preferred Stock proposed to be authorized, the Board of Directors
believes that the availability of such shares will provide the Association with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other corporate needs which may arise. In the event of a proposed
merger, tender offer or other attempt to gain control of the Association of
which management does not approve, it might be possible for the Board of
Directors to authorize the issuance of one or more series of Preferred Stock
with rights and preferences which could impede the completion of such a
transaction. An effect of the possible issuance of such Preferred Stock,
therefore, may be to deter a future takeover attempt. The Board of Directors
does not intend to issue any Preferred Stock except on terms which the Board
deems to be in the best interest of the Association and its then existing
stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of the
Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Association
or the Company; or (iii) offers which are not opposed by the Board of Directors
of the Association and which receive the prior approval of the OTS. Such
prohibition is also applicable to the acquisition of the stock of the Company.
Such acquisition may be disapproved by the OTS if it is found, among other
things, that the proposed acquisition (a) would frustrate the purposes of the
provisions of the regulations regarding conversions; (b) would be manipulative
or deceptive; (c) would subvert the fairness of the conversion; (d) would be
likely to result in injury to the savings institution; (e) would not be
consistent with economical home financing; (f) would otherwise violate law or
regulation; or (g) would not contribute to the prudent deployment of the savings
institution's conversion proceeds. In the event that any person, directly or
indirectly, violates this regulation, the securities beneficially owned by such
person in excess of 10% shall not be counted as shares entitled to vote and
shall not be voted by any person or counted as voting shares in connection with
any matters submitted to a vote of stockholders. The definition of beneficial
ownership for this regulation extends to persons holding revocable or
irrevocable proxies for the Company's stock under circumstances that give rise
to a conclusive or rebuttable determination of control under the OTS
regulations.
In addition, any proposal to acquire 10% of any class of equity security of
the Company generally would be subject to approval by the OTS under the Change
in Bank Control Act. The OTS requires all persons seeking control of a savings
institution and, therefore, indirectly its holding company, to obtain regulatory
approval prior to offering to obtain control. Federal law generally provides
that no "person," acting directly or indirectly or through or in concert with
one or more other persons, may acquire directly or indirectly "control," as that
term is defined in OTS regulations, of a federally-insured savings institution
without giving at least 60 days' written notice to the OTS and providing the
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OTS an opportunity to disapprove the proposed acquisition. Such acquisitions of
control may be disapproved if it is determined, among other things, that (i) the
acquisition would substantially lessen competition; (ii) the financial condition
of the acquiring person might jeopardize the financial stability of the savings
institution or prejudice the interests of its depositors; or (iii) the
competency, experience or integrity of the acquiring person or the proposed
management personnel indicates that it would not be in the interest of the
depositors or the public to permit the acquisition of control by such person.
Such change in control restrictions on the acquisition of holding company stock
are not limited to three years after conversion but will apply for as long as
the regulations are in effect. Persons holding revocable or irrevocable proxies
may be deemed to be beneficial owners of such securities under OTS regulations
and therefore prohibited from voting all or the portion of such proxies in
excess of the 10% aggregate beneficial ownership limit. Such regulatory
restrictions may prevent or inhibit proxy contests for control of the Company or
the Association which have not received prior regulatory approval.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 33,000,000 shares of Common Stock having
a par value of $0.01 per share and 3,000,000 shares of preferred stock having a
par value of $0.01 per share (the "Preferred Stock"). Based on the sale of
Common Stock in connection with the Conversion and issuance of authorized but
unissued Common Stock to the Foundation in an amount equal to 7.7% of the Common
Stock sold in the Conversion, the Company currently expects to issue up to
9,775,000 shares of Common Stock (or 11,241,250 in the event of an increase of
15% in the Estimated Price Range) and no shares of Preferred Stock in the
Conversion. Except as discussed above in "Restriction on Acquisition of the
Company and the Association," each share of the Company's Common Stock will have
the same relative rights as, and will be identical in all respects with, each
other share of Common Stock. Upon payment of the Purchase Price for the Common
Stock, in accordance with the Plan, all such stock will be duly authorized,
fully paid and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE
FDIC.
COMMON STOCK
Dividends. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation." The
holders of Common Stock of the Company will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor. If the Company issues
Preferred Stock, the holders thereof may have a priority over the holders of the
Common Stock with respect to dividends.
Voting Rights. Upon Conversion, the holders of Common Stock of the Company
will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
Except as discussed in "Restrictions on Acquisition of the Company and the
Association," each holder of Common Stock will be entitled to one vote per share
and will not have any right to cumulate votes in the election of directors. If
the Company issues Preferred Stock, holders of the Preferred Stock may also
possess voting rights. Certain matters require an 80% shareholder vote. See
"Restrictions on Acquisition of the Company and the Association."
As a federal mutual savings and loan association, corporate powers and
control of the Association are vested in its Board of Directors, who elect the
officers of the Association and who fill any vacancies on the Board of Directors
as it exists upon Conversion. Subsequent to Conversion, voting rights will be
vested exclusively in the owners of the shares of capital stock of the
Association, which will be the Company, and voted at the direction of the
Company's Board of Directors. Consequently, the holders of the Common Stock
will not have direct control of the Association.
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Liquidation. In the event of any liquidation, dissolution or winding up of
the Association, the Company, as holder of the Association's capital stock,
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of the Association (including all deposit accounts and
accrued interest thereon) and after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders (see "The Conversion--Liquidation Rights"), all assets of the
Association available for distribution. In the event of liquidation,
dissolution or winding up of the Company, the holders of its Common Stock would
be entitled to receive, after payment or provision for payment of all its debts
and liabilities, all of the assets of the Company available for distribution.
If Preferred Stock is issued, the holders thereof may have a priority over the
holders of the Common Stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
DESCRIPTION OF CAPITAL STOCK OF THE ASSOCIATION
GENERAL
The Federal Stock Charter of the Association, to be effective upon the
Conversion, authorizes the issuance of capital stock consisting of 33,000,000
shares of common stock, par value $1.00 per share, and 3,000,000 shares of
preferred stock, par value $1.00 per share, which preferred stock may be issued
in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of Common
Stock of the Association will have the same relative rights as, and will be
identical in all respects with, each other share of common stock. After the
Conversion, the Board of Directors will be authorized to approve the issuance of
Common Stock up to the amount authorized by the Federal Stock Charter without
the approval of the Association's stockholders. Assuming that the holding
company form of organization is utilized, all of the issued and outstanding
common stock of the Association will be held by the Company as the Association's
sole stockholder. THE CAPITAL STOCK OF THE ASSOCIATION WILL REPRESENT NON-
WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT
BE INSURED BY THE FDIC.
COMMON STOCK
Dividends. The holders of the Association's common stock will be entitled
to receive and to share equally in such dividends as may be declared by the
Board of Directors of the Association out of funds legally available therefor.
See "Dividend Policy" for certain restrictions on the payment of dividends and
"Federal and State Taxation--Federal Taxation" for a discussion of the
consequences of the payment of cash dividends from income appropriated to bad
debt reserves.
Voting Rights. Immediately after the Conversion, the holders of the
Association's common stock will possess exclusive voting rights in the
Association. Each holder of shares of common stock will be entitled to one vote
for each share held, subject to the right of shareholders to cumulate their
votes for the election of directors. During the five-year period after the
effective date of the Conversion, cumulation of votes will not be permitted.
See "Restrictions on Acquisition of the Company and the Association--Anti-
Takeover Effects of the Company's Certificate of Incorporation and Bylaws and
Management Remuneration Adopted in Conversion."
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Liquidation. In the event of any liquidation, dissolution, or winding up
of the Association, the holders of common stock will be entitled to receive,
after payment of all debts and liabilities of the Association (including all
deposit accounts and accrued interest thereon), and distribution of the balance
in the special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders, all assets of the Association available for
distribution in cash or in kind. If preferred stock is issued subsequent to the
Conversion, the holders thereof may also have priority over the holders of
common stock in the event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the
Association will not be entitled to preemptive rights with respect to any shares
of the Association which may be issued. The common stock will not be subject to
redemption. Upon receipt by the Association of the full specified purchase
price therefor, the common stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company.
CHANGE IN ACCOUNTANTS
Prior to the year ended June 30, 1998 the Association's financial
statements were audited by Packer, Thomas & Co. As a result of the
Association's decision to convert from a mutual savings and loan association to
a stock savings and loan association, the Association decided on June 29, 1998
to dismiss Packer, Thomas & Co. and to engage Crowe, Chizek and Company LLP as
the independent auditors of the Association. The decision to change auditors
was recommended by the Audit Committee and was approved by the Board of
Directors. Accordingly, the statement of financial condition as of June 30,
1997 and related statements of income, retained earnings and cash flows for the
years ended June 30, 1997 and 1996, and included in this Prospectus, were
audited by Packer, Thomas & Co.
For the year ended June 30, 1997 and up to the date of replacement of
Packer, Thomas & Co., there were no disagreements with Packer, Thomas & Co. on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure which, if not resolved to the satisfaction of
Packer, Thomas & Co., would have caused it to make reference to the subject
matter of the disagreement in connection with its report. The independent
auditors' report on the financial statements for the year ended June 30, 1997
did not contain an adverse opinion or a disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
EXPERTS
The consolidated financial statements of the Association as of June 30,
1998, and for the year ended June 30, 1998, have been included herein in
reliance upon the report of Crowe, Chizek & Company, LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of the Association as of June 30, 1997 and for the
years ended June 30, 1997 and 1996, have been included herein in reliance upon
the report of Packer, Thomas & Co., independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
Keller and Company, Inc. has consented to the publication herein of the
summary of its report to the Association and Company setting forth its opinion
as to the estimated pro forma market value of the Common Stock upon Conversion
and its opinion with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Association and Company by Patton
Boggs LLP, Washington, D.C., special counsel to the Association and Company.
The federal income tax consequences of First Federal of Warren Community
Foundation will be passed
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upon for the Association and the Company by Crowe, Chizek and Company LLP,
independent certified public accountants who have served as the Association's
and the Company's independent tax advisors. Patton Boggs LLP will rely as to
certain matters of Delaware law on the opinion of Potter Anderson & Corroon LLP.
Ohio state income tax consequences will be passed upon by Crowe, Chizek and
Company LLP. Certain legal matters will be passed upon for Webb by Elias, Matz,
Tiernan & Herrick L.L.P., Washington, DC.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information,
including the Conversion Valuation Appraisal Report, which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates.
In addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including the Company. The
Conversion Valuation Appraisal Report may also be inspected by members of the
Association at the offices of the Association during normal business hours.
This Prospectus contains a description of the material terms and features of all
material contracts, reports or exhibits to the registration statement required
to be described; however, the statements contained in this Prospectus as to the
contents of any contract or other document filed as an exhibit to the
registration statement are, of necessity, brief descriptions thereof and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
The Association has filed an application for conversion with the OTS.
Pursuant to the rules and regulations of the OTS, this Prospectus omits certain
information contained in that application. The application may be examined at
the principal office of the OTS, 1700 G Street, Washington, DC, 20552 and at the
office of the Regional Director of the OTS located at 200 West Madison Street,
Suite 1300, Chicago, Illinois, 60606.
The Company has filed with the Office of Thrift Supervision an Application
to Form a Holding Company. This Prospectus omits certain information contained
in such Application. Such Application may be inspected at the offices of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552.
In connection with the Conversion, the Company has registered its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, the Company and
the holders of its stock are subject to the proxy solicitation rules, reporting
requirements and restrictions on stock purchases and sales by directors,
officers and greater than 10% stockholders, the annual and periodic reporting
and certain other requirements of the Exchange Act. Under the Plan, the Company
has undertaken that it will not terminate such registration for a period of at
least three years following the Conversion. In the event that the Association
amends the Plan to eliminate the concurrent formation of the Company as part of
the Conversion, the Association will register its stock with the Federal Deposit
Insurance Corporation under Section 12(g) of the Exchange Act and, upon such
registration, the Association and the holders of its stock will become subject
to the same obligations and restrictions.
A copy of the Plan of Conversion, Certificate of Incorporation and the
Bylaws of the Company and the Charter and Bylaws of the Association are
available without charge from the Association. The Association's principal
office is located at 185 East Market Street, Warren, Ohio and its telephone
number is (330) 373-1221.
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FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
INDEX TO FINANCIAL STATEMENTS
Page
-------------
Independent Auditors' Report for the Year Ended June 30, 1998...... F-2
Independent Auditors' Report for the Years Ended June 30, 1997 and
1996.............................................................. F-3
Statements of Financial Condition as of June 30, 1998 and 1997..... F-4
Statements of Income for the Years Ended June 30, 1998, 1997 and
1996.............................................................. F-5
Statements of Retained Earnings for the Years Ended June 30, 1998,
1997 and 1996..................................................... F-6
Statements of Cash Flows for the Years Ended June 30, 1998,
1997 and 1996...................................................... F-7 to F-8
Notes to Financial Statements...................................... F-9 to F-27
All schedules are omitted because they are not required or applicable, or
the required information is shown in the financial statements or notes thereto.
The financial statements of First Place Financial Corp. have been omitted
because First Place Financial Corp. has not yet issued any stock, has no assets
and no liabilities, and has not conducted any business other than of an
organizational nature.
F-1
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[LETTERHEAD OF CROWE CHIZEK APPEARS HERE]
REPORT OF INDEPENDENT AUDITORS
Board of Directors
First Federal Savings and Loan Association
of Warren
Warren, OH
We have audited the accompanying statements of financial condition of First
Federal Savings and Loan Association of Warren as of June 30, 1998, and the
related statements of income, retained earnings and cash flows for the year then
ended. 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 audit. The 1997 and 1996 financial statements were
audited by other auditors whose report dated September 9, 1997, expressed an
unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects, the financial position of First Federal Savings and
Loan Association of Warren as of June 30, 1998, and the results of its
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Cleveland, Ohio
July 22, 1998
F-2
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REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
We have audited the accompanying statements of financial condition of First
Federal Savings and Loan Association of Warren as of June 30, 1997 and 1996 and
the related statements of income, retained earnings and cash flows, for the
years then ended. These financial statements are the responsibility of the
Association's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Federal Savings and Loan
Association of Warren as of June 30, 1997 and 1996, and the results of its
operations and cash flows for the years then ended, in conformity with generally
accepted accounting principles.
Warren, Ohio /s/ Packer, Thomas & Co.
September 9, 1997 Packer, Thomas & Co.
F-3
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
STATEMENTS OF FINANCIAL CONDITION
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,668,406 $ 6,757,030
Federal funds sold 1,565,167 209,892
Securities available for sale 211,184,978 202,676,569
Securities held to maturity, fair value of
$28,518,985 in 1998 and $44,798,465 in 1997 28,294,848 44,874,887
Loans receivable, net 353,012,434 285,211,625
Premises and equipment, net 5,898,813 6,446,380
Accrued interest receivable 1,835,336 1,888,998
Other assets 938,261 804,191
------------ ------------
Total assets $609,398,243 $548,869,572
============ ============
LIABILITIES
Deposits $435,461,723 $412,933,944
Repurchase agreements 60,430,000 16,000,000
Federal Home Loan Bank advances 44,820,060 58,397,984
Advances by borrowers for taxes and insurance 1,983,256 1,700,988
Accrued interest payable 1,089,645 704,278
Federal income taxes payable 1,702,008 1,115,234
Other liabilities 4,554,191 4,270,326
------------ ------------
Total liabilities 550,040,883 495,122,754
------------ ------------
Commitments and contingencies
RETAINED EARNINGS
Retained earnings, substantially restricted 57,762,916 53,690,574
Unrealized gain on available for sale securities, net
of taxes 1,594,444 56,244
------------ ------------
Total retained earnings 59,357,360 53,746,818
------------ ------------
Total liabilities and retained earnings $609,398,243 $548,869,572
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-4
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
STATEMENTS OF INCOME
Years ended June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $25,735,667 $ 21,871,589 $ 20,135,093
Securities
Taxable 3,098,434 3,542,299 3,145,380
Tax-exempt 66,072 193,879 31,517
Mortgage-backed and related securities 13,581,433 12,805,242 13,124,197
----------- ------------ ------------
Total interest income 42,481,606 38,413,009 36,436,187
----------- ------------ ------------
INTEREST EXPENSE
Deposits 19,859,626 18,495,360 17,881,388
FHLB advances 3,056,698 3,953,237 3,976,414
Repurchase agreements 2,595,728 480,356
----------- ------------ ------------
Total interest expense 25,512,052 22,928,953 21,857,802
----------- ------------ ------------
NET INTEREST INCOME 16,969,554 15,484,056 14,578,385
Provision for loan losses 1,778,591 590,395 238,239
----------- ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 15,190,963 14,893,661 14,340,146
----------- ------------ ------------
NONINTEREST INCOME
Service charges 1,084,911 929,166 803,099
Gains (losses) on securities available
for sale, net 135,138 (934,150) (26,451)
Other 531,723 449,007 443,426
----------- ------------ ------------
Total noninterest income 1,751,772 444,023 1,220,074
----------- ------------ ------------
NONINTEREST EXPENSE
Salaries and benefits 5,470,758 4,863,349 4,698,715
Occupancy and equipment 1,577,820 1,431,500 1,295,575
Federal deposit insurance premiums 258,236 2,970,655 867,188
Franchise taxes 776,228 713,658 648,608
Other 2,289,423 1,919,304 1,638,425
----------- ------------ ------------
Total noninterest expense 10,372,465 11,898,466 9,148,511
----------- ------------ ------------
INCOME BEFORE INCOME TAX 6,570,270 3,439,218 6,411,709
Provision for income tax 2,497,928 1,215,175 2,262,419
----------- ------------ ------------
NET INCOME $ 4,072,342 $ 2,224,043 $ 4,149,290
=========== ============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-5
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
STATEMENTS OF RETAINED EARNINGS
Years ended June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Gains (Losses)
on Securities
Retained Available for
Earnings Sale, Net Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance at July 1, 1995 $47,317,241 $(1,107,951) $46,209,290
Change in fair value of
securities available for sale (1,535,916) (1,535,916)
Net income 4,149,290 4,149,290
----------- ----------- -----------
Balance at June 30, 1996 51,466,531 (2,643,867) 48,822,664
Change in fair value of
securities available for sale 2,700,111 2,700,111
Net income 2,224,043 2,224,043
----------- ----------- -----------
Balance at June 30, 1997 53,690,574 56,244 53,746,818
Change in fair value of
securities available for sale 1,538,200 1,538,200
Net income 4,072,342 4,072,342
----------- ----------- -----------
Balance at June 30, 1998 $57,762,916 $ 1,594,444 $59,357,360
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-6
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
STATEMENTS OF CASH FLOWS
Years ended June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,072,342 $ 2,224,043 $ 4,149,290
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 737,726 570,125 514,596
Provision for loan losses 1,778,591 590,395 238,239
Net amortization 282,363 127,892 298,834
Investment security (gains) losses (135,138) 934,150 26,451
Loss on disposal of fixed assets 158,878
FHLB dividend (351,800) (330,022) (262,378)
Change in
Interest receivable 53,662 (15,920) 44,704
Interest payable 385,367 (185,616) (446,752)
Other assets (134,070) (23,960) (78,098)
Other liabilities 498,574 572,638 986,473
Deferred loan fees 3,611 (180,949) 179,410
Deferred taxes (420,339) 15,175 209,680
------------ ------------ ------------
Net cash from operating activities 6,770,889 4,456,829 5,860,449
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment and mortgage-backed securities
available for sale
Proceeds from sales 37,052,332 43,293,998 20,683,939
Proceeds from maturities, calls
and principal paydowns 41,984,709 9,480,126 2,782,904
Purchases (85,697,887) (50,050,159) (74,984,501)
Investment and mortgage-backed securities
held to maturity
Proceeds from maturities, calls
and principal paydowns 16,437,655 7,225,191 25,571,016
Purchases (4,000,000)
Net decrease (increase) in Federal Funds sold (1,355,275) 2,360,909 (1,128,407)
Purchases of Federal Home Loan Bank Stock (330,000) (1,084,200)
Sale of Federal Home Loan Bank Stock 830,000
Net increase in loans (69,583,011) (30,678,497) (15,351,087)
Premises and equipment expenditures, net (190,159) (2,063,256) (460,180)
------------ ------------ ------------
Net cash from investing activities (60,521,636) (24,761,688) (43,970,516)
------------ ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-7
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
STATEMENTS OF CASH FLOWS (Continued)
Years ended June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 22,527,779 21,199,868 15,151,770
Net change in advances by borrowers
for taxes and insurance 282,268 (16,448) (230,556)
Net change in repurchase agreements 44,430,000 16,000,000
Proceeds from FHLB borrowings 57,075,000 59,550,000 82,078,100
Repayment of FHLB borrowings (70,652,924) (77,229,912) (58,435,754)
------------ ------------ ------------
Net cash from financing activities 53,662,123 19,503,508 38,563,560
------------ ------------ ------------
Net change in cash and cash equivalents (88,624) (801,351) 453,493
Cash and cash equivalents at beginning
of year 6,757,030 7,558,381 7,104,888
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,668,406 $ 6,757,030 $ 7,558,381
============ ============ ============
Supplemental disclosures of cash flow
information
Cash paid during the year for
Interest $ 25,126,685 $ 23,215,732 $ 22,182,972
Income taxes 2,745,000 1,200,000 1,895,000
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-8
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: First Federal Savings and Loan Association of Warren is a
- ------------
federally chartered mutual thrift association operating in Trumbull and Mahoning
Counties, Ohio. The Association is engaged in the business of banking with
operations conducted through its main office in Warren, Ohio and eleven branch
locations and two loan production offices. The Association originates and holds
residential, consumer and commercial loans and also offers a variety of deposit
products to customers. The majority of the Association's income is derived from
one- to four-family residential real estate loans and mortgage-backed
securities.
Use of Estimates in Preparation of Financial Statements: In preparing financial
- -------------------------------------------------------
statements, management must make estimates and assumptions. These estimates and
assumptions affect the amounts reported for assets, liabilities, revenues and
expenses as well as affecting the disclosures provided. Future results could
differ from current estimates. Areas involving the use of management's
estimates and assumptions primarily include the allowance for loan losses, the
realization of deferred tax assets, fair value of certain securities and the
determination and carrying value of impaired loans.
Cash Reserves: At June 30, 1998, the Association was required to have $100,000
- -------------
on deposit with a correspondent bank. This deposit does not earn interest.
Investment Securities: Securities are classified into held-to-maturity and
- ---------------------
available-for-sale categories. Held-to-maturity securities are those that the
Association has the positive intent and ability to hold to maturity, and are
reported at amortized cost. Available-for-sale securities are those that the
Association may decide to sell if needed for liquidity, asset-liability
management, or other reasons. Available-for-sale securities are reported at
fair value, with unrealized gains or losses included as a separate component of
equity, net of tax.
Realized gains or losses on sales are determined based on the amortized cost of
the specific security sold. Amortization of premiums and accretion of discounts
are computed under a system materially consistent with the level yield method
and are recognized as adjustments to interest income. Prepayment activity on
mortgage-backed securities is affected primarily by changes in interest rates.
Yields on mortgage-backed securities are adjusted as prepayments occur through
changes to premium amortization or discount accretion.
- --------------------------------------------------------------------------------
(Continued)
F-9
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Interest income on loans is accrued over the term of the loans based
- -----
upon the principal outstanding. The accrual of interest on loans is suspended
when a loan is 90 days or more past due or when, in management's opinion, the
collection of all or a portion of the loan principal has become doubtful. When
a loan is placed on nonaccrual status, accrued and unpaid interest at risk is
charged against income. Under Statement of Financial Accounting Standards
("SFAS") No. 114, as amended by SFAS No. 118, the carrying value of impaired
loans is periodically adjusted to reflect cash payments, revised estimates of
future cash flows and increases in the present value of expected cash flows due
to the passage of time. Cash payments representing interest income are reported
as such and other cash payments are reported as reductions in carrying value.
Increases or decreases in carrying value due to changes in estimates of future
payments or the passage of time are reported as reductions or increases in bad
debt expense.
Loan fees, net of direct loan origination costs, are deferred and recognized
over the life of the loan as a yield adjustment.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
- -------------------------
allowance for loan losses is maintained. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the risk
of the loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations including their financial position and collateral values, and other
factors and estimates which are subject to change over time. While management
may periodically allocate portions of the allowance for specific problem-loan
situations, the whole allowance is available for any loan charge-offs that
occur. A loan is charged-off against the allowance by management when deemed
uncollectible, although collection efforts continue and future recoveries may
occur.
Effective July 1, 1995, the Association adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114 requires that the carrying
values of impaired loans be determined by calculating the present value of
estimated future cash flows, discounted using the loan's effective interest
yield. A loan is impaired when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. SFAS No. 118 was issued in October 1994 and amends SFAS No. 114 to
allow a creditor to use existing methods to recognize income on impaired loans.
SFAS No. 114 and SFAS No. 118 did not materially affect the Association's
financial condition or results of operations.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one- to four-family
residences, residential construction loans and automobile, home equity and
second mortgages. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment.
- --------------------------------------------------------------------------------
(Continued)
F-10
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
When analysis of borrower operating results and financial condition indicates
that underlying cash flows of the borrower's business are not adequate to meet
its debt service requirements, the loan is evaluated for impairment. Often this
is associated with a delay or shortfall in payments of 30 days or more. Loans
are generally moved to nonaccrual status when 90 days or more past due or when
collection of principal or interest is in doubt. These loans are often also
considered impaired. Impaired loans, or portions thereof, are charged off when
deemed uncollectible. The nature of disclosures for impaired loans is considered
generally comparable to prior nonaccrual and renegotiated loans and non-
performing and past-due asset disclosures.
Real Estate Owned: Real estate owned, other than that which is used in the
- -----------------
normal course of business, is recorded at fair value less estimated costs to
sell. For real estate acquired through foreclosure, any initial loss is
recorded as a charge to the allowance for loan losses before being transferred
to real estate owned. Any subsequent reduction in fair value is recognized in a
valuation allowance by charges to income.
Premises and Equipment: Office properties and equipment are stated at cost less
- ----------------------
accumulated depreciation. Depreciation is computed based on both the straight-
line method and the accelerated method over the estimated useful lives of the
respective properties and equipment, which range from 5 to 30 years. Maintenance
and repairs are expensed and major improvements are capitalized.
Income Taxes: The Association records income tax expense based on the amount of
- ------------
tax due on its tax return plus deferred taxes computed based on the expected
future tax consequences of temporary differences between the carrying amounts
and tax bases of assets and liabilities, using enacted tax rates. The provision
for income taxes is based on the effective tax rate expected to be applicable
for the entire year.
Concentrations of Credit Risk: The Association grants residential, consumer and
- -----------------------------
commercial loans to customers located primarily in Trumbull and surrounding
counties in Ohio. Real estate mortgage loans make up approximately 82% of the
Association's loan portfolio and the remaining 18% is made up of consumer and
commercial loans. The Association, in the normal course of business, makes
commitments to make loans that are not reflected in the financial statements.
Statement of Cash Flows: For purposes of this statement, cash and cash
- -----------------------
equivalents are defined to include the Association's cash on hand and due from
banks. The Association reports net cash flows for customer loan transactions,
deposit transactions, repurchase agreements transactions and federal funds sold.
Reclassifications: Certain items in the 1997 and 1996 financial statements have
- ------------------
been reclassified to conform with the 1998 presentation. Such reclassifications
had no effect on the net results of operations.
- --------------------------------------------------------------------------------
(Continued)
F-11
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair values
of investment securities at June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Available for sale
Investment securities
U.S. Government agencies $ 15,733,962 $ 63,519 $ 567 $ 15,796,914
Federal Home Loan Bank stock 4,414,500 4,414,500
Obligations of states and
political subdivisions 826,127 27,226 853,353
------------ ---------- -------- ------------
Total 20,974,589 90,745 567 21,064,767
------------ ---------- -------- ------------
Mortgage-backed securities and
collateralized mortgage obligations
FHLMC 99,493,537 1,470,722 66,163 100,898,096
FNMA 49,958,930 1,095,359 536,341 50,517,948
GNMA 37,354,752 375,622 16,455 37,713,919
Other 987,346 2,902 990,248
------------ ---------- -------- ------------
Total 187,794,565 2,944,605 618,959 190,120,211
------------ ---------- -------- ------------
$208,769,154 $3,035,350 $619,526 $211,184,978
============ ========== ======== ============
HELD TO MATURITY
Investment securities
U.S. Treasury securities $ 6,004,462 $ 12,938 $ 3,640 $ 6,013,760
U.S. Government agencies 4,147,358 33,268 4,180,626
Obligations of states and
political subdivisions 364,203 32,108 396,311
------------ ---------- -------- ------------
Total 10,516,023 78,314 3,640 10,590,697
------------ ---------- -------- ------------
Mortgage-backed securities and
collateralized mortgage obligations
FNMA 16,266,909 210,027 110,026 16,366,910
GNMA 1,511,916 49,462 1,561,378
------------ ---------- -------- ------------
Total 17,778,825 259,489 110,026 17,928,288
------------ ---------- -------- ------------
$ 28,294,848 $ 337,803 $113,666 $ 28,518,985
============ ========== ======== ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-12
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Available for sale
Investment securities
U.S. Government agencies $ 34,011,694 $ 73,846 $ 407,560 $ 33,677,980
Federal Home Loan Bank stock 4,892,700 4,892,700
Obligations of states and
political subdivisions 825,316 12,649 837,965
Equity securities 3,216,426 236,184 2,980,242
------------ ---------- ---------- ------------
Total 42,946,136 86,495 643,744 42,388,887
------------ ---------- ---------- ------------
Mortgage-backed securities and
collateralized mortgage obligations
FHLMC 60,892,819 553,578 555,331 60,891,066
FNMA 57,604,132 1,055,564 771,678 57,888,018
GNMA 39,493,035 340,681 11,197 39,822,519
Other 1,655,228 30,851 1,686,079
------------ ---------- ---------- ------------
Total 159,645,214 1,980,674 1,338,206 160,287,682
------------ ---------- ---------- ------------
$202,591,350 $2,067,169 $1,981,950 $202,676,569
============ ========== ========== ============
HELD TO MATURITY
Investment securities
U.S. Treasury securities $ 14,004,878 $ 599 $ 54,837 $ 13,950,640
U.S. Government agencies 4,238,818 2,081 5,273 4,235,626
Obligations of states and
political subdivisions 405,088 34,249 439,337
------------ ---------- ---------- ------------
Total 18,648,784 36,929 60,110 18,625,603
------------ ---------- ---------- ------------
Mortgage-backed securities and
collateralized mortgage obligations
FNMA 24,283,597 73,909 177,438 24,180,068
GNMA 1,942,506 50,288 1,992,794
------------ ---------- ---------- ------------
Total 26,226,103 124,197 177,438 26,172,862
------------ ---------- ---------- ------------
$ 44,874,887 $ 161,126 $ 237,548 $ 44,798,465
============ ========== ========== ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-13
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES (Continued)
The amortized cost and estimated fair value of debt securities at June 30, 1998,
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
------------ ------------
<S> <C> <C>
AVAILABLE FOR SALE
Due in one year or less $ 9,552,400 $ 9,575,038
Due after one year through five years 7,007,689 7,075,229
------------ ------------
16,560,089 16,650,267
Mortgage-backed securities and
collateralized mortgage obligations 187,794,565 190,120,211
Federal Home Loan Bank stock 4,414,500 4,414,500
------------ ------------
$208,769,154 $211,184,978
============ ============
HELD TO MATURITY
Due in one year or less $ 6,044,517 $ 6,054,319
Due after one year through five years 4,308,691 4,352,783
Due after five years through ten years 162,815 183,595
------------ ------------
10,516,023 10,590,697
Mortgage-backed securities and
collateralized mortgage obligations 17,778,825 17,928,288
------------ ------------
$ 28,294,848 $ 28,518,985
============ ============
</TABLE>
Proceeds from the sale of debt securities for the years ended June 30, 1998 and
1997 were $34,009,566 and $43,293,998. Gross gains of $472,837 and $ 76,317
and gross losses of $164,038 and $1,010,467 were realized on sales of securities
in 1998 and 1997. Proceeds from the sale of equity securities for the year
ended June 30, 1998 were $3,042,766, resulting in gross loss of $173,661.
- --------------------------------------------------------------------------------
(Continued)
F-14
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES (Continued)
Investment and mortgage-backed securities with a carrying value of $103,493,000
and $27,517,152 as of June 30, 1998 and 1997 were pledged to secure public
deposits, repurchase agreements and for other purposes as required or permitted
by law.
NOTE 3 - LOANS
Loans as presented on the balance sheet are comprised of the following
classifications at June 30:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Real estate mortgage loans
One- to four- family $267,949,898 $215,548,836
Multifamily 4,481,617 2,292,969
Commercial 8,626,770 6,787,635
Construction 6,301,000 5,376,444
Home equity 9,189,216 9,822,022
------------ ------------
296,548,501 239,827,906
------------ ------------
Consumer loans
Automobile 52,846,731 43,172,395
Other 11,242,663 6,521,390
------------ ------------
64,089,394 49,693,785
------------ ------------
Commercial loans 2,586,649 2,067,758
Less:
Loans in process 5,865,902 3,339,387
Net deferred loan origination fees 1,319,278 1,315,667
Allowance for loan losses 3,026,930 1,722,770
------------ ------------
10,212,110 6,377,824
------------ ------------
$353,012,434 $285,211,625
============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-15
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period $1,722,770 $1,258,829 $1,186,076
Provision for loan losses 1,778,591 590,395 238,239
Charge-offs (515,000) (138,000) (236,000)
Recoveries 40,569 11,546 70,514
---------- ---------- ----------
Balance at end of period $3,026,930 $1,722,770 $1,258,829
========== ========== ==========
</TABLE>
Nonaccrual loans totaled $2,143,000, $2,480,000 at June 30, 1998 and 1997.
Interest not recognized on nonaccrual loans totaled approximately $94,400,
$172,000 and $109,000 for the years then ended June 30, 1998, 1997 and 1996.
There were no impaired loans at June 30, 1998 and 1997 or during the fiscal
years ended June 30, 1998, 1997 and 1996.
NOTE 4 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Association has granted loans to
executive officers, directors, and their related business interests. A summary
of related party loan activity is as follows for the year ended June 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of period $695,688
New loans 343,145
Repayments (59,995)
--------
Balance at end of period $978,838
========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-16
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land and improvements $ 1,076,403 $ 1,076,403
Buildings and improvements 4,522,645 4,499,798
Leasehold improvements 959,540 948,618
Furniture and equipment 6,466,648 6,257,427
Construction in process 137,376 190,207
----------- -----------
Total cost 13,162,612 12,972,453
Accumulated depreciation (7,263,799) (6,526,073)
----------- -----------
$ 5,898,813 $ 6,446,380
=========== ===========
</TABLE>
At June 30, 1998, the Association is obligated for rental commitments under non-
cancelable operating leases on real estate and equipment as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 344,576
2000 262,076
2001 214,753
2002 210,451
2003 186,451
Thereafter 1,274,243
----------
$2,492,550
==========
</TABLE>
NOTE 6 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at June 30, is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Investment securities $ 461,348 $ 647,200
Mortgage backed
and related securities 1,061,572 956,187
Loans receivable 312,416 285,611
---------- ----------
$1,835,336 $1,888,998
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-17
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Noninterest-bearing demand $ 5,216,944 $ 4,066,290
Savings 67,401,498 71,191,247
NOW 34,140,895 32,699,421
Money Market 68,733,365 57,801,995
Certificates of deposit 259,969,021 247,174,991
------------ ------------
$435,461,723 $412,933,944
============ ============
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 is $53,224,874 and $42,399,697 at June 30, 1998 and 1997. Deposits in
excess of $100,000 are not insured by the FDIC.
At June 30, 1998, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $167,818,397
2000 51,160,680
2001 17,703,267
2002 6,715,124
2003 1,633,548
Thereafter 14,938,005
------------
$259,969,021
============
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Savings $ 1,661,053 $ 1,782,357 $ 2,012,822
NOW 556,529 591,428 634,090
Money Market 2,743,742 2,109,814 1,308,307
Certificates of deposit 14,898,302 14,011,761 13,926,169
----------- ----------- -----------
$19,859,626 $18,495,360 $17,881,388
=========== =========== ===========
</TABLE>
NOTE 8 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are secured by mortgage-backed
securities with a carrying value and fair value of approximately $62,608,000 at
June 30, 1998 and $16,836,000 at June 30, 1997.
Securities sold under agreements to repurchase are financing arrangements that
mature within three years. Information concerning securities sold under
agreements to repurchase is summarized as follows:
- --------------------------------------------------------------------------------
(Continued)
F-18
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 8 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Continued)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Average daily balance during the year $45,044,000 $ 8,470,000
Average interest rate during the year 5.76% 5.67%
Maximum month-end balance during the year $60,430,000 $16,000,000
</TABLE>
NOTE 9 - ADVANCES FROM FEDERAL HOME LOAN BANK
The association had the following outstanding Federal Home Loan Bank ("FHLB")
advances at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998
----------------------------------
Rate at
Amount June 30, Maturity
----------- --------- ----------
<S> <C> <C> <C>
LIBOR indexed advance $20,000,000 5.54% 06/30/2000
LIBOR indexed advance 6,000,000 5.59 12/01/2000
Amortizing term advance 1,668,719 5.20 05/01/2003
Amortizing term advance 1,147,881 5.30 07/01/2003
Amortizing term advance 1,178,121 5.20 09/01/2003
Amortizing term advance 3,258,081 6.30 02/01/2007
Amortizing term advance 4,013,449 6.05 12/01/2010
Amortizing term advance 7,553,809 6.05 12/01/2010
-----------
$44,820,060
===========
1997
----------------------------------
Cash management advance $ 675,000 5.75% 9/23/1997
Cash management advance 175,000 5.75 9/25/1997
Cash management advance 650,000 5.75 9/26/1997
LIBOR indexed advance 20,000,000 5.54 6/30/2000
LIBOR indexed advance 6,000,000 5.59 12/1/2000
Amortizing term advance 1,959,068 5.20 5/1/2003
Amortizing term advance 1,339,586 5.30 7/1/2003
Amortizing term advance 1,368,367 5.20 9/1/2003
Amortizing term advance 3,964,467 6.30 2/1/2007
Amortizing term advance 4,444,364 6.05 12/1/2010
Amortizing term advance 8,364,844 6.05 12/1/2010
Amortizing term advance 9,457,288 6.20 12/1/2010
-----------
$58,397,984
===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-19
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 9 - ADVANCES FROM FEDERAL HOME LOAN BANK (Continued)
Amortizing term advances are FHLB advances which have a fixed interest rate for
a fixed term, on which the principal balance of the advance is reduced by the
monthly payments. At June 30, 1998, scheduled principal payments on FHLB
advances are as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
<S> <C>
1999 $ 2,185,521
2000 22,188,640
2001 8,197,754
2002 2,212,920
2003 2,202,090
Thereafter 7,833,135
-----------
$44,820,060
===========
</TABLE>
All advances are collateralized by the Association's FHLB stock and residential
mortgage loans totaling $67,230,000 and $87,597,000 at June 30, 1998 and 1997.
Based on the Association investment in FHLB stock, the maximum dollar amount of
FHLB advance borrowings available at June 30, 1998 was $88,290,000.
NOTE 10 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Current provision $2,918,267 $1,200,000 $2,052,739
Deferred provision (benefit) (420,339) 15,175 209,680
---------- ---------- ----------
$2,497,928 $1,215,175 $2,262,419
========== ========== ==========
</TABLE>
The differences between the financial statement provision and amounts computed
by applying the statutory federal income tax rate of 34% to income before taxes
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income tax computed at the
statutory federal rate $2,301,892 $1,169,334 $2,179,981
Add (subtract) tax effect of
miscellaneous items 196,036 45,841 82,438
---------- ---------- ----------
$2,497,928 $1,215,175 $2,262,419
========== ========== ==========
Effective tax rate 38.0% 35.3% 35.3%
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-20
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (Continued)
The tax effects of principal temporary differences and the resulting deferred
tax assets and liabilities that comprise the net deferred tax balance are as
follows at June 30:
<TABLE>
<CAPTION>
1998 1997
------------- -----------
<S> <C> <C>
Items giving rise to deferred tax assets:
Deferred loan fees and costs $ 525,309 $ 472,088
Nonaccrual loan interest 32,097 58,441
Write down of marketable equity security - 51,680
Accrued retirement 137,037 160,542
Deferred compensation 68,104 26,319
Other 27,848 24,967
Items giving rise to deferred tax liabilities:
FHLB stock dividend (605,653) (596,775)
Franchise taxes (139,174) (124,272)
Depreciation (467,544) (467,544)
Bad debt (26,298) (469,712)
Unrealized gain on securities available for sale (821,379) (28,974)
Other (26,214) (30,561)
------------ ----------
Net deferred liability ($1,295,867) ($923,801)
============ ==========
</TABLE>
The Association has sufficient taxes paid in prior years and available for
recovery to warrant recording the full deferred tax asset without a valuation
allowance.
Retained earnings at June 30, 1998, include approximately $11,600,000 for which
no provision for federal income taxes has been made. This amount represents the
tax bad debt reserve at June 30, 1988, which is the end of the Association's
base year for purposes of calculating the bad debt deduction for tax purposes.
If this portion of retained earnings is used in the future for any purpose other
than to absorb bad debts, the amount used will be added to future taxable
income. The unrecorded deferred tax liability on the above amount at June 30,
1998 was approximately $3,900,000.
Tax expense (benefit) attributable to securities gains (losses) approximated
$46,000, ($318,000) and ($9,000) for the years ended June 30, 1998, 1997 and
1996.
- --------------------------------------------------------------------------------
(Continued)
F-21
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Association sponsors a defined benefit pension plan that covers
substantially all employees. The plan calls for benefits to be paid to eligible
employees at retirement based primarily upon years of service with the
Association and compensation rates near retirement. Contributions to the plan
reflect benefits attributed to employees' services to date, as well as services
expected to be earned in the future. Plan assets consist primarily of
certificates of deposits with the Association and insurance contracts.
The following sets forth the funded status of the plan as of March 31, 1998 and
1997 and the amounts recognized in the accompanying Statements of Financial
Condition at June 30, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Present values using actuarial assumptions:
Accumulated benefit obligation, based on current
compensation:
Vested $ 2,044,689 $ 2,369,415
Non vested 80,459 49,936
----------- -----------
Total $ 2,125,148 $ 2,419,351
=========== ===========
Projected benefit obligation, using compensation
increase assumptions $ 3,943,041 $ 3,744,281
Plan assets at fair value 1,415,664 2,032,070
----------- -----------
Projected benefit obligation in excess of plan assets (2,527,377) (1,712,211)
Unrecognized obligation from accounting transition 158,537 105,120
Unrecognized net gain in assumptions or plan assets 1,619,661 904,860
----------- -----------
Recorded pension liability $ 749,179 $ 702,231
=========== ===========
</TABLE>
Pension expense and related year-end assumptions consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ----------- -----------
<S> <C> <C> <C>
Service cost--benefits earned $225,414 $ 230,080 $ 186,752
Interest cost on benefit obligation 224,829 232,512 202,334
Actual return on plan assets (34,891) (133,399) (119,357)
Net amortization and deferral (41,800) 21,779 2,042
-------- ----------- -----------
Pension expense $373,552 $ 350,972 $ 271,771
======== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-22
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Weighted average discount rate 6.93% 6.93% 6.60%
Rate of increase in future compensation 5.00% 5.00% 5.00%
Expected long-term return on plan assets 7.00% 7.00% 7.00%
</TABLE>
The Association also sponsors a salary reduction profit sharing plan under
section 401(k) of the Internal Revenue Code. The plan covers substantially all
full-time employees. Contributions to the plan are based on the salary
reduction of the participants and a matching contribution at the discretion of
the Association. The expense related to this plan was $54,000, $58,000 and
$48,000 for the years ended June 30, 1998, 1997 and 1996.
NOTE 12 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
The Association is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to make loans. The
Association's exposure to credit loss in case of nonperformance by the other
party to the financial instrument for commitments to make loans is represented
by the contractual amount of those instruments. The Association follows the
same credit policy to make such commitments as is followed for those loans
recorded in the financial statements.
As of June 30, 1998, variable rate commitments to make loans or fund outstanding
lines of credit amounted to approximately $1.9 million and fixed-rate
commitments amounted to $22.0 million. The interest rates on variable-rate
commitments ranged from 6.625% to 7.375% and interest rates on fixed-rate
commitments ranged from 6.625% to 8.5% at June 30, 1998. As of June 30, 1997,
commitments to extend credit totaled approximately $13.9 million. Since loan
commitments may expire without being used, the amounts do not necessarily
represent future cash commitments.
NOTE 13 - SAVINGS ASSOCIATION INSURANCE FUND RECAPITALIZATION
Included in federal deposit insurance premium expense in the Statement of Income
for the year ended June 30, 1997 is $2,461,000 for a special assessment
resulting from legislation passed and enacted into law on September 30, 1996 to
recapitalize the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation. Thrifts such as the Association paid a one-time
assessment in November, 1996 of $0.657 for each 100 in deposits as of March 31,
1995. Because of the recapitalization, the Association began paying lower
deposit insurance premiums in January, 1997.
- --------------------------------------------------------------------------------
(Continued)
F-23
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 14 - REGULATORY CAPITAL
The Association is subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
Capital to risk-
weighted assets
----------------- Tier 1 capital
Total Tier 1 to average assets
------- -------- ------------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
At June 30, 1998, management believes the Association complies with all
regulatory capital requirements. Based on the computed regulatory capital
ratios, the Association is considered well capitalized under the Federal Deposit
Insurance Act. No conditions or events have occurred after June 30, 1998 that
management believes have changed the Associations category.
- --------------------------------------------------------------------------------
(Continued)
F-24
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 14 - REGULATORY CAPITAL (Continued)
At year end, actual capital levels (in millions) and minimum required levels
were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
---------------- ------------------ --------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- --------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
1998
- ----
Total capital (to risk weighted assets) $60,418 21.8% $22,134 8.0% $27,667 10.0%
Tier 1 capital (to risk weighted assets) $57,763 20.9% $11,067 4.0% $16,600 6.0%
Tier 1 capital (to adjusted total assets) $57,763 9.5% $24,279 4.0% $30,349 5.0%
Tangible capital (to adjusted total assets) $57,763 9.5% $ 9,105 1.5% N/A
1997
- ----
Total capital (to risk weighted assets) $54,967 23.8% $18,434 8.0% $23,043 10.0%
Tier 1 capital (to risk weighted assets) $53,659 23.3% $ 9,217 4.0% $13,826 6.0%
Tier 1 capital (to adjusted total assets) $53,659 9.8% $21,905 4.0% $27,381 5.0%
Tangible capital (to adjusted total assets) $53,659 9.8% $ 8,214 1.5% N/A
</TABLE>
A reconciliation of GAAP capital at June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Total Tier I Tangible
------- -------- --------
<S> <C> <C> <C>
GAAP Capital $59,357 $59,357 $59,357
Unrealized loss on securities available for sale (1,594) (1,594) (1,594)
Allowable allowance for loan losses 2,655
-------
$60,418 $57,763 $57,763
======= ======= =======
</TABLE>
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair value and the related carrying
value of the Associations financial instruments at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 6,668,000 $ 6,668,000 $ 6,757,000 $ 6,757,000
Federal Funds sold 1,565,000 1,565,000 210,000 210,000
Securities available
for sale 211,185,000 211,185,000 202,677,000 202,677,000
Securities held to
maturity 28,295,000 28,519,000 44,875,000 44,798,000
Loans receivable, net 353,012,000 368,109,000 285,212,000 283,734,000
Accrued interest receivable 1,835,000 1,835,000 1,889,000 1,889,000
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-25
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
LIABILITIES
<S> <C> <C> <C> <C>
Demand and savings deposits (175,493,000) (175,493,000) (165,725,000) (165,725,000)
Time deposits (259,969,000) (260,580,000) (247,175,000) (246,722,000)
Repurchase agreements (60,430,000) (60,888,000) (16,000,000) (16,000,000)
FHLB advances (44,820,000) (44,774,000) (58,398,000) (58,288,000)
Advances by borrowers
for taxes and insurance (1,983,000) (1,983,000) (1,701,000) (1,701,000)
Accrued interest payable (1,090,000) (1,090,000) (704,000) (704,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used. The estimated fair value for cash and cash equivalents
and federal funds sold is considered to approximate cost. The estimated fair
value of investment and mortgage-backed securities is based on quoted market
values for the individual securities or for equivalent securities. Carrying
value is considered to approximate fair value for loans that contractually
reprice at intervals of six months or less, for short-term borrowings, for
deposit liabilities subject to immediate withdrawal and accrued interest. The
fair values of fixed rate loans, loans that reprice less frequently than each
six months, time deposits and Federal Home Loan Bank borrowings have been
approximated by a discount rate value technique utilizing estimated market
interest rates as of June 30, 1998 and 1997. The fair values of unrecorded
commitments at June 30, 1998 and 1997 are not material.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Association to
have disposed of such items at June 30, 1998 and 1997, the estimated fair values
would necessarily have been achieved at these dates, since market values may
differ depending on various circumstances. The estimated fair values at June
30, 1998 and 1997 should not necessarily be considered to apply at subsequent
dates.
Other assets and liabilities of the Association may have value but are not
included in the above disclosures, such as property and equipment. In addition,
nonfinancial instruments typically not recognized in these financial statements
nevertheless may have value, but are not included in the above disclosures.
These include, among other items, the estimated earnings power of core deposit
accounts, the earnings potential of loan servicing rights, the value of a
trained work force, customer goodwill, and similar items.
- --------------------------------------------------------------------------------
(Continued)
F-26
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 16 - ADOPTION OF PLAN OF CONVERSION
On June 15, 1998, the Board of Directors of the Association, subject to
regulatory approval and approval by the members of the Association, unanimously
adopted a Plan of Conversion from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan association with the
concurrent formation of a holding company. The Holding Company will acquire 100
percent of the Association's common stock. The conversion is expected to be
accomplished through amendment of the Association's charter and the sale of the
Holding Company's common stock in an amount equal to the pro forma market value
of the Association after giving effect to the conversion. A subscription
offering of the shares of the Holding Company's common stock will be offered to
the Association's depositors, then to an employee stock benefit plan and then to
other members. Any shares of the Holding Company's common stock not sold in the
subscription offering may be offered for sale to the general public.
In connection with the Association's Plan of Conversion, the Association
intends to establish a charitable foundation. The foundation will be funded
concurrent with the sale of Common Stock sold in the Conversion through a
contribution of the Company stock.
At the time of the conversion, the Association will establish a liquidation
account in the amount equal to its regulatory capital as of the latest
practicable date before the conversion at which such regulatory capital can be
determined. The liquidation account will be maintained for the benefit of
eligible depositors who continue to maintain their accounts at the Association
after the conversion. The liquidation account will be reduced annually to the
extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The Association may not pay dividends that would reduce
stockholders' equity below the required liquidation account balance.
Under Office of Thrift Supervision (OTS) regulations, limitations have been
imposed on all "capital distributions" by savings institutions, including cash
dividends. The regulation establishes a three-tiered system of restrictions,
with the greatest flexibility afforded to thrifts that are both well capitalized
and given favorable qualitative examination ratings by the OTS.
Conversion costs will be deferred and deducted from the proceeds of the shares
sold in the conversion. If the conversion is not completed, all costs will be
charged to expense. At June 30, 1998, no costs have been deferred or expensed.
- --------------------------------------------------------------------------------
F-27
<PAGE>
<TABLE>
<CAPTION>
================================================================= ==========================================================
<S> <C>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS
CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE
HEREBY, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY FIRST PLACE FINANCIAL CORP., FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF WARREN OR CHARLES WEBB & COMPANY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY 9,077,065 Shares
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FIRST
PLACE FINANCIAL CORP. OR FIRST FEDERAL SAVINGS AND LOAN FIRST PLACE FINANCIAL CORP.
ASSOCIATION OF WARREN SINCE ANY OF THE DATES AS OF WHICH
INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF. (Proposed Holding Company for
First Federal Savings and Loan Association of Warren)
____________________________
TABLE OF CONTENTS
Page
----
Summary of the Conversion and the Offerings.................. 4 COMMON STOCK
Selected Financial and Other Data of the (par value $0.01 per share)
Association .............................................. 10
Summary of Recent Developments............................... 12
Management's Discussion and Analysis of Recent
Developments ............................................. 14
Risk Factors................................................. 16
First Place Financial Corp................................... 26 __________
First Federal Savings and Loan Association of Warren......... 26
Regulatory Capital Compliance................................ 28 PROSPECTUS
Use of Proceeds.............................................. 29 __________
Dividend Policy.............................................. 30
Market for the Common Stock.................................. 31
Capitalization............................................... 32
Pro Forma Data............................................... 33
Comparison of Valuation and Pro Forma Information
with No Foundation.......................................... 36
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 37
Business of the Company...................................... 50
Business of the Association.................................. 50
Federal and State Taxation................................... 72
Regulation................................................... 74
Management of the Company.................................... 81
Management of the Association................................ 82
The Conversion............................................... 95
Restrictions on Acquisition of the
Company and the Association............................... 117
Description of Capital Stock of the Company.................. 123
Description of Capital Stock of the Association.............. 124
Transfer Agent and Registrar................................. 125 CHARLES WEBB & COMPANY
Change in Accountants........................................ 125 A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
Experts...................................................... 125
Legal and Tax Opinions....................................... 125
Additional Information....................................... 126
Index to Financial Statements................................ F-1
____________________________
UNTIL DECEMBER 15, 1998 OR 25 DAYS AFTER COMMENCEMENT OF
THE SYNDICATED COMMUNITY OFFERING, IF ANY, WHICHEVER IS November 12, 1998
LATER, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, 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.
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