<PAGE>
File Pursuant to Rule 424(b)(3)
Registration No. 333-64089
PROSPECTUS
GRAND CENTRAL FINANCIAL CORP.
(Proposed Holding Company for
Central Federal Savings and Loan Association of Wellsville)
From 1,445,000 to 1,955,000 Shares of Common Stock
This offering is made as part of the plan of conversion of Central
Federal Savings and Loan Association of Wellsville, Wellsville, Ohio, from a
mutual to a stock association. In this conversion, the Association will
become a wholly owned subsidiary of Grand Central Financial Corp. No shares
will be sold if the minimum number of shares are not subscribed for or if the
necessary approvals from the banking regulatory authorities and the members
of the Association are not received.
There is currently no public market for the common stock. The
Company has applied to have its common stock listed on the Nasdaq SmallCap
Market, under the symbol "GCFC", upon completion of the conversion. However,
if the Company, after the Offerings, qualifies to be listed on the Nasdaq
National Market, it will take steps to do so.
Investing in the common stock involves certain risks. See "Risk
Factors" beginning on page 12.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE OFFICE OF
THRIFT SUPERVISION OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES
COMMISSION, NOR HAS SUCH COMMISSION OFFICE OR OTHER AGENCY OR SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE SHARES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED
OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENT AGENCY NOR ARE THEY INSURED OR GUARANTEED BY THE ASSOCIATION OR
THE COMPANY. THE COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL INVESTED.
<TABLE>
<CAPTION>
Minimum Maximum
1,445,000 1,955,000
Per Share Shares Shares(1)
----------------------- ---------------------- ------------------
<S> <C> <C> <C>
Public offering price........................... $10.00 $14,450,000 $19,550,000
Estimated underwriting commissions
and other expenses......................... $0.42 to $0.53 $765,800 $826,800
Estimated proceeds to Company................... $9.47 to $9.58 $13,684,200 $18,723,200
</TABLE>
- ---------------------
(1) Subject to changes in market conditions and the approval of the Office of
Thrift Supervision, up to 2,248,250 shares, or an additional 15% above the
maximum number of shares, may be issued.
The shares are offered first in a Subscription Offering to persons who
have specified priorities of subscription rights based on their relationship
with the Association. In order to purchase shares pursuant to a subscription
right, you must submit a properly completed subscription order form and
certification, together with payment for the shares, to the Association prior
to the expiration date, 12:00 noon, Eastern time, on December 18, 1998,
unless extended.
To the extent sufficient shares to complete the conversion are not sold
in the Subscription Offering, the remaining shares will be offered for sale
in a Community Offering and, if necessary, other public offering.
Charles Webb & Company, a division of Keefe, Bruyette & Woods, Inc. has
agreed to assist the Company in selling the shares, but does not guarantee
that at least the minimum number of shares will be sold.
- ----------------------------------------------------------------------
Charles Webb & Company
a Division of Keefe, Bruyette & Woods, Inc.
- ----------------------------------------------------------------------
The date of this Prospectus is November 12, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary ...............................................................................4
Selected Financial and Other Data of the Association...................................10
Risk Factors...........................................................................12
Recent Developments....................................................................18
Management's Discussion and Analysis of Recent Developments............................20
Grand Central Financial Corp...........................................................22
Central Federal Savings and Loan Association of Wellsville.............................22
Regulatory Capital Compliance..........................................................24
Use of Proceeds........................................................................25
Dividend Policy........................................................................26
Market for the Common Stock............................................................27
Capitalization.........................................................................28
Pro Forma Data.........................................................................29
Management's Discussion and Analysis of Financial Condition and Results of Operations..34
Business of the Association............................................................47
Federal and State Taxation.............................................................67
Regulation.............................................................................69
Management of the Company..............................................................76
Management of the Association..........................................................76
The Conversion.........................................................................87
Restrictions on Acquisition of the Company and the Association........................105
Description of Capital Stock of the Company...........................................110
Description of Capital Stock of the Association.......................................112
Transfer Agent and Registrar..........................................................112
Experts .............................................................................113
Legal and Tax Opinions................................................................113
Additional Information................................................................114
</TABLE>
This document contains forward-looking statements which involve risks
and uncertainties. Grand Central Financial Corp.'s actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" beginning on page 12 of this document.
2
<PAGE>
INSERT MAP PAGE HERE
3
<PAGE>
SUMMARY
This summary highlights selected information from this document and
does not contain all the information that you need to know before making an
informed investment decision. To understand the stock offering fully, you should
read carefully this entire Prospectus, including the financial statements and
the notes to the financial statements of Central Federal Savings and Loan
Association of Wellsville. References in this document to the "Association"
refer to Central Federal Savings and Loan Association of Wellsville. References
in this document to the "Company" refer to Grand Central Financial Corp.
Grand Central
Financial Corp.................... Grand Central Financial Corp., a
Delaware corporation, was recently
organized to become a savings and loan
holding company and own all of the
capital stock of Central Federal Savings
and Loan Association of Wellsville to be
issued upon its conversion from mutual
to stock form. To date, the Company has
not engaged in any business.
The Company's office is located at 601
Main Street, Wellsville, Ohio 43968 and
its telephone number is (330) 532-1517.
The Association's executive office has
the same address and phone number.
Central Federal Savings and Loan
Association of Wellsville........... The Association is a federally chartered
mutual savings and loan association. At
June 30, 1998, the Association had total
assets of $121.7 million, total deposits
of $78.9 million and total equity of
$14.4 million.
The Association currently operates six
banking offices in Columbiana, Mahoning
and Jefferson Counties in Ohio. The
Association historically has operated as
a community-oriented banking institution
primarily providing single-family
residential mortgage loans and a variety
of retail deposit products to consumers.
The Conversion...................... The Association has adopted a Plan of
Conversion which is subject to
requirements of the Office of Thrift
Supervision (the "OTS"), the primary
federal banking regulator of the
Association. The conversion, which
hereafter is referred to as the
"Conversion," is governed by the Plan
and has three major components:
(i) The conversion of the Association
to stock form;
(ii) The acquisition by the Company of
all of the outstanding capital
stock of the Association; and
(iii)The sale by the Company of common
stock.
The Plan of Conversion is subject to
approval by a majority of the
Association's members. For more details
regarding the Conversion, see "The
Conversion--General."
4
<PAGE>
Terms of the Offering............... The shares of common stock are 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 in the
Association as of December
31, 1996;
(ii) Employee plans, consisting of the
Employee Stock Ownership Plan of
the Company and the Association
(the "ESOP");
(iii) Supplemental Eligible Account
Holders in the Association as of
September 30, 1998 who are not
entitled to a first priority
subscription right; and
(iv) Other Members in the Association
consisting of depositors as of
October 31, 1998 and borrowers
with loans outstanding as of
January 18, 1995 which continue
to be outstanding as of October
31, 1998 who are not entitled to
a higher priority subscription
right.
Shares of common stock not subscribed
for by persons having priority
subscription rights will be offered to
certain members of the general public in
a concurrent Community Offering, with
priority given to natural persons
residing in Columbiana, Mahoning and
Jefferson Counties of Ohio. For more
information regarding the offerings, see
"The Conversion--Subscription Offering
and Subscription Rights" and
"--Community Offering."
Expiration Date of
Subscription Offering............. Subscription rights will expire if not
exercised and all orders to purchase
common stock in the Subscription
Offering must be received by 12:00 noon,
Eastern time, on December 18, 1998,
unless extended for up to 45 days by the
Association or such additional periods
with the approval of the OTS, if
required, which is the "Expiration
Date." If the minimum number of shares
is not sold by the Expiration Date, any
amounts paid will be promptly returned
to investors.
Nontransferability of
Subscription Rights............... The subscription rights are not
transferable by law.
Number of Shares Offered............ The Company is offering between a
minimum of 1,445,000 shares and a
maximum of 1,955,000 shares of common
stock, or up to an adjusted maximum of
2,248,250 shares if the maximum number
of shares is increased.
The number of shares offered is based
upon an independent appraisal prepared
by Keller & Company, Inc. ("Keller")
dated as of September 18, 1998 and
updated as of October 23, 1998, which
estimates that the aggregate pro forma
market value of the Common Stock to be
sold ranged from $14.5 million to $19.6
million. (This range is referred to as
the "Estimated Price Range"). Keller is
an independent appraisal firm
experienced in appraisals of savings
institutions.
5
<PAGE>
The final aggregate estimated pro forma
market value of the common stock to be
sold will be determined at the time of
closing of the Subscription and
Community Offerings, or if all shares
are not sold in the Subscription and
Community Offerings, the closing of the
Syndicated Community Offering. Such
estimated aggregate pro forma market
value is subject to change due to
changes in market and general financial
and economic conditions.
The maximum number of shares to be sold
may be increased by up to 15%, the
adjusted maximum, if the aggregate
estimated pro forma market value of the
common stock to be sold is increased.
How To Order Stock.................. If you are entitled to a subscription
right, you may order shares in the
Subscription Offering by delivering to
the Association a properly executed
stock order and certification form
together with full payment for the
shares ordered on or prior to the
Expiration Date. ONCE TENDERED,
SUBSCRIPTION ORDERS CANNOT BE REVOKED OR
MODIFIED WITHOUT THE CONSENT OF THE
ASSOCIATION. All order forms should be
accompanied or preceded by a Prospectus.
Please make sure you review the
Prospectus carefully. 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, 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 Association
is not obligated to accept subscriptions
submitted on anything other than an
original stock order form.
IMPORTANT: To ensure that your
subscription rights are properly
identified, you must list 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.
Persons wishing to order shares in the
Community Offering also must submit a
properly executed stock order and
certification form prior to the
expiration date for the Community
Offering.
For more information on how to order
stock, see "The Conversion--Procedure
for Purchasing Shares in Subscription
and Community Offerings."
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.
Orders for common stock in the
Subscription Offering which aggregate
$50,000 or more must be paid by official
bank or certified check or by withdrawal
authorization from a deposit account at
the Association. No wire transfers will
be accepted.
6
<PAGE>
Number of Shares that may
be Ordered...................... Minimum: 25 shares ($250).
Maximum:
- No Eligible Account Holder,
Supplemental Eligible Account Holder
or Other Member may purchase in the
Subscription Offering more than
$200,000 of common stock.
- No person, together with associates
or persons acting in concert with
such person, may purchase in the
Community Offering more than
$200,000 of common stock.
- No person, together with associates
or persons acting in concert with
such person, may purchase in the
aggregate more than $200,000 of the
common stock to be sold. However,
the ESOP may purchase up to 10% of
the Common Stock to be issued in
connection with the Conversion. It
is intended that the ESOP will
purchase 8% of the Common Stock
issued.
Use of Proceeds..................... The Company will use 50% of the net
proceeds from the sale of common stock
to purchase all of the common stock of
the Association to be issued in the
Conversion. The portion of net proceeds
retained by the Company will be used for
general business activities, including
the loan of funds to the ESOP to enable
the ESOP to purchase 8% of the stock
issued in connection with the
Conversion. The Association intends
initially to use the funds for general
corporate purposes, including investment
in single-family residential mortgage
loans and other loans and investment in
short- to intermediate-term securities
and mortgage-backed securities. In
addition, under appropriate market
conditions, the Association may repay
advances from the Federal Home Loan Bank
of Cincinnati ("FHLB-Cincinnati"). See
"Use of Proceeds."
Dividend Policy..................... No decision has been made by the Company
with respect to the payment of
dividends, if any. Additionally, the
Company and the Association have
committed to the OTS that during the
one-year period following the
Conversion, the Company will not take
any steps towards a distribution to
stockholders that, for federal tax
purposes, would be treated as a return
of capital without prior approval of the
OTS.
Benefits of the Conversion to
Management........................ Subsequent to the Conversion, the
Company intends to adopt a Stock-Based
Incentive Plan for the benefit of
directors, officers and employees of the
Company and Association. If the
Stock-Based Incentive Plan is adopted
within one year after the Conversion,
the plan will be subject to
stockholders' approval at a meeting of
stockholders which may not be held
earlier than six months after the
Conversion. The Stock-Based Incentive
Plan would provide for the award at no
cost to the recipients of shares of
common stock in an amount equal to 4% of
the common stock issued in connection
with the Conversion, and the grant of
options to purchase common stock in an
amount equal to 10% of the Common Stock
issued in the Conversion.
7
<PAGE>
Additionally, an ESOP, which is a tax
qualified plan, will be established to
provide retirement benefits to
employees. Benefits under that plan will
be distributed to eligible employees
over an approximate twelve-year period.
See the table below for the estimated
value of such benefits.
<TABLE>
<CAPTION>
Estimated Percentage
Value of Shares
of Shares(1) Issued
------------ ---------
(In thousands)
<S> <C> <C>
Employee Stock Ownership Plan........................... $1,360 8.0%
Stock-Based Incentive Plan:
Stock Awards(2)....................................... 680 4.0
Stock Options(3)...................................... -- 10.0
-------- ----
Total............................................... $2,040 22.0%
--------
--------
</TABLE>
(1) Assumes that shares are allocated to
participants at $10.00 per share and
that shares are issued in the Conversion
at the midpoint of the Estimated Price
Range.
(2) Any Common Stock awarded under the
Stock-Based Incentive Plan 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 the Company's 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.
Certain officers of the Company and the
Association will also receive employment
agreements which provide such officers
with employment rights and/or payments
upon their termination of service
following a change in control. Benefits
under such agreements may provide for up
to three times the officer's salary and
would only be paid if the officer were
terminated without cause or if the
officer voluntarily retired under
certain circumstances following a change
in control. See "Management of the
Association--Employment Agreements." The
Stock-Based Incentive Plan may also
provide participants with benefits upon
a change in control of the Company or
the Association.
Voting Control of Officers
and Directors..................... Directors and executive officers of the
Association and the Company expect to
purchase approximately 13.8% or 10.2% of
the shares of common stock to be issued
in the Conversion, based on the
estimated minimum and maximum of such
shares, respectively. Additionally,
assuming the implementation of the ESOP
and the Stock-Based Incentive Plan,
directors, executive officers and
employees have the potential to control
the voting of approximately 25.8% or
22.2% of the common stock to be issued
in the Conversion, based on the minimum
and maximum of such shares,
respectively.
8
<PAGE>
No Board Recommendations............ The Association's Board of Directors and
the Company's Board of Directors make no
recommendation to depositors or other
potential investors regarding whether
they 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 the
Conversion, please call the Conversion
Center at (330) 532-5025.
9
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF THE ASSOCIATION
The selected financial and other data of the Association set forth below is
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, At December 31,
-------------------- ---------------------------------------------------
1998(1) 1997(1) 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets......................... $121,641 $124,842 $118,265 $124,186 $110,412 $116,707 $121,643
Cash and cash equivalents............ 3,433 3,680 5,846 5,238 4,640 3,408 8,613
Loans, net(2)........................ 60,562 53,622 57,886 49,517 48,233 48,748 47,774
Securities held-to-maturity(3):
Mortgage-related securities, net.. 34,076 35,554 27,987 37,893 38,485 44,262 53,640
Investment securities, net........ 1,497 6,496 3,489 5,499 -- -- --
Securities available-for-sale(3):
Mortgage-related securities, net.. 5,947 9,411 7,629 10,093 11,871 13,945 6,956
Investment securities, net........ 10,208 10,835 10,189 10,879 2,948 2,000 678
Deposits............................. 78,909 75,339 76,983 75,828 71,991 71,274 71,218
FHLB advances........................ 27,680 34,997 26,161 34,277 24,524 32,726 38,256
Total equity......................... 14,331 13,665 14,165 13,243 13,224 12,063 11,503
Real estate owned, net............... -- -- -- -- -- -- --
Nonperforming assets and
troubled debt restructurings....... 138 117 199 45 24 126 165
</TABLE>
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
-------------------- ---------------------------------------------------
1998(1) 1997(1) 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Total interest income .......................... $ 4,412 $ 4,433 $ 8,803 $ 8,613 $ 8,117 $ 7,989 $ 7,675
Interest expense ............................... 2,536 2,656 5,273 5,197 4,771 4,372 4,401
------- ------- ------- ------- ------- ------- -------
Net interest income ......................... 1,876 1,777 3,530 3,416 3,346 3,617 3,274
Provision for loan losses ...................... 150 -- -- -- 42 48 48
------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for loan losses .......................... 1,726 1,777 3,530 3,416 3,304 3,569 3,226
Noninterest income:
Net gain (loss) on sale of securities ....... 4 -- -- (9) -- -- 192
Other ....................................... 158 115 241 178 157 253 296
------- ------- ------- ------- ------- ------- -------
Total noninterest income ................. 162 115 241 169 157 253 488
Noninterest expense(4) ......................... 1,692 1,359 2,883 3,252 2,485 2,411 2,416
------- ------- ------- ------- ------- ------- -------
Income before income taxes ..................... 196 533 888 333 976 1,411 1,298
Income taxes ................................... 45 156 207 46 307 432 407
------- ------- ------- ------- ------- ------- -------
Cumulative effect of accounting change ......... -- -- -- -- -- -- (24)
------- ------- ------- ------- ------- ------- -------
Net income ................................... $ 151 $ 377 $ 681 $ 287 $ 669 $ 979 $ 867
======= ======= ======= ======= ======= ======= =======
</TABLE>
(See footnotes on next page)
10
<PAGE>
<TABLE>
<CAPTION>
At or For the Six
Months Ended
June 30, At or for the Year Ended December 31,
------------------- -------------------------------------------------
1998(1) 1997(1) 1997 1996 1995 1994 1993
---------- -------- --------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Ratios and Other Data(5):
Performance Ratios:
Average yield on interest-earning assets(6) ...... 7.49% 7.44% 7.42% 7.37% 7.26% 7.03% 7.53%
Average rate paid on interest-bearing liabilities 4.85 4.93 4.94 4.93 4.75 4.19 4.57
Average interest rate spread(7) .................. 2.64 2.53 2.48 2.44 2.51 2.84 2.96
Net interest margin(8) ........................... 3.19 2.98 2.98 2.92 2.99 3.18 3.21
Ratio of interest-earning assets to
interest-bearing liabilities .................. 112.64 110.43 111.22 110.89 111.39 109.00 105.88
Efficiency ratio(9) .............................. 83.19 71.83 76.45 90.48 70.94 62.30 67.68
Noninterest expense as a percent of
average assets ................................ 2.82 2.22 2.36 2.71 2.22 2.05 2.23
Return on average assets ......................... 0.25 0.61 0.56 0.24 0.60 0.83 0.80
Return on average equity ......................... 2.11 5.70 5.00 2.19 5.26 8.21 7.27
Ratio of average equity to average asset ......... 11.80 10.78 11.16 10.94 11.37 10.14 10.99
Regulatory Capital Ratios:(10)
Tangible capital ratio ........................... 11.72 11.09 11.95 10.80 11.91 10.32 9.43
Core capital ratio ............................... 11.72 11.09 11.95 10.80 11.91 10.32 9.43
Risk-based capital ratio ......................... 23.22 25.83 27.39 28.38 30.90 27.80 25.59
Asset Quality Ratios:
Nonperforming loans and troubled debt
restructurings as a percent of total loans(11) 0.23 0.22 0.35 0.09 0.05 0.26 0.34
Nonperforming assets and troubled debt
restructurings as a percent of total assets(12) 0.11 0.09 0.17 0.04 0.02 0.12 0.14
Allowance for loan losses as a percent
of total loans ................................. 0.61 0.43 0.40 0.46 0.51 0.43 0.37
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings(2)(11) ......................... 2.72x 1.97x 1.16x 5.09x 10.38x 1.67x 1.07x
Full service offices at end of period ................ 5 4 4 4 3 3 3
</TABLE>
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(1) The data presented for the six months ended June 30, 1998 and 1997 was
derived from unaudited financial statements and reflect, in the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) which are necessary to present fairly the results for such
interim periods. Interim results at and for the six months ended June 30,
1998, are not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 1998.
(2) Loans, net, represents gross loans receivable and loans held for sale net
of the allowance for loan losses, loans in process and deferred loan
origination fees. The allowance for loan losses at June 30, 1998 and 1997
and December 31, 1997, 1996, 1995, 1994 and 1993 was $375,000, $231,000,
$231,000, $229,000, $249,000, $211,000 and $177,000, respectively.
(3) The Association adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," during fiscal 1994.
(4) Includes a one-time special assessment of $449,000 in order to
recapitalize the SAIF fund in fiscal 1996.
(5) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods. Ratios for
interim periods are stated on an annualized basis.
(6) Calculations of yield are presented on a taxable equivalent basis using
the Federal income tax rate of 34%.
(7) The average 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.
(8) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(9) Equals noninterest expense divided by net interest income plus noninterest
income (excluding gains or losses on securities transactions).
(10) For definitions and further information relating to the Association's
regulatory capital requirements, see "Regulation --Capital Requirements."
See "Regulatory Capital Compliance" for the Association's pro forma
capital levels as a result of the Offerings.
(11) Non-performing loans consist of all non-accrual loans and all other loans
90 days or more past due. The Association ceases to accrue interest on
loans 90 days or more past due (unless the loan principal and interest are
determined by management to be fully secured and in the process of
collection) and to charge off all accrued interest. See "Business of the
Association--Lending Activities--Delinquencies and Classified Assets."
(12) Non-performing assets consist of non-performing loans, other repossessed
assets and REO.
11
<PAGE>
RISK FACTORS
The following risk factors should be considered by investors in
deciding whether to purchase the Common Stock offered hereby.
Above Average 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 investments, and its interest expense on interest-bearing
liabilities, such as deposits and borrowings. 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 in response to
such movements.
A significant portion of the Association's assets consist of
fixed-rate residential mortgage loans. At June 30, 1998, the Association had
$53.3 million of fixed-rate mortgage loans, or 87.21% of the Association's gross
loans receivable, with average weighted maturities of 18.3 years. The
Association's emphasis on fixed-rate mortgage loans is due to the consumer
preference for fixed-rate mortgage loans in the Association's market area.
Investment in fixed-rate mortgage loans generally results in increased interest
rate risk as such loans generally do not reprice as quickly as adjustable-rate
mortgage ("ARM") loans during periods of rising interest rates. In addition, the
Association generally has accepted deposits for considerably shorter terms than
its fixed-rate mortgage loans. At June 30, 1998, the Association had $25.6
million of certificate accounts maturing in less than twelve months.
Consequently, management expects that the yield on interest-earning assets of
the Association will adjust to changes in interest rates at a slower rate than
the cost of the Association's interest-bearing liabilities, and that any
significant increase in interest rates will have an adverse effect on the
Association's results of operations. The Association attempts to offset the
risks associated with its predominantly fixed-rate loan portfolio by investing
in adjustable-rate mortgage-backed and other securities and by maintaining a
relatively high level of capital. Although the Association will continue to
offer ARM loans, there can be no assurance that in the future the Association
will be able to originate a sufficient volume of ARM loans to constitute a
significant portion of the Association's loan portfolio. In addition, the
Association does not currently anticipate that commercial lending activities
will significantly increase in the immediate future. At June 30, 1998, the
Association had a $10 million, 15-year bond issued by FHLB-Cincinnati paying a
rate of interest of 7.0%. The relatively long term of the bond as compared with
the relatively short term of the Association's FHLB-Cincinnati advances used to
finance the purchase of the bond contributed to the Association's above average
risk from rising interest rates. Moreover, because the bond may be repaid early
and the Association may not be able to reinvest the funds at as high an interest
rate, such early repayment could adversely affect the Association's net interest
income. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Management of Market Risk."
Increases in market interest rates would result in an increase in the
interest rates on the Association's adjustable-rate loans, thereby causing
higher loan payment amounts by the borrowers which, in turn, may result in
elevated delinquencies on such loans. Increases in the level of interest rates
may also adversely affect the value of the Association's investment and
mortgage-backed securities and other interest-earning assets and, in turn, its
results of operations or retained earnings. At June 30, 1998, the Association's
held-to-maturity and available-for-sale securities, including investment
securities, and mortgage-backed securities, had an estimated fair value of $51.3
million, which was $300,000 less than their amortized cost. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Management of Market Risk," "Business of the Association--Lending
Activities--Single-Family Mortgage Lending" and "--Investment Activities."
Low Return on Equity Following the Conversion
At June 30, 1998, the Association's ratio of average equity to average
assets was 11.80%. 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 maximum, as adjusted, of the Estimated
Price Range, the Company's ratio of equity to assets would be approximately
22.26%. The Company's ability to deploy this new capital through
12
<PAGE>
investments in interest-earning 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. 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. Additionally, due to the implementation of
stock-based benefit plans such as the ESOP and the Stock-Based Incentive
Plan, the Company's future compensation expense will be increased, thereby
adversely affecting its net income and return on equity.
Heavy Concentration in Real Estate Lending in Eastern Ohio
At June 30, 1998, 74.16% of the Association's total gross loan
portfolio was secured by real estate, substantially all of which is located in
the Association's primary market area in Eastern Ohio. The Association's primary
market area includes the counties of Columbiana, Mahoning and Jefferson, which
have experienced relatively slow growth in the last several years. In recent
years, the Association has expanded its market area through the establishment of
additional branches within those counties. The success of that expansion policy
will depend on whether the increased operating expenses resulting from the
additional branches can be offset by growth of the Association's business within
its market area. Per capita income and median household income in the market
area are lower and have increased at a lower rate than in Ohio and the United
States. In addition, the recent closing of two large industrial plants in
neighboring Trumbull County may also impact the Bank's market area. See
"Business of the Association--Market Area and Competition" and "--Lending
Activities." Accordingly, a substantial decline in real estate values, the onset
of other recessionary economic conditions or the loss of a large employer in the
Association's primary market area could adversely affect the Association's
operating results and financial condition by, among other things, requiring
increased provisions for loan losses and increased noninterest expense
associated with the management and disposition of real estate owned as well as
decreasing demand for single-family mortgage loans.
Increased Credit Risks Associated with Consumer Loans
At June 30, 1998, $15.4 million, or 25.20% of the Association's total
gross loan portfolio consisted of consumer loans. Of these loans, $12.5 million
or 20.42% of the Association's total loans consisted of new and used automobile
loans. Loans secured by rapidly depreciable assets such as automobiles entail
greater risks than single-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, consumer loan collections on these loans depend 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. Because a significant portion of the
Association's automobile loans are originated on the Association's behalf by
dealers at the time of sale, the volume of such loans depend substantially on
the Association's maintaining relationships with such dealers. Also, because
loan underwriting is accomplished without benefit of direct interaction between
the borrower and the Association's lending officers, underwriting risks
associated with such loans may be greater than with loans originated directly by
the Association.
Competition in Market Area
The Association faces significant competition in its market area both
in attracting deposits and in originating loans. The Association's primary
market area is a competitive market for financial services. The Association
faces direct competition from a number of financial institutions, many with a
state-wide or regional presence, and, in some cases, a national presence. This
competition arises from other savings institutions, commercial banks, credit
unions and other providers of financial services, many of which are
significantly larger than the Association and therefore have greater financial
and marketing resources than the Association. See "Business of the
Association--Market Area and Competition."
13
<PAGE>
Increased Expenses from Stock-Based Benefits to Management and Directors,
Employment Contracts and Change in Control Payments
Stock-Based Incentive Plan. The Company intends to adopt a Stock-Based
Incentive Plan which would provide for the granting of options to purchase
common stock ("Stock Options"), awards of common stock ("Stock Awards"), and
certain related rights to eligible officers, employees and directors of the
Company and Association. While the Company currently anticipates granting Stock
Options and Stock Awards under a single plan, it may establish separate plans to
provide for such awards. In the event such plan is adopted within one year after
conversion, OTS regulations require the plan to be approved by stockholders at a
meeting of stockholders which may be held no earlier than six months after
completion of the Conversion. It is anticipated the Stock-Based Incentive Plan
will provide for the granting of options to purchase shares of Common Stock
equal to 10% of the shares of Common Stock issued in the Conversion (144,500
shares and 195,500 shares at the minimum and maximum of the Estimated Price
Range, respectively) and the granting of Stock Awards in an amount equal to 4%
of the shares of Common Stock issued in the Conversion (57,800 shares and 78,200
shares at the minimum and maximum of the Estimated Price Range, respectively).
Shares of common stock used to satisfy such awards will be acquired by the Plan
or a trust established for the Plan either through open market purchases or from
authorized but unissued Common Stock. See "--Possible Dilutive Effect of
Stock-Based Incentive Plan."
Employee Stock Ownership Plan. In connection with the Conversion,
certain officers and employees of the Association and the Company will obtain
the benefit of stock ownership through the establishment of the ESOP, which is a
tax-qualified plan for the benefit of all eligible employees, including
executive officers, of the Association. The ESOP intends to purchase in the
Subscription Offering 8% of the Common Stock issued in the Conversion, or
115,600 shares and 156,400 shares at the minimum and maximum of the Estimated
Price Range. The ESOP will be funded over time by the Association and the
Association will allocate shares of Common Stock to employees of the Association
who are Participants in the ESOP at no cost to the ESOP beneficiaries. See
"Management of the Association--Benefits--Employee Stock Ownership Plan and
Trust."
Employment Contracts and Change in Control Provisions. Employment
agreements to be entered into with certain officers and the employee severance
compensation plan upon the consummation of the Conversion provide for benefits
and cash payments in the event of a change in control of the Company or the
Association. The provisions in such agreements and plan would provide the
recipient with a change in control payment in the event of the recipient's
involuntary or, in certain circumstances, voluntary termination of employment
subsequent to a change in control of the Company or the Association. In addition
to any payments which may be made under the Stock-Based Incentive Plan upon a
change in control, these provisions may have the effect of increasing the cost
of acquiring the Company, thereby discouraging future attempts to take over the
Company or the Association. Based solely 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 an employee severance compensation plan would be
approximately $1.19 million. However, the actual amount to be paid in the event
of a change in control of the Company or Association 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," "--Employee Severance Compensation Plan"
and "--Benefits."
Possible Dilutive Effect of Stock-Based Incentive Plan
Following the Conversion, the Stock-Based Incentive Plan will acquire
an amount of shares equal to 4% of the shares of Common Stock issued in the
Conversion, either through open market purchases or the issuance of authorized
but unissued shares of Common Stock from the Company. If the Stock-Based
Incentive Plan is funded by the issuance of authorized but unissued shares, the
voting interests of existing stockholders at that time will be diluted by 3.8%.
Also following the Conversion, directors, officers and employees will be granted
stock options under the Stock-Based Incentive Plan in an amount equal to 10% of
the Common Stock issued in the Conversion. The exercise of such stock options
may be satisfied by the issuance of authorized but unissued shares. Under
certain circumstances, such options may be exercised and sold on the same day,
thereby eliminating any risk to officers and directors in
14
<PAGE>
exercising options in the event that the market price exceeds the exercise
price. If all of the stock options were to be exercised using authorized but
unissued Common Stock and the stock awards granted under the Stock-Based
Incentive Plan were funded with authorized but unissued shares, the voting
interests of existing stockholders at that time would be diluted at that time by
12.3%.
Certain Anti-Takeover Provisions Which May Discourage Takeover Attempts
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, non-cumulative voting for
directors, limits on the calling of special meetings, limits on voting shares in
excess of 10% of outstanding shares, and certain uniform price provisions for
certain business combinations. The Association's Stock Charter also prohibits,
for five years, the acquisition or offer to acquire, directly or indirectly, the
beneficial ownership of more than 10% of the Association's equity securities.
Any person violating this restriction may not vote the Association's securities
in excess of 10%. These provisions in the Association's and the Company's
governing instruments may discourage potential proxy contests and other
potential takeover attempts, particularly those which have not been negotiated
with the Board of Directors, and thus, generally may serve to perpetuate
existing management. For a more detailed discussion of these provisions, see
"Restrictions on Acquisitions of the Company and the Association."
Potential Voting Control of Executive Officers and Directors
Directors and officers of the Association and the Company expect to
purchase approximately 13.8% or 10.2% of the shares of Common Stock to be issued
in the Conversion, based upon the minimum and the maximum of the Estimated Price
Range, respectively, exclusive of shares that may be attributable to directors
and officers through the Stock-Based Incentive Plan (exclusive of shares to be
issued upon the exercise of options) and the ESOP, which plans may give
directors, officers and employees the potential to control the voting of
approximately 25.8% of the Company's Common Stock assuming such plans were
funded with authorized but unissued shares. Management's potential voting
control could, together with additional stockholder support, defeat stockholder
proposals requiring 80% approval of stockholders. As a result, this potential
voting control may preclude takeover attempts that certain stockholders deem to
be in their best interest and may tend to perpetuate existing management. See
"Restrictions on Acquisition of the Company and the Association--Restrictions in
the Company's Certificate of Incorporation and Bylaws."
Absence of Market For Common Stock
The Company and the Association have never issued capital stock. The
Company has applied to have its Common Stock listed on the Nasdaq SmallCap
Market under the symbol "GCFC" upon completion of the Conversion. However, if
the Company, after the Offerings, qualifies to be listed on the Nasdaq National
Market, it will take steps to do so. There can be no assurance that an active
and liquid trading market for the Common Stock will develop or, once developed,
will continue, nor can there be any assurances that purchasers of the Common
Stock will be able to sell their shares at or above the Purchase Price. The
absence or discontinuance of a market for the Common Stock would have an adverse
impact on both the price and liquidity of the Common Stock. See "Market for the
Common Stock."
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% due to
regulatory considerations, changes in market conditions or general financial and
economic conditions following the commencement of the Subscription and Community
Offerings. In the event that the Estimated Price Range is so increased, it is
expected that the Company will issue up to 2,248,250 shares of Common Stock at
the Purchase Price for an aggregate purchase price of up to $22.5 million. An
increase in the number of shares issued will decrease a subscriber's pro forma
net earnings per share and stockholders' equity
15
<PAGE>
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.
Financial Institution Regulation and Legislative Uncertainty
The Association is subject to extensive regulation and supervision as a
federal savings association. In addition, the Company, as a savings association
holding company, is subject to extensive regulation and supervision. Such
regulations, which affect the Association on a daily basis, may be changed at
any time, and the interpretation of the relevant law and regulations is also
subject to change by the authorities who examine the Association and interpret
those laws and regulations. Any change in the regulatory structure or the
applicable statutes or regulations, whether by the OTS, the FDIC or the
Congress, could have a material impact on the Company, the Association, their
operations or the Association's Conversion. See "Regulation."
The Deposit Insurance Funds Act of 1996 (the "Funds Act"), which was
enacted in September 1996, provides that the BIF (the deposit insurance fund
that covers most commercial bank deposits) and the SAIF will merge on January
1, 1999, if there are no more savings associations as of that date. Several
bills have been introduced in the current Congress that would eliminate the
federal thrift charter and the OTS. A bill originally reported by the House
Banking Committee would have required federal thrifts to become national
banks or state banks within two years of enactment or they would have become
national banks by operation of law. OTS would have been abolished and its
functions transferred to the bank regulatory agencies. The bill as passed by
the House of Representatives, however, did not provide for the elimination of
the federal thrift charter or OTS, but did provide that unitary savings and
loan holding companies existing or applied for after March 31, 1998 would not
have the ability to engage in unlimited activities but would be subject to
the activities restrictions applicable to multiple savings and loan holding
companies. Unitary holding companies existing or applied for before 1998
would be grandfathered and could continue to engage in unlimited activities
and could transfer the grandfather rights to acquirors of the holding
company. The Senate has not acted on such legislation but if such legislation
was enacted, the Company would not qualify for unlimited activities but would
be subject to the activities restrictions applicable to multiple savings and
loan holding companies. The Association is unable to predict whether such
legislation will be enacted or, given such uncertainty, determine the extent
to which the legislation, if enacted, would affect its business. The
Association is also unable to predict whether the SAIF and BIF will
eventually be merged or the federal thrift charter eliminated, and what
effect, if any, such legislation would have on the Association.
Effect on Voting Rights of Members
Currently, 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 the completion of the 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.
Year 2000 Compliance
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "98" is stored on the
system to represent 1998. Accordingly, the Association's operating system may
recognize "00" as the year 1900 rather than 2000, causing the system to fail or
generate erroneous information. The Association has not identified any material
expenses which are reasonably likely to be incurred by the Association in
connection with Year-2000 issues and the Association does not expect to incur
significant expense to implement corrective measures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance."
16
<PAGE>
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
The Association has received an opinion from Keller which states that,
pursuant to Keller's valuation, subscription rights granted to Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members have no value.
However, such valuation is not binding on the Internal Revenue Service ("IRS").
If the subscription rights granted to Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are deemed to have an ascertainable
value, such rights may be taxable as ordinary income or capital gain to those
Eligible Account Holders, Supplemental Eligible Account Holders or Other Members
who receive and/or exercise the subscription rights in an amount equal to such
value. Additionally, the Association could recognize a gain for tax purposes on
such distribution. Whether subscription rights are considered to have
ascertainable value is an inherently factual determination. See "The
Conversion--Effects of Conversion" and "--Tax Aspects."
Risk of Delayed Offering
The Company and the Association expect to complete the Conversion
within the time periods indicated in this Prospectus. Nevertheless, it is
possible, although not anticipated, that adverse market, economic or regulatory
conditions, or other factors could significantly delay the completion of the
Conversion and result in increased costs or in changes in the independent
appraisal. The Subscription and Community Offerings could be extended to
December 21, 2000 before subscribers would have the right to confirm, modify or
rescind their subscriptions. If the Subscription and Community Offerings are
extended beyond December 21, 2000, all subscribers will have the right to
confirm, modify or rescind their subscriptions and to have their subscription
funds returned promptly, with interest at a rate equal to the Association's
interest rate paid on passbook accounts, or to have their withdrawal
authorization terminated. See "The Conversion."
17
<PAGE>
RECENT DEVELOPMENTS
The selected financial and operating data presented below at September
30, 1998 and for the three and nine-month periods ended September 30, 1998 and
1997 are derived from unaudited financial data but, in the opinion of
management, reflects all adjustments (consisting only of normal recurring
adjustments) which are necessary to present fairly the results from such interim
periods. The results of operations of the three and nine months ended September
30, 1998 are not necessary indicative of the results of operations that may be
expected for the year ending December 31, 1998.
<TABLE>
<CAPTION>
At At
September 30, 1998 December 31, 1997
------------------ -----------------
(In thousands)
<S> <C> <C>
Selected Financial Data:
Total assets................................................... $119,901 $118,265
Cash and cash equivalents...................................... 3,315 5,846
Loans, net..................................................... 62,179 57,886
Mortgage-related securities, net............................... 37,266 35,616
Investment securities, net..................................... 11,205 13,678
Deposits....................................................... 79,179 76,983
FHLB advances.................................................. 25,312 26,161
Total equity................................................... 14,494 14,165
Nonperforming assets and troubled debt restructurings.......... 25 199
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- -----------------------------------
1998 1997 1998 1997
--------------- ---------------- ----------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Selected Operating Data:
Total interest income ................... $2,226 $2,195 $6,638 $6,628
Total interest expense .................. 1,261 1,345 3,797 4,001
------ ------ ------ ------
Net interest income .................. 965 850 2,841 2,627
Provision for loan losses ............... 4 7 154 7
------ ------ ------ ------
Net interest income after
provision for loan losses ....... 961 843 2,687 2,620
Noninterest income:
Net gain (loss) on sale of securities 9 5 13 5
Other ............................... 76 88 234 203
------ ------ ------ ------
Total noninterest income ....... 85 93 247 208
Noninterest expense ..................... 811 668 2,503 2,027
------ ------ ------ ------
Income before income tax ................ 235 268 431 801
Provision for income tax ................ 60 70 105 226
------ ------ ------ ------
Net income ........................... $ 175 $ 198 $ 326 $ 575
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
At or For the At or for the
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Selected Financial Ratios and Other Data (1):
Performance Ratios:
Average yield on interest-earning assets(2)........................ 7.53% 7.25% 7.64% 7.39%
Average rate paid on interest-bearing liabilities.................. 4.74 4.94 4.82 4.94
Net interest rate spread(3)........................................ 2.79 2.31 2.82 2.45
Net interest margin(4)............................................. 3.27 2.81 3.33 2.93
Ratio of interest-earning assets to interest-bearing liabilities... 111.11 111.14 111.89 110.95
Efficiency ratio(5)................................................ 77.91 71.22 81.40 71.63
Noninterest expense as a percent of average assets................. 2.65 2.15 2.76 2.19
Return on average assets........................................... 0.57 0.64 0.36 0.62
Return on average equity........................................... 4.81 5.70 3.04 5.70
Ratio of average retained equity to average assets................. 11.91 11.17 11.84 10.92
Regulatory Capital Ratios(6):
Tangible capital................................................... 12.01 11.52 12.01 11.52
Core capital....................................................... 12.01 11.52 12.01 11.52
Total Risk-based capital........................................... 27.36 25.89 27.36 25.89
Asset Quality Data and Ratios:
Total nonperforming loans(7)....................................... $ 25 $ 209 $ 25 $ 209
Real estate owned, net............................................. -- -- -- --
Total nonperforming assets(8)...................................... 25 209 25 209
Allowance for loan losses.......................................... 379 244 379 244
Nonperforming loans as a percent of total loans(7)(9).............. 0.04% 0.37% 0.04% 0.37%
Nonperforming assets as a percent of total assets(8)............... 0.02 0.17 0.02 0.17
Allowance for loan losses as a percent of total loans(9)........... 0.60 0.43 0.60 0.43
Allowance for loan losses as a percent of
nonperforming loans (7)......................................... 15.16x 1.17x 15.16x 1.17x
</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 monthly balances during the indicated periods and are annualized
where appropriate.
(2) Calculations of yields are presented on a taxable equivalent basis using
the Federal income tax rate of 34%.
(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) Equals noninterest expense divided by net interest income plus noninterest
income (excluding gains or losses on securities transactions).
(6) For definitions and further information relating to the Association's
regulatory capital requirements, see "Regulation and
Supervision--Regulations--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. The Association ceases to accrue interest on all
loans 90 days or more past due (unless the loan principal and interest are
determined by management to be fully secured and in the process of
collection) and to charge off all accrued interest. See "Business of the
Association--Lending Activities--Delinquent and Classified Assets."
(8) Nonperforming assets consist of nonperforming loans, other repossessed
assets and REO.
(9) Loans represent gross loans receivable, and loans held for sale net of the
allowance for loan losses, loans in process and deferred loan origination
fees.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
Comparison of Financial Condition at September 30, 1998 and December 31, 1997.
Total assets at September 30, 1998 were $119.9 million compared to
$118.3 million at December 31, 1997, an increase of $1.6 million. The primary
factor in this increase was a $4.3 million increase in net loans receivable from
$57.9 million at December 31, 1997 to $62.2 million at September 30, 1998,
offset by a $823,000 decrease in investment and mortgage-related securities from
$49.3 million at December 31, 1997 to $48.5 million at September 30, 1998 and a
$2.5 million decrease and cash equivalents from $5.8 million at December 31,
1997 to $3.3 million at September 30, 1998.
Total deposits increased by $2.2 million from $77.0 million at December
31, 1997 to $79.2 million at September 30, 1998 due principally to an increase
in certificates of deposits. The increase in deposits was due to normal growth
from the new branch offices opened during 1997 and 1998. FHLB-Cincinnati
advances decreased by $849,000 from $26.2 million at December 31, 1997 to $25.3
million at September 30, 1998 due to regular amortization of the advances.
Total equity at September 30, 1998 was $14.5 million compared to $14.2
million at December 31, 1997, an increase of $329,000, or 2.3%, due to net
earnings of $326,000 for the nine months ended September 30, 1998 and a $3,000
SFAS No. 115 adjustment for an increase in the market value of certain
securities available for sale.
Comparison of Results of Operations for the Three Months Ended September 30,
1998 and 1997.
Net earnings for the three months ended September 20, 1998 were
$175,000 compared to $198,000 for the three months ended September 30, 1997. Net
interest income increased $115,000 or 13.5% for the three months ended September
30, 1998 compared to the same period in 1997. This increase was more than offset
by the increase in noninterest expense and decrease in noninterest income during
the three month period ended September 30, 1998 compared to the same period in
1997.
Interest Income
Interest income for the three months ended September 30, 1998 was $2.23
million compared to $2.20 million for the three months ended September 30, 1997,
an increase of $31,000 or 1.4%. The increase in interest income was the result
of an increase in the yield on interest-earning assets of 7.5% for the three
month period ended September 30, 1998 compared to 7.3% for the same period in
1997. The increase in yield on interest-earning assets was partially offset by
the decline in average interest-earning assets from $120.1 million for the three
months ended September 30, 1997 to $117.2 million for the three months ended
September 30, 1998.
Interest Expense
Interest expense for the three months ended September 30, 1998 was
$1.26 million compared to $1.35 million for the three months ended September 30,
1997, a decrease of $84,000 or 6.2%. The decrease in interest expense was due to
both the decrease in the yield on interest-bearing liabilities for the three
months ended September 30, 1998 to 4.7%, from 4.9% for the same period in 1997,
and the decrease in average interest-bearing liabilities from $108.0 million for
the three months ended September 30, 1997 to $105.5 million for the three months
ended September 30, 1998.
Provision for Loan Losses
The Association's provision for loan losses for the three months ended
September 30, 1998 was $4,000 compared to $7,000 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.
20
<PAGE>
Noninterest Income
Noninterest income for the three months ended September 30, 1998 was
$85,000 compared to $93,000 for the three months ended September 30, 1997, a
decrease of $8,000. The decrease was due to a decline in fee income during the
period.
Noninterest Expense
Noninterest expense was $811,000 for the three months ended September
30, 1998 compared to $668,000 for the three months ended September 30, 1997, a
$143,000 or 21.4% increase. The increase was primarily due to an increase in
salaries and employee benefits and occupancy expense due to the impact of branch
offices which were open during 1998 and were not open in 1997.
Income Taxes
Income taxes for the three months ended September 30, 1998 was $60,000
compared to $70,000 for the three months ended September 30, 1997, a decrease of
$10,000 due to the decrease in net income before income tax.
Comparison of Operating Results for the Nine Months Ended September 30, 1998 and
September 30, 1997
Net earnings for the nine months ended September 30, 1998 were $326,000
compared to $575,000 for the nine months ended September 30, 1997. Net interest
income increased $214,000, or 8.2%, for the nine months ended September 30, 1998
compared to the same period in 1997, which was more than offset by the increase
in noninterest expense during the nine months ended September 30, 1998 compared
to the same period in 1997. In addition, the provision for loan losses for the
nine months ended September 30, 1998 increased $154,000 over the similar period
in 1997.
Interest Income
Interest income for the nine months ended September 30, 1998 was $6.64
million compared to $6.63 million for the nine months ended September 30, 1997,
an increase of $10,000 or 0.2%. The increase in interest income was the result
of an increase in yield for interest-earning assets for the nine months ended
September 30, 1998 of 7.5% compared to 7.4% for the same period in 1997. The
increase in yield on interest-earning assets was partially offset by the decline
in average interest-earning assets from $120.1 million for the nine months ended
September 30, 1997 to $117.9 million for the nine months ended September 30,
1998.
Interest Expense
Interest expense for the nine months ended September 30, 1998 was $3.8
million compared to $4.0 million for the nine months ended September 30, 1997, a
decrease of $204,000 or 5.1%. The decrease in interest expense was due to the
decrease in the yield on interest-bearing liabilities for the nine months ended
September 30, 1998 from 4.8% compared to 4.9% for the same period in 1997 and
due to the decrease in average interest-bearing liabilities from $108.2 million
for the nine months ended September 30, 1997 to $105.4 million for the nine
months ended September 30, 1998.
Provision for Loan Losses
The provision for loan losses for the nine months ended September 30,
1998 was $154,000 compared to $0 for the nine 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 increase in the
provision for loan losses is due to a number of factors including the increased
level of consumer bankruptcies, layoffs related to a strike of a major employer
in the Association's market area (which has subsequently been resolved), the
growth of the loan portfolio and the review of specific problem loans by
management. Management believes the allowance for
21
<PAGE>
loan losses is adequate to absorb losses; however, future additions to the
allowance may be necessary based on changes in economic conditions.
Noninterest Income
Noninterest income for the nine months ended September 30, 1998 was
$247,000 compared to $208,000 for the nine months ended September 30, 1997, an
increase of $39,000 or 18.8%. The increase was primarily due to an increase in
service charge income and, to a lesser extent, an increase in the gain on sale
of securities available for sale.
Noninterest Expense
Noninterest expense was $2.5 million for the nine months ended
September 30, 1998 compared to $2.0 million for the nine months ended September
30, 1997, a $469,000, or 23.1%, increase. The increase was primarily due to an
increase in salaries and employee benefits and occupancy expense due to the full
year impact of the branch offices opened during 1997 and the additional impact
of the branch offices open during 1998. The additional branches are part of
management's strategy to increase its market area and expand into higher growth
market areas than exist in the Association's traditional market area. Management
expects further increases in noninterest expense in future periods due to the
full impact of the branches opened during 1998.
Income Taxes
Income taxes for the nine months ended September 30, 1998 were $105,000
compared to $226,000 for the nine months ended September 30, 1997, a decrease of
$121,000 due to the decrease in net income.
GRAND CENTRAL FINANCIAL CORP.
The Company was recently organized under Delaware law at the direction
of the Board of Directors of the Association for the purpose of acquiring all of
the capital stock to be issued by the Association. The Company has applied to
the OTS to become a savings and loan holding company, and, as such, will be
subject to regulation by the OTS. See "The Conversion--General." After
completion of the Conversion, the Company will conduct business initially as a
unitary savings and loan holding company. See "Regulation--Holding Company
Regulation." Upon consummation of the Conversion, the Company's assets will
consist of all of the outstanding shares of the Association's capital stock
issued to the Company in the Conversion and that portion of the net proceeds of
the Offerings retained by the Company. The Company intends to use part of the
net proceeds it retains to make a loan directly to the ESOP to enable the ESOP
to purchase 8% of the Common Stock in the Conversion. See "Use of Proceeds." The
Company will have no significant liabilities. The management of the Company is
set forth under "Management of the Company." Initially, the Company will neither
own nor lease any property, but will instead use the premises, equipment and
furniture of the Association. At the present time, the Company does not intend
to employ any persons other than officers, but will utilize the support staff of
the Association from time to time. Additional employees will be hired as
appropriate to the extent the Company expands its business in the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so, its
business activities through existing or newly-formed subsidiaries, or through
acquisitions of other financial institutions and financial services related
companies. Although there are no current arrangements, understandings or
agreements, written or oral, regarding any such opportunities or transactions,
the Company will be in a position after the Conversion, subject to regulatory
limitations and the Company's financial position, to take advantage of any such
acquisition and expansion opportunities that may arise. The initial activities
of the Company are anticipated to be funded by the net proceeds retained by the
Company and earnings thereon or, alternatively, through dividends from the
Association.
The Company's executive offices are located at the home office of the
Association at 601 Main Street, Wellsville, Ohio 43968 and its telephone number
is (330) 532-1517.
22
<PAGE>
CENTRAL FEDERAL SAVINGS AND LOAN ASSOCIATION OF WELLSVILLE
The Association was organized in 1892, and has operated for over one
hundred years as a community-oriented savings institution. The Association's
primary market area consists of the areas in and surrounding the Village of
Wellsville and includes portions of the counties of Columbiana, Mahoning and
Jefferson Counties in Eastern Ohio. The Association conducts its business
from its home office located in Wellsville, Ohio, and its five full service
branch offices, four of which have been opened since 1996.
The Association's business has been and continues to be attracting
deposits from the general public in its primary market area and investing
such deposits and other funds, generated from operations, and FHLB advances,
primarily in conventional mortgage loans secured by single-family residences.
At June 30, 1998, $42.7 million, or 69.91%, of the Association's gross loans
receivable generally consisted of fixed-rate single-family mortgage loans. In
addition, the Association invests in consumer loans, primarily automobile
loans originated directly or on the Association's behalf by automobile
dealers at the time of sale. To a significantly lesser extent, the
Association invests in home equity, multi-family, commercial real estate,
construction (primarily to individual borrowers for the construction of
owner-occupied residential properties) and land loans. In addition to its
lending activities, the Association also invests in mortgage-backed
securities, primarily those guaranteed or insured by government agencies such
as Ginnie Mae, Fannie Mae and Freddie Mac, and other investment grade
securities.
The Association is subject to extensive regulation, supervision and
examination by the OTS, its primary regulator, and the FDIC, which insures
its deposits. As of June 30, 1998, the Association exceeded all regulatory
capital requirements with tangible, core and risk-based capital of $14.3
million, $14.3 million and $14.6 million, respectively. Additionally, the
Association's regulatory capital was in excess of the amount necessary to be
"well-capitalized" under the Federal Deposit Insurance Corporation
Improvement Act of 1992 ("FDICIA"). See "Regulatory Capital Compliance" and
"Regulation." The Association is a member of the FHLB-Cincinnati which is one
of the twelve regional banks which comprise the FHLB system.
The Association's executive offices are located at its home office
at 601 Main Street, Wellsville, Ohio 43968 and its telephone number is (330)
532-1517.
23
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At June 30, 1998, the Association exceeded all regulatory capital
requirements. See "Regulation--Federal Savings Institution
Regulation--Capital Requirements." Set forth below is a summary of the
Association's compliance with regulatory capital standards as of June 30,
1998, on a historical and pro forma basis assuming that the indicated number
of shares were sold as of such date and receipt by the Association of 50% of
the net proceeds. For purposes of the table below, the amount expected to be
borrowed by the ESOP and the cost of the shares expected to be acquired by
the Stock Programs are deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
Central Federal Savings and Loan Association of Wellsville
Pro Forma at June 30, 1998, Based Upon Sale at $10.00 Per Share
------------------------------------------------------------------------------------
2,248.250 Shares
1,445,000 Shares 1,700,000 Shares 1,955,000 Shares (15% above
(Minimum of (Midpoint of (Maximum of Maximum
Historical Estimated Estimated Estimated of Estimated
At 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 ............ $14,331 11.8% $19,439 15.3% $20,393 16.0% $21,347 16.6% $22,443 17.3%
Tangible Capital:
Capital Level(3) .... $14,245 11.7% $19,353 15.3% $20,307 15.9% $21,261 16.5% $22,357 17.2%
Requirement ............. 1,824 1.5 1,900 1.5 1,915 1.5 1,929 1.5 1,945 1.5
------- ----- -------- ----- ------- ------- -------- ----- ------- -------
Excess .............. $12,421 10.2% $17,453 13.8% $18,392 14.4% $19,332 15.0% $20,412 15.7%
------- ----- -------- ----- ------- ------- -------- ----- ------- -------
------- ----- -------- ----- ------- ------- -------- ----- ------- -------
Core Capital:
Capital Level(3) .... $14,245 11.7% $19,353 15.3% $20,307 15.9% $21,261 16.5% $22,357 17.2%
Requirement(4) ...... 3,647 3.0 3,801 3.0 3,829 3.0 3,858 3.0 3,891 3.0
------- ----- -------- ----- ------- ------- -------- ----- ------- -------
Excess .............. $10,598 8.7% $15,652 12.3% $16,478 12.9% $17,403 13.5% $18,466 14.2%
------- ----- -------- ----- ------- ------- -------- ----- ------- -------
------- ----- -------- ----- ------- ------- -------- ----- ------- -------
Total Risk-Based Capital:
Capital Level(3) .... $14,620 23.2% $19,728 30.1% $20,682 31.3% $21,636 32.5% $22,732 33.9%
Requirement ......... 5,037 8.0 5,248 8.0 5,287 8.0 5,327 8.0 5,372 8.0
------- ----- -------- ----- ------- ------- -------- ----- ------- -------
Excess .............. $ 9,583 15.2% $14,480 22.1% $15,395 23.3% $16,309 24.5% $17,360 25.9%
------- ----- -------- ----- ------- ------- -------- ----- ------- -------
------- ----- -------- ----- ------- ------- -------- ----- ------- -------
</TABLE>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations, changes in market conditions or
general financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of total adjusted assets.
Risk-based capital levels are shown as a percentage of risk-weighted
assets.
(3) Certain deductions and additions are made to equity as calculated under
generally accepted accounting principles ("GAAP") to determine regulatory
capital. The general valuation allowance of $375,000 is added to GAAP
capital to arrive at total risk-based capital. Assumes net proceeds are
invested in assets that carry a risk weighting of 51.6%, the average risk
weighting of the Association's assets at June 30, 1998.
(4) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a 4% to 5% core capital ratio requirement for all other
thrifts. See "Regulation--Federal Savings Institution Regulation--Capital
Requirements."
24
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that the net proceeds from the sale of the Common Stock will be
between $13.7 million and $18.7 million (or $21.6 million if the Estimated Price
Range is increased by 15%). See "Pro Forma Data" and "The Conversion--Stock
Pricing" as to the assumptions used to arrive at such amounts. The Company will
be unable to utilize any of the net proceeds of the Offerings until the
consummation of the Conversion.
The Company will purchase all of the outstanding capital stock of the
Association to be issued upon Conversion in exchange for 50% of the net proceeds
of the Offering. Such proceeds will be added to the Association's general funds
to be used for general corporate purposes, including investment in loans,
particularly single-family residential mortgage loans, non-residential real
estate loans, including commercial real estate loans in the Association's
primary market area, and construction loans, including home equity loans. The
Association expects that the level of such lending activity generally will be
proportionately consistent with its existing lending policies. See "Business of
the Association--Lending Activities." The Association also plans to use such
proceeds to invest in short- to intermediate-term securities and mortgage-backed
securities and fund the Stock-Based Incentive Plan. In addition, under
appropriate market conditions, the Company may repay advances from the
FHLB-Cincinnati. The Association has no current arrangements, understandings or
agreements regarding any such transactions.
Net proceeds to be retained by the Company after the purchase of the
capital stock of the Association, and including the loan to the ESOP, are
estimated to be between $6.9 million and $9.4 million (or $10.8 million if the
Estimated Price Range is increased by 15%). The net proceeds retained by the
Company will initially be invested primarily in short- to intermediate-term
securities and mortgage-backed securities. The Company intends to use a portion
of the net proceeds to make a loan directly to the ESOP to enable the ESOP to
purchase 8.0% of the Common Stock issued in the Conversion. Based upon the
issuance of 1,445,000 shares and 1,955,000 shares at the minimum and maximum of
the Estimated Price Range, the amount of the loan to the ESOP would be $1.2
million or $1.6 million, respectively (or $1.8 million if the Estimated Price
Range is increased by 15%) to be repaid over a 12-year period at the prevailing
prime rate of interest, which is currently 8.5%. See "Management of the
Association--Benefits--Employee Stock Ownership Plan and Trust."
The net proceeds retained by the Company may also be used to support
the future expansion of operations through the acquisition of other savings
associations and commercial banks or diversification into other banking related
businesses. The Company may use a portion of the net proceeds to fund the Stock
Programs. The Company has no current arrangements, understandings or agreements
regarding any such transactions. The Company, upon the Conversion, will be a
unitary savings and loan holding company, which under existing laws would
generally not be restricted as to the types of business activities in which it
may engage, provided that the Association continues to be a qualified thrift
lender ("QTL"). See "Regulation--Holding Company Regulation" for a description
of certain regulations and proposed regulations applicable to the Company.
Upon completion of the Conversion, the Board of Directors of the
Company will have the authority to adopt stock repurchase plans, subject to
statutory and regulatory requirements. Unless approved by the OTS, the Company,
pursuant to OTS regulations, will be prohibited from repurchasing any shares of
the Common Stock for three years except for (i) an offer to all stockholders on
a pro rata basis, (ii) the repurchase of qualifying shares of a director, or
(iii) a purchase in the open market by an employee stock benefit plan.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the Conversion, the Company may repurchase its Common
Stock so long as (i) the repurchases within the following two years are part of
an open-market program not involving greater than 5% of its outstanding capital
stock during a twelve-month period, (ii) the repurchases do not cause the
Association to become "undercapitalized" within the meaning of the OTS prompt
corrective action regulation, and (iii) the Company provides to the Regional
Director of the OTS no later than 10 days prior to the commencement of a
repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
See "Regulation--Prompt Corrective Regulatory Action." In addition, under
current OTS policies, repurchases may be allowed in the first year following
Conversion and in amounts greater than 5% in the second and third years
following Conversion provided there are valid and compelling business reasons
for such repurchases and the OTS does not object to such repurchases.
25
<PAGE>
Based upon facts and circumstances following Conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but not
be limited to: (i) market and economic factors such as the price at which the
stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares, and the opportunity to improve the
Company's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Company and its shareholders.
In the event the Company determines to repurchase stock, such repurchases may be
made at market prices which may be in excess of the Purchase Price in the
Conversion.
Any stock repurchases will be subject to the determination of the Board
of Directors that both the Company and the Association will be capitalized in
excess of all applicable regulatory requirements after any such repurchases and
that such capital will be adequate, taking into account, among other things, the
level of non-performing and other risk assets, the Company's and the
Association's current and projected results of operations and asset/liability
structure, the economic environment and tax and other considerations. See "The
Conversion--Certain Restrictions on Purchase or Transfer of Shares After
Conversion."
In connection with the Conversion, the Company and the Association have
committed to the OTS that, during the one-year period following consummation of
the Conversion, the Company will not take any steps in furtherance of a
distribution to stockholders that, for federal tax purposes, would be treated as
a return of capital without prior approval of the OTS.
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. The Company is newly formed and has conducted no
operations to date. The Board of Directors intends to consider a policy of
paying dividends on the Common Stock in the future. No decision has been made as
to the amount or timing of such dividends, if any. Declarations of dividends by
the Board of Directors will depend upon a number of factors, including the
amount of net proceeds retained by the Company in the Conversion, investment
opportunities available to the Company or the Association, capital requirements,
regulatory limitations, the Company's and the Association's financial condition
and results of operations, tax considerations and general economic conditions.
No assurances can be given, however, that any dividends will be paid or, if
commenced, will continue to be paid.
The Association will not be permitted to pay dividends on its capital
stock if its stockholders' equity would be reduced below the amount required for
the liquidation account. See "The Conversion--Liquidation Rights." For
information concerning federal regulations which apply to the Association in
determining the amount of proceeds which may be retained by the Company and
regarding a savings institution's ability to make capital distributions
including payment of dividends to its holding company, see "Federal and State
Taxation--Federal Taxation--Distributions" and "Regulation--Federal Savings
Institution Regulation--Limitation on Capital Distributions."
Unlike the Association, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders. The Company is
subject, however, to the requirements of Delaware law, which generally limit
dividends to an amount equal to the excess of the net assets of the Company (the
amount by which total assets exceed total liabilities) over its statutory
capital (generally defined as the aggregate par value of the outstanding shares
of the Company's capital stock having a par value plus the amount of the
consideration paid for shares of the Company's capital stock without par value)
or, if there is no such excess, to its net profits for the current and/or
immediately preceding fiscal year. Since the Company initially will have no
significant source of income other than dividends from the Association and
earnings from the net proceeds retained by the Company, the payment of dividends
by the Company may be dependent, in part, upon dividends from the Association
which is subject to various tax and regulatory restrictions on the payment of
dividends.
26
<PAGE>
MARKET FOR THE COMMON STOCK
The Company was recently formed and has never issued capital stock. The
Association, as a mutual institution, has never issued capital stock. The
Company has applied to have its Common Stock quoted on the Nasdaq SmallCap
Market under the symbol "GCFC" subject to the completion of the Conversion and
compliance with certain conditions. However, if the Company, after the
Offerings, qualifies to be listed on the Nasdaq National Market, it will take
steps to do so. The Company will seek to encourage and assist at least three
market makers to make a market in its Common Stock. Keefe, Bruyette & Woods,
Inc. has agreed to make a market for the Common Stock following consummation of
the Conversion, although it has no obligation to do so, and will assist the
Company in seeking to encourage at least two additional market makers to
establish and maintain a market in the Common Stock. Making a market involves
maintaining bid and ask quotations and being able, as principal, to effect
transactions in reasonable quantities at those quoted prices, subject to various
securities laws and other regulatory requirements. There can be no assurance
that an active and liquid trading market will develop or, if developed, will be
maintained. A public market having the desirable characteristics of depth,
liquidity and orderliness, however, depends upon the presence in the marketplace
of both willing buyers and sellers of Common Stock at any given time, which is
not within the control of the Company. No assurance can be given that an
investor will be able to resell the Common Stock at or above the Purchase Price
of the Common Stock after the Conversion. See "Risk Factors--Absence of Market
for Common Stock."
27
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Association at June 30, 1998, and the pro forma
consolidated capitalization of the Company after giving effect to the
Conversion, based upon the sale of the number of shares indicated in the table
and the other assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
Company Pro Forma Based Upon Sale at $10.00 Per Share
----------------------------------------------------
2,248,250
1,445,000 1,700,000 1,955,000 Shares
Shares Shares Shares (15% above
(Minimum of (Midpoint of (Maximum of Maximum of
Association Estimated Estimated Estimated Estimated
Historical Price Range) Price Range) Price Range) Price Range)(1)
------------ ------------ ------------- ------------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total deposits(2) ..................... $ 78,909 $ 78,909 $ 78,909 $ 78,909 $ 78,909
FHLB advances ......................... 27,680 27,680 27,680 27,680 27,680
--------- --------- --------- --------- ---------
Total ............................ $ 106,589 $ 106,589 $ 106,589 $ 106,589 $ 106,589
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Stockholders' equity:
Preferred Stock, $0.01 par value,
1,000,000 shares authorized;
none to be issued ................ $ -- $ -- $ -- $ -- $ --
Common Stock, $0.01 par value,
6,000,000 shares authorized;
shares to be issued as reflected . -- 14 17 20 22
Additional paid-in capital(3) ...... -- 13,670 16,187 18,703 21,599
Retained earnings(4) ............... 14,270 14,270 14,270 14,270 14,270
Unrealized loss on securities
available for sale ............. 61 61 61 61 61
Common Stock acquired by the ESOP(5) -- (1,156) (1,360) (1,564) (1,799)
Common Stock acquired by the
Stock Programs(6) ................ -- (578) (680) (782) (899)
--------- ---------- ---------- --------- ----------
Total stockholders' equity ............ $ 14,331 $ 26,281 $ 28,495 $ 30,708 $ 33,254
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
</TABLE>
- --------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations, or changes in market conditions or
general financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock-Based Incentive Plans intended to be adopted by
the Company and presented for approval of stockholders at a meeting of
stockholders following the Conversion. If approved by the stockholders of
the Company, an amount equal to 10% of the shares of Common Stock issued in
the Conversion will be reserved for issuance upon the exercise of options
to be granted under the Stock-Based Incentive Plan. See "Risk
Factors--Possible Dilutive Effect of Stock-Based Incentive Plan," Footnote
3 to the tables under "Pro Forma Data" and "Management of the
Association--Benefits--Stock-Based Incentive Plan."
(4) The retained earnings of the Association will be substantially restricted
after the Conversion. See "The Conversion--Liquidation Rights" and
"Regulation--Federal Savings Institution Regulation--Limitations on Capital
Distributions." Does not reflect the payment of any possible future
dividends. See "Dividend Policy."
(5) Assumes that 8.0% of the shares offered for sale in the Conversion will be
purchased by the ESOP and that the funds used to acquire such shares will
be borrowed from the Company. The Common Stock acquired by the ESOP is
reflected as a reduction of stockholders' equity. See "Management of the
Association--Benefits--Employee Stock Ownership Plan and Trust."
(6) Assumes that an amount equal to 4.0% of the shares of Common Stock issued
in the Conversion is purchased by the Stock-Based Incentive Plan subsequent
to the Conversion through open market purchases. The Common Stock purchased
by the Stock-Based Incentive Plan is reflected as a reduction of
stockholder's equity. Implementation of the Stock-Based Incentive Plan is
subject to the approval of the Company's stockholders at a meeting
following the Conversion. See "Risk Factors--Possible Dilutive Effect of
Stock-Based Incentive Plan," Footnote 2 to the tables under "Pro Forma
Data" and "Management of the Association--Benefits--Stock-Based Incentive
Plan."
28
<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 $13.7 million and $18.7 million (or $21.6
million in the event the Estimated Price Range is increased by 15% based upon
the following assumptions: (i) 100% of the shares of Common Stock will be sold
in the Subscription and Community Offerings; (ii) directors, officers and
employees of the Association and members of their immediate families
(collectively, "Affiliates") will purchase an aggregate of 200,000 shares of
Common Stock; (iii) Webb will receive a fee equal to 1.3% of the aggregate
Purchase Price of the shares sold in the Subscription and Community Offerings,
excluding shares purchased by Affiliates and the ESOP for which there is no fee;
and (iv) Conversion expenses, excluding the marketing fees paid to Webb, will be
approximately $594,000. Actual Conversion expenses may vary from those
estimated.
Pro forma consolidated net earnings of the Company for the six months
ended June 30, 1998, and for the year ended December 31, 1997, have been
calculated as if the Common Stock had been sold at the beginning of the
respective periods and the net proceeds had been invested at 5.29% and 5.35%,
respectively, the one-year U.S. Treasury note rate at June 30, 1998 and December
31, 1997, respectively. The Treasury yield was used on the reinvestment of
proceeds because it more appropriately reflects a market rate of return than the
arithmetic average yield on the Association's interest-earning assets and cost
of deposits. The tables below do not reflect the effect of withdrawals from
deposit accounts for the purchase of Common Stock or the effect of any possible
use of the net conversion proceeds. The pro forma after-tax yields for the
Company and the Association are assumed to be 3.49% for the six months ended
June 30, 1998, based on an effective tax rate of 34% and 3.53% for the year
ended December 31, 1997, based on an effective tax rate of 34%. Historical and
pro forma net earnings per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Common
Stock issued, as adjusted to give effect to the purchase of shares by the ESOP.
Historical and pro forma stockholders' equity per share amounts have been
calculated by dividing historical and pro forma amounts by the indicated number
of shares of Common Stock issued. No effect has been given in the pro forma
stockholders' equity calculations for the assumed earnings on the net proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company computed in accordance with GAAP. The pro forma stockholders' equity is
not intended to represent the fair market value of the Common Stock and may be
greater than amounts that would be available for distribution to stockholders in
the event of liquidation.
The following tables summarize historical data of the Association and
pro forma data of the Company at or for the six months ended June 30, 1998, and
at or for the year ended December 31, 1997, based on the assumptions set forth
above and in the table and should not be used as a basis for projections of
market value of the Common Stock following the Conversion. The tables below give
effect to the Stock Programs, which are expected to be adopted by the Company
following the Conversion and presented to stockholders for approval at a meeting
of stockholders. See Footnote 2 to the tables and "Management of the
Association--Benefits--Stock-Based Incentive Plan." No effect has been given in
the tables to the possible issuance of additional shares reserved for future
issuance pursuant to the Stock Option Plans which are expected to be adopted by
the Board of Directors of the Company and presented to stockholders for approval
at a meeting of stockholders, nor does book value give any effect to the
liquidation account to be established for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders or the bad debt reserve in
liquidation. See Footnote 3 to the tables below, "The Conversion--Liquidation
Rights" and "Management of the Association--Benefits--Stock-Based Incentive
Plan."
29
<PAGE>
<TABLE>
<CAPTION>
At or For the Six Months Ended June 30, 1998
---------------------------------------------------------
1,445,000 1,700,000 1,955,000 2,248,250
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share (15%
(Minimum (Midpoint (Maximum above Maximum
of Estimated of Estimated of Estimated of Estimated
Price Range) Price Range) Price Range) Price Range)(5)
----------- ----------- ----------- --------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds ........................................... $ 14,450 $ 17,000 $ 19,550 $ 22,483
Less: Estimated offering expenses and commission ......... (766) (796) (827) (862)
----------- ----------- ----------- -----------
Estimated net proceeds ................................... 13,684 16,204 18,723 21,621
Less: Common Stock acquired by ESOP ..................... (1,156) (1,360) (1,564) (1,799)
Common Stock acquired by
Stock-Based Incentive Plan ..................... (578) (680) (782) (899)
----------- ----------- ----------- -----------
Estimated net proceeds, as adjusted .................... $ 11,950 $ 14,164 $ 16,377 $ 18,923
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Consolidated net earnings:
Historical ............................................. $ 151 $ 151 $ 151 $ 151
Pro forma adjustments:
Net income from proceeds .......................... 209 247 286 330
ESOP(1) ........................................... (32) (37) (43) (49)
Stock-Based Incentive Plan(2) ..................... (38) (45) (52) (59)
----------- ----------- ----------- -----------
Pro forma net income ................................... $ 290 $ 316 $ 342 $ 373
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net earnings per share:
Historical ............................................. $ 0.11 $ 0.10 $ 0.08 $ 0.07
Pro forma adjustments:
Net income from proceeds .......................... 0.16 0.16 0.16 0.16
ESOP (1) .......................................... (0.02) (0.02) (0.02) (0.02)
Stock-Based Incentive Plan(2) ..................... (0.03) (0.03) (0.03) (0.03)
----------- ----------- ----------- -----------
Pro forma net income ................................... $ 0.22 $ 0.21 $ 0.19 $ 0.18
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Number of shares using SOP 93-6 ........................ 1,334,217 1,569,667 1,805,117 2,075,864
Stockholders' equity:
Historical ............................................. $ 14,331 $ 14,331 $ 14,331 $ 14,331
Estimated net proceeds ................................. 13,684 16,204 18,723 21,621
Less: Common Stock acquired by ESOP(1) ................ (1,156) (1,360) (1,564) (1,799)
Common Stock acquired by Stock-
Based Incentive Plan(2) ........................ (578) (680) (782) (899)
----------- ----------- ----------- -----------
Pro forma stockholders' equity(2)(3)(4) ................ $ 26,281 $ 28,495 $ 30,708 $ 33,254
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Stockholders' equity per share:
Historical ............................................. $ 9.92 $ 8.43 $ 7.33 $ 6.37
Estimated net proceeds ................................. 9.47 9.53 9.58 9.62
Less: Common Stock acquired
by ESOP(1) .................................... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by Stock-
Based Incentive Plan(2) ....................... (0.40) (0.40) (0.40) (0.40)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share(2)(3)(4) ...... $ 18.19 $ 16.76 $ 15.71 $ 14.79
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Offering price as a percentage of pro forma stockholders'
equity per share ....................................... 54.98% 59.66% 63.66% 67.61%
Number of shares ......................................... 1,445,000 1,700,000 1,955,000 2,248,250
Offering price to pro forma net earnings per share ....... 23.03x 23.49x 26.37x 27.87x
</TABLE>
(footnotes on following page)
30
<PAGE>
- ------------------------
(1) It is assumed that 8.0% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. For purposes of this table, the
funds used to acquire such shares are assumed to have been borrowed by the
ESOP from the Company. The amount borrowed is reflected as a reduction of
stockholders' equity. The Association intends to make annual contributions
to the ESOP in an amount at least equal to the principal and interest
requirement of the debt. The Association's total annual payment of the ESOP
debt is based upon 12 equal annual installments of principal and interest.
The pro forma net earnings assumes: (i) that the Association's contribution
to the ESOP is equivalent to the debt service requirement (excluding
interest, which is assumed to be paid to the Company and therefore
eliminated in consolidation) for the six months ended June 30, 1998, and
was made at the end of the period; (ii) that 48,167, 56,667, 65,167 and
74,942 shares at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Price Range, respectively, were committed to be released
during the six months 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--Benefits--Employee Stock Ownership Plan and Trust." Under SOP
93-6, the Company will recognize compensation cost equal to the fair value
of the ESOP shares during the periods in which they become committed to be
released. To the extent that the fair value of the Association's ESOP
shares differs from the cost of such shares, this differential will be
charged or credited to equity.
(2) Gives effect to the Stock-Based Incentive Plan expected to be adopted by
the Company following the Conversion and presented for approval at a
meeting of stockholders. The Stock-Based Incentive Plan intends to acquire
an amount of Common Stock equal to 4.0% of the shares of Common Stock
issued in the Conversion, or 57,800, 68,000, 78,200 and 89,930 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-Based Incentive Plan to purchase the shares will be contributed to
the Stock-Based Incentive Plan by the Association. In calculating the pro
forma effect of the Stock-Based Incentive Plan, it is assumed that the
required stockholder approval has been received, that the shares were
acquired by the Stock-Based Incentive Plan 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 Common Stock to the
Stock-Based Incentive Plan 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 $0.22, $0.20, $0.19 and $0.18 and pro
forma stockholders' equity per share would be $17.87, $16.50, $15.49 and
$14.61. There can be no assurance that stockholder approval of the
Stock-Based Incentive Plan will be obtained, or that the actual purchase
price of the shares will be equal to the Purchase Price. See "Management of
the Association--Benefits--Stock-Based Incentive Plan."
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock-Based Incentive Plan expected to be adopted by
the Company following the Conversion. The Company expects to present the
Stock-Based Incentive Plan for approval at a meeting of stockholders. If
the Stock-Based Incentive Plan is approved by stockholders, an amount equal
to 10% of the Common Stock issued in the Conversion, or 144,500, 170,000,
195,500 and 224,825 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-Based Incentive Plan. The issuance of Common Stock pursuant to the
exercise of options under the Stock-Based Incentive Plan will result in the
dilution of existing stockholders' interests. Assuming stockholder approval
of the Stock-Based Incentive Plan and all options were exercised at the end
of the period at an exercise price of $10.00 per share, the pro forma net
earnings per share would be $0.22, $0.20, $0.19 and $0.18, respectively,
and the pro forma stockholders' equity per share would be $17.44, $16.15,
$15.19 and $14.36, respectively. See "Management of the
Association--Benefits--Stock-Based Incentive Plan."
(4) The retained earnings of the Association will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The
Conversion--Liquidation Rights" and "Regulation--Federal Savings
Institution Regulation--Limitation on Capital Distributions."
(5) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations, changes in market conditions or
general financial and economic conditions following the commencement of the
Subscription and Community Offerings.
31
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1997
---------------------------------------------------------
1,445,000 1,700,000 1,955,000 2,248,250
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share (15%
(Minimum (Midpoint (Maximum above Maximum
of Estimated of Estimated of Estimated of Estimated
Price Range) Price Range) Price Range) Price Range)(5)
----------- ----------- ----------- --------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds........................................ $14,450 $17,000 $19,550 $22,483
Less: Estimated offering expenses and commissions... (766) (796) (827) (862)
---------- ---------- ---------- ----------
Estimated net proceeds................................ 13,684 16,204 18,723 21,621
Less: Common Stock acquired by ESOP.................. (1,156) (1,360) (1,564) (1,799)
Common Stock acquired by
Stock-Based Incentive Plan.................. (578) (680) (782) (899)
---------- ---------- ---------- ----------
Estimated net proceeds, as adjusted............... $11,950 $14,164 $16,377 $18,923
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Consolidated net earnings:
Historical........................................ $ 681 $ 681 $ 681 $ 681
Pro forma adjustments:
Net income from proceeds....................... 420 498 576 666
ESOP (1) ...................................... (64) (75) (86) (99)
Stock-Based Incentive Plan (2)................. (76) (90) (103) (119)
----------- ----------- ---------- ----------
Pro forma net income.............................. $ 961 $ 1,014 $ 1,068 $ 1,129
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share:
Historical........................................ $ 0.51 $ 0.43 $ 0.38 $ 0.33
Pro forma adjustments:
Net income from proceeds....................... 0.32 0.32 0.32 0.32
ESOP (1) ...................................... (0.05) (0.05) (0.05) (0.05)
Stock-Based Incentive Plan (2)................. (0.06) (0.06) (0.06) (0.06)
---------- ---------- ---------- ----------
Pro forma net income ............................. $ 0.72 $ 0.64 $ 0.59 $ 0.55
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Number of shares using SOP 93-6....................... 1,339,033 1,575,333 1,811,633 2,083,378
Stockholders' equity:
Historical........................................ $14,165 $14,165 $14,165 $14,165
Estimated net proceeds............................ 13,684 16,204 18,723 21,621
Less: Common Stock acquired by ESOP(1)............ (1,156) (1,360) (1,564) (1,799)
Common Stock acquired by Stock-Based
Incentive Plan(2)......................... (578) (680) (782) (899)
---------- ---------- ---------- ----------
Pro forma stockholders' equity(2)(3)(4)........... $26,115 $28,329 $30,542 $33,088
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Stockholders' equity per share:
Historical........................................ $ 9.80 $ 8.33 $ 7.25 $ 6.30
Estimated net proceeds............................ 9.42 9.49 9.54 9.58
Less: Common Stock acquired by ESOP(1)............ (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by Stock-Based
Incentive Plan(2)........................ (0.40) (0.40) (0.40) (0.40)
---------- ---------- ---------- ---------
Pro forma stockholders' equity per share(2)(3)(4). $ 18.02 $ 16.62 $ 15.59 $ 14.68
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Offering price as a percentage of pro forma stockholders'
equity per share.................................. 55.48% 60.16% 64.16% 68.10%
Number of shares...................................... 1,445,000 1,700,000 1,955,000 2,248,250
Offering price to pro forma net earnings per share... 13.94x 15.54x 16.97x 18.45x
</TABLE>
(footnotes on following page)
32
<PAGE>
- --------------------------
(1) It is assumed that 8.0% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. For purposes of this table, the
funds used to acquire such shares are assumed to have been borrowed by the
ESOP from the Company. The amount borrowed is reflected as a reduction of
stockholders' equity. The Association intends to make annual contributions
to the ESOP in an amount at least equal to the principal and interest
requirement of the debt. The Association's total annual payment of the ESOP
debt is based upon 12 equal annual installments of principal and interest.
The pro forma net earnings assumes: (i) that the Association's contribution
to the ESOP is equivalent to the debt service requirement (excluding
interest, which is assumed to be paid to the Company and therefore
eliminated in consolidation) for the year ended December 31, 1997, and was
made at the end of the period; (ii) that 96,333, 111,333, 130,333 and
149,883 shares at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Price Range, respectively, were committed to be released
during the year ended December 31, 1997, 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--Benefits--Employee Stock Ownership Plan and Trust." Under SOP
93-6, the Company will recognize compensation cost equal to the fair value
of the ESOP shares during the periods in which they become committed to be
released. To the extent that the fair value of the Association's ESOP
shares differs from the cost of such shares, this differential will be
charged or credited to equity.
(2) Gives effect to the Stock-Based Incentive Plan expected to be adopted by
the Company following the Conversion and presented for approval at a
meeting of stockholders. The Stock-Based Incentive Plan intends to acquire
an amount of Common Stock equal to 4.0% of the shares of Common Stock
issued in the Conversion, or 57,800, 68,000, 78,200 and 89,930 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-Based Incentive Plan to purchase the shares will be contributed to
the Stock-Based Incentive Plan by the Association. In calculating the pro
forma effect of the Stock-Based Incentive Plan, it is assumed that the
required stockholder approval has been received, that the shares were
acquired by the Stock-Based Incentive Plan 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 Common Stock to the
Stock-Based Incentive Plan 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 $0.70, $0.63, $0.58 and $0.53 and pro
forma stockholders' equity per share would be $17.71, $16.37, $15.37 and
$14.50. There can be no assurance that stockholder approval of the
Stock-Based Incentive Plan will be obtained, or that the actual purchase
price of the shares will be equal to the Purchase Price. See "Management of
the Association--Benefits--Stock-Based Incentive Plan."
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock-Based Incentive Plan expected to be adopted by
the Company following the Conversion. The Company expects to present the
Stock-Based Incentive Plan for approval at a meeting of stockholders. If
the Stock-Based Incentive Plan is approved by stockholders, an amount equal
to 10% of the Common Stock issued in the Conversion, or 144,500, 170,000,
195,500 and 224,825 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-Based Incentive Plan. The issuance of Common Stock pursuant to the
exercise of options under the Stock-Based Incentive Plan will result in the
dilution of existing stockholders' interests. Assuming stockholder approval
of the Stock-Based Incentive Plan and all options were exercised at the end
of the period at an exercise price of $10.00 per share, the pro forma net
earnings per share would be $0.68, $0.62, $0.57 and $0.52, respectively,
and the pro forma stockholders' equity per share would be $17.27, $16.02,
$15.08 and $14.26, respectively. See "Management of the
Association--Benefits--Stock-Based Incentive Plan."
(4) The retained earnings of the Association will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The
Conversion--Liquidation Rights" and "Regulation--Federal Savings
Institution Regulation--Limitation on Capital Distributions."
(5) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations, changes in market conditions or
general financial and economic conditions following the commencement of the
Subscription and Community Offerings.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company has only recently been formed and, accordingly, has no
results of operations. The Association's results of operations depend
primarily on net interest income, which is the difference between the
interest income earned on its loans, mortgage-backed securities, and
securities 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 investment securities, as well as
income from service charges and loan originations. The Association's
operating expenses principally consist of employee compensation and benefits,
occupancy, federal deposit-insurance premiums 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. Future changes in applicable law,
regulations or government policies may materially impact the Association.
Management Strategy
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 single-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. Management has sought in recent years to expand
the business of the Association by establishing additional branches to
service additional customers in its market area. Management's efforts in
increasing the Association's volume of shorter-term consumer loans have been
intended to help reduce interest rate risk, as well as to build on the
Association's residential mortgage business. The Association's deposits are
insured up to the maximum allowable amount by the Savings Association
Insurance Fund (the "SAIF"), and administered by the Federal Deposit
Insurance Corporation (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 of Market Risk
General. Market risk is the risk of loss from adverse changes in
market prices and rates. The Company's market risk arises primarily from
interest rate risk inherent in its lending and deposit taking activities. 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. One of the Association's principal
financial objectives is to achieve long-term profitability while reducing and
managing its exposure to fluctuations in interest rates. To that end,
management actively monitors and manages its interest rate risk exposure.
Qualitative Aspects of Market Risk. The principal objective of the
Association's interest rate risk management function is to evaluate the
interest rate risk included in certain balance sheet accounts, determine the
level of risk appropriate given the Association's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board of Directors' approved
guidelines. Through
34
<PAGE>
such management, the Association seeks to reduce the vulnerability of its
operations to changes in interest rates. The Association monitors its
interest rate risk as such risk relates to its operating strategies. The
Association's Board of Directors has established an Asset/Liability
Committee, responsible for reviewing its asset/liability policies and
interest rate risk position, which meets on a monthly basis and reports
trends and interest rate risk position to the Board of Directors. The extent
of the movement of interest rates is an uncertainty that could have a
negative impact on the earnings of the Association. See "Risk
Factors--Above Average Sensitivity to Increases in Interest Rates."
The Association has sought to reduce exposure of its earnings to
changes in market interest rates by managing asset and liability maturities
and interest rates primarily by reducing the effective maturity of assets
through the use of adjustable-rate mortgage-backed securities and, subject to
market conditions, adjustable-rate mortgage loans and by extending the
maturities of its interest-bearing liabilities. In the current low interest
rate environment, customer demand for adjustable-rate mortgage loans has been
limited. See "Business of the Association--Investment Activities."
Quantitative Aspects of Market Risk. As part of its interest rate
risk analysis, the Association uses an interest rate sensitivity model which
generates estimates of the change in the Association's net portfolio value
("NPV") over a range of interest rate scenarios and which is prepared by the
OTS on a quarterly basis. 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. The OTS produces
such analysis using its own model, based upon data submitted on the
Association's quarterly Thrift Financial Reports, including estimated loan
prepayment rates, reinvestment rates and deposit decay rates. See
"Regulation--Federal Savings Institution Regulation." The following table
sets forth the Association's NPV as of June 30, 1998, as calculated by the
OTS.
<TABLE>
<CAPTION>
NPV as % of Portfolio
Change in Value of Assets
Interest Rates Net Portfolio Value -------------------------------
In Basis Points ----------------------------------------------- NPV
(Rate Shock) Amount $ Change % Change Ratio Change (1)
- ---------------- ---------- ---------- ---------- --------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400 $ 7,946 $(10,082) (56)% 7.09% (730)
300 10,473 (7,555) (42) 9.08 (531)
200 13,136 (4,892) (27) 11.05 (333)
100 15,763 (2,265) (13) 12.89 (149)
Static 18,028 - - 14.39 -
(100) 19,977 1,949 11 15.60 121
(200) 21,599 3,571 20 16.54 216
(300) 23,425 5,397 30 17.58 319
(400) 25,614 7,586 42 18.79 441
</TABLE>
- ---------------
(1) Expressed in basis points (100 basis points equal 1.0%).
As illustrated in the table, the Association's NPV declines in a
rising interest rate environment. Specifically, the table indicates that, at
June 30, 1998, the Association's NPV was $18.0 million (or 14.39% of the
market value of portfolio assets) and that, based upon the assumptions
utilized, an immediate increase in market interest rates of 200 basis points
would result in a $4.9 million or 27% decline in the Association's NPV and
would result in a 333 basis point or 30.23% decline in the Association's NPV
ratio to 11.05%. The percentage decline in the Association's NPV at June 30,
1998 was within the limit in the Association's Board-approved guidelines.
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 different degrees to changes in market interest rates.
35
<PAGE>
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 and early withdrawal
levels would likely deviate significantly from those assumed in calculating
the table. Finally, the ability of many borrowers to service their debt may
decrease in case of an interest rate increase. 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 attempting to originate adjustable-rate
loans as market conditions allow, purchasing adjustable-rate mortgage-backed
securities, maintaining capital well in excess of regulatory requirements and
by selling fixed-rate single-family real estate loans, except such loans that
bear an interest rate above levels established from time to time by the
Association's board of directors based on current market rates.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid
on them.
36
<PAGE>
Average Balance Sheet. The following table sets forth certain
information relating to the Association at and for the six months ended June 30,
1998 and 1997 and for the years ended December 31, 1997, 1996 and 1995. The
average yields and costs are derived by dividing income or expense by the
average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown, except where otherwise noted, and reflect
annualized yields and costs. Average balances are derived from average monthly
balances. Management does not believe that the use of average monthly balances
instead of average daily balances has caused any material differences in the
information presented. The yields and costs include fees which are considered
adjustments to yields.
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
--------------------------------------------------------------
At June 30, 1998 1998 1997
------------------- ------------------------------- -----------------------------
Average Average
Yield/ Average Yield/ Average Yield/
Balance Rate(6) Balance Interest Rate(6) Balance Interest Rate(6)
-------- --------- --------- -------- --------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits ................. $ 1,217 5.80% $ 6,226 $ 64 2.07% $ 2,643 $ 43 3.28%
Investment securities(1):
Taxable ................... 51,497 6.72 50,719 1,814 7.22 63,258 2,207 6.99
Non-taxable(2) ............ 231 9.87 268 9 10.25 305 9 9.03
Loans, net(3) ............................. 60,937 7.97 59,045 2,434 8.31 51,312 2,091 8.22
FHLB stock ............................ 2,605 7.85 2,546 91 7.21 2,370 83 7.06
-------- -------- -------- -------- ------
Total interest-earning assets ......... 116,487 118,804 4,412 7.49 119,888 4,433 7.46
Noninterest-earning assets .................. 5,154 2,277 3,800
-------- -------- --------
Total assets .......................... $121,641 $121,081 $ 123,688
-------- -------- --------
-------- -------- --------
Interest-bearing liabilities:
Deposits:
NOW accounts ............................. $ 7,953 2.50 $ 7,632 109 2.88 $ 7,698 110 2.88
Money Market Accounts ................... 2,585 3.00 2,635 45 3.44 2,807 45 3.23
Savings accounts ......................... 23,945 3.10 23,427 358 3.08 23,684 361 3.07
Certificates of deposit .................. 43,449 5.74 43,765 1,206 5.56 40,201 1,139 5.71
-------- -------- -------- -------- ------
Total deposits .................. 77,932 77,459 1,718 4.47 74,390 1,655 4.49
FHLB advances and other borrowings .......... 27,680 5.86 28,009 818 5.89 34,177 1,001 5.91
-------- -------- -------- -------- ------
Total interest-bearing liabilities ....... 105,612 105,468 2,536 4.85 108,567 2,656 4.93
Noninterest-bearing liabilities ............. 1,698 1,319 -------- ------ 1,782 ------
-------- -------- --------
Total liabilities ....................... 107,310 106,787 110,349
Equity ...................................... 14,331 14,294 13,339
-------- -------- --------
Total liabilities and equity ............ $121,641 $121,081 $123,688
-------- -------- --------
-------- -------- --------
Net interest-earning assets ................. $ 10,875 $ 13,336 $ 11,322
-------- -------- --------
-------- -------- --------
Net interest income/interest rate
spread (4) ............................... $ 1,876 2.64% $ 1,777 2.53%
-------- ------ -------- ----
-------- ------ -------- ----
Net interest margin as a percentage of
interest-earning assets (5) .............. 3.19% 2.98%
----- ----
----- ----
Ratio of interest-earning assets to interest-
bearing liabilities ...................... 112.64 110.43
-------- --------
-------- --------
</TABLE>
- ----------------------------
(1) Includes investment securities available-for-sale and held-to-maturity,
mortgage-related securities available-for-sale and held-to-maturity.
(2) Yield/Rate is presented on a taxable equivalent basis using the Federal
income tax marginal rate of 34%.
(3) Balances are net of deferred loan origination costs, undisbursed proceeds
of construction loans in process, and include nonperforming loans.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(6) Stated on an annualized basis.
37
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------------------------
1997 1996 1995
--------------------------- -------------------------- -------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- -------- -------- -------- -------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest-bearing deposits .............. $ 2,892 $ 100 3.46% $ 3,382 $ 138 4.08% $ 3,314 151 4.56%
Investment securities (1):
Taxable .......................... 59,325 4,107 6.89 61,400 4,224 6.85 56,810 3,788 6.65
Non-taxable(2) ................... 291 18 9.36 411 26 9.59 530 33 9.43
Loans (3) ........................... 53,484 4,405 8.24 49,097 4,068 8.29 48,919 4,002 8.18
FHLB stock .......................... 2,412 173 7.17 2,250 157 6.98 2,100 143 6.81
-------- -------- -------- ------- -------- ------
Total interest-earning assets .... 118,404 8,803 7.42 116,540 8,613 7.37 111,673 8,117 7.26
Noninterest-earning assets ................ 3,718 3,491 2,854
-------- -------- --------
Total assets .............................. $122,122 $120,031 $114,527
-------- -------- --------
-------- -------- --------
Interest-bearing liabilities:
Deposits:
NOW accounts ........................ $ 7,611 200 2.63 $ 7,237 197 2.72 $ 7,446 218 2.93
Money market accounts ............... 2,741 92 3.36 2,888 95 3.29 3,583 117 3.27
Savings accounts .................... 23,424 724 3.09 24,536 759 3.09 25,282 781 3.09
Certificates of deposit ............. 41,001 2,351 5.73 37,740 2,181 5.78 33,383 1,777 5.32
-------- -------- ------- ----- -------- ------
Total deposits ................ 74,777 3,367 4.50 72,401 3,232 4.46 69,694 2,893 4.15
FHLB advances and other
borrowings .......................... 31,907 1,906 5.97 32,953 1,965 5.96 30,727 1,878 6.11
-------- -------- -------- ----- -------- ------
Total interest-bearing liabilities 106,684 5,273 4.94 105,354 5,197 4.93 100,421 $4,771 4.75
-------- ---- ----- ---- ------ ----
Noninterest-bearing liabilities ........ 1,814 1,550 1,386
-------- -------- --------
Total liabilities ................ 108,498 106,904 101,807
Equity ................................. 13,624 13,127 12,720
-------- -------- --------
Total liabilities and equity ..... $122,122 $120,031 $114,527
-------- -------- --------
-------- -------- --------
Net interest-earning assets ............ $ 11,720 $ 11,186 $ 11,252
-------- -------- --------
-------- -------- --------
Net interest income/interest rate
spread (4) .......................... $ 3,530 2.48% $3,416 2.44% $3,346 2.51%
-------- ---- ------ ---- ------ ----
-------- ---- ------ ---- ------ ----
Net interest margin as a percentage
of interest-earning assets (5) ....... 2.98% 2.92% 2.99%
---- ---- ----
---- ---- ----
Ratio of interest-earning assets
to interest-bearing liabilities ...... 111.22% 110.89% 111.39%
-------- -------- --------
-------- -------- --------
</TABLE>
- -------------------------------------
(1) Includes investment securities available-for-sale and held-to-maturity,
mortgage-related securities available-for-sale and held-to-maturity.
(2) Yield/Rate is presented on a taxable equivalent basis using the Federal
income tax marginal rate of 34%.
(3) Balances are net of deferred loan origination costs, undisbursed proceeds
of construction loans in process, and include nonperforming loans.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
38
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Association's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change (the sum of the prior columns). The changes attributable to the combined
impact of volume and rate have been allocated on a proportional basis between
changes in rate and volume.
<TABLE>
<CAPTION>
Six Months Ended Year Ended Year Ended
June 30, 1998 December 31, 1997 December 31, 1996
Compared to Compared to Compared to
Six Months Ended Year Ended Year Ended
June 30, 1997 December 31, 1996 December 31, 1995
-------------------------- ------------------------- --------------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Due to Due to
------------------ ---------------- ----------------
Rate Volume Net Rate Volume Net Rate Volume Net
-------- ------- -------- ------- ------- ------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits ...... $ (20) $ 41 $ 21 $ (19) $ (19) $ (38) $ (16) $ 3 $ (13)
Investment securities:
Taxable ..................... 70 (463) (393) 28 (145) (117) 118 318 436
Non-taxable ................. 2 (2) -- 3 (11) (8) 4 (11) (7)
Loans .......................... 24 319 343 (24) 361 337 51 15 66
FHLB ........................... 2 6 8 4 12 16 4 10 14
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest-earning assets $ 78 $ (99) $ (21) $ (8) $ 198 $ 190 $ 161 $ 335 $ 496
===== ===== ===== ===== ===== ===== ===== ===== =====
Interest-bearing liabilities:
Deposits:
NOW accounts ................ $ -- $ (1) $ (1) $ (7) $ 10 $ 3 $ (15) $ (6) $ (21)
Money market accounts ....... 3 (3) -- 2 (5) (3) 1 (23) (22)
Savings accounts ............ 1 (4) (3) (1) (34) (35) 1 (23) (22)
Certificates of deposit ..... (32) 99 67 (17) 187 170 160 244 404
FHLB advances and other
borrowing ................ (3) (180) (183) 3 (62) (59) (47) 134 87
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest-bearing
liabilities .......... $ (31) $ (89) $(120) $ (20) $ 96 $ 76 $ 100 $ 326 $ 426
===== ===== ===== ===== ===== ===== ===== ===== =====
Increase(decrease) in net
interest income ................ $ 109 $ (10) $ 99 $ 12 $ 102 $ 114 $ 61 $ 9 $ 70
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Comparison of Financial Condition at June 30, 1998 and December 31, 1997
Total assets of the Association were $121.6 million at June 30, 1998,
compared to $118.3 million at December 31, 1997, representing an increase of
$3.3 million, or 2.85%. This increase was primarily attributable to increases in
both total securities and total loans, which was partially offset by a decrease
in cash and cash equivalents. The increase in loans and securities was funded by
increases in both deposits and advances from FHLB-Cincinnati. The changes in the
balance sheets and the factors that caused the changes are discussed below.
Securities. Total securities increased $2.4 million, or 4.87%, from
$49.3 million at December 31, 1997 to $51.7 million at June 30, 1998. The
increase was the result of the Association using funds obtained through
FHLB-Cincinnati advances and increased deposits to fund securities and loan
growth.
In addition, the Association has approximately $9.7 million, or 25.0%
of mortgage-related securities, of privately backed CMOs at June 30, 1998.
Privately backed CMOs carry more risk than government-backed CMOs
39
<PAGE>
due to slightly higher credit risk. While many private issues carry insurance or
guarantees against credit losses to ensure a "AAA" market rating, the insurance
is not 100% of the principal as is the implicit guarantee associated with
government-backed CMOs. The reward for investing in private label products is
the yield premium versus comparable government-backed CMOs.
Loans. Loans increased $2.7 million, or 4.70% from $60.6 million at
December 31, 1997 to $60.6 million at June 30, 1998. Average loans comprised
49.70% of average interest-earning assets in 1998 compared to 45.17% at December
31, 1997. The increase in real estate loans reflects the Association's expansion
efforts through the new branch offices as well as the decrease in long-term
rates in 1998 which led to an overall increase in loan demand due to significant
refinancing activity.
Deposits and Borrowings. The Association's deposits are obtained
primarily from individuals and businesses in its market area. Total deposits
increased $1.9 million, or 2.47%, from $77.0 million at December 31, 1997 to
$78.9 million at June 30, 1998. The growth was primarily in certificates of
deposit, which increased $1.2 million, or 2.85%. The increase in certificates of
deposit, savings and interest-bearing checking accounts reflects the effect of
the additional deposits obtained due to the Association's expansion efforts
through the new branch offices. Advances from the FHLB-Cincinnati used to
purchase securities and fund loan demand increased $1.6 million, or 6.13% during
the period. Management uses FHLB-Cincinnati advances as an alternative source of
funding for loan demand and to fund additional mortgage-related securities.
Comparison of Results of Operations for the Six Months Ended June 30, 1998 and
1997
General. Net income for the six months ended June 30, 1998 decreased by
$226,000 or 59.95% from $377,000 for the six months ended June 30, 1997 to
$151,000 for the six months ended June 30, 1998. The decrease was primarily due
to the increase in noninterest expense and the provision for loan losses. The
decrease was partially offset by increases in net interest income and
noninterest income and a decrease in 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-earning assets and interest expense incurred on
interest-bearing liabilities. Net interest income is primarily affected by the
volumes, interest rates and composition of interest-earning assets and
interest-bearing liabilities.
Net interest income increased approximately $99,000, or 5.57%, from
$1.8 million for the six months ended June 30, 1997 to $1.9 million for the six
months ended June 30, 1998. The primary component of this change was $120,000,
or 4.52%, decrease in interest expense. The decrease in interest expense
consisted of a $180,000 decrease due to decreased average volume of
interest-bearing liabilities and a $60,000 increase due to increasing average
interest rates. The decrease in interest expense of $120,000 was partially
offset by a $21,000, or 0.47%, decrease in interest income.
Average loans outstanding during the six months ended June 30, 1998
increased $7.7 million, or 15.07%, compared to the six months ended June 30,
1997, while average securities decreased $12.6 million, or 19.79%, compared to
the prior period. During the six months ended June 30, 1998, the Association
experienced increases in yield on assets of 3 basis points and decreases in
yield for the cost of liabilities of 8 basis points, resulting in the $99,000
increase in net interest income. Net interest margin increased 21 basis points
from 2.98% for the six months ended June 30, 1997 to 3.19% for the six months
ended June 30, 1998. The Association's average interest rate spread increased 11
basis points from 2.53% for the six months ended June 30, 1997 to 2.64% for the
six months ended June 30, 1998.
The tables appearing elsewhere in this prospectus 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 Balance Sheet,"
"Rate/Volume Analysis" and "Weighted Average Yields."
40
<PAGE>
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 $150,000 from $0 for the six
months ended June 30, 1997 to $150,000 for the six months ended June 30, 1998.
At June 30, 1998, the allowance for loan losses totalled 0.61% of total loans
compared to 0.43% at June 30, 1997. The increase in the provision and the
allowance for loan losses is due in part to a $50,000 specific allocation for a
commercial loan for which the collection of the principal is in doubt. The loan
was classified as impaired during the six months ended June 30, 1998. The
remaining increase in the provision was due to the continued increase in
consumer lending, a significant portion of which is from indirect lending. While
the Association has had a relatively low amount of charge-offs from its consumer
loan portfolio, management believed that national increases in the level of
consumer bankruptcies during 1998 and the growth in consumer lending in areas of
the Association's market served by the Association's newer branches warranted an
increase in the overall level of the allowance for loan losses during 1998. In
addition, significant layoffs caused by a strike at facilities of a major
employer located in the northern portion of the Association's market area caused
management to increase the overall level of the allowance during 1998.
Subsequent to June 30, 1998, the strike was settled and the majority of the
workers affected by the layoffs have returned to work. 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.
Noninterest Income. The Association experienced a $47,000, or 40.87%,
increase in noninterest income for the six months ended June 30, 1998, as
compared with the six months ended June 30, 1997. The increase was primarily due
to loan sales which generated net gains of $33,000 in 1998, whereas no such
gains were generated in 1997.
Noninterest Expense. Noninterest expense increased $333,000, or 24.50%,
primarily due to the increase in salaries and benefits of $153,000, or 22.30%,
compared to 1997, and due to the increase in net occupancy expense of $39,000,
or 20.74%, compared to 1997. The increase in both salaries and benefits and net
occupancy expense were a direct result of the two branch offices opened during
October, 1997 and February, 1998. The branches are leased facilities located in
Phar-Mor stores and have allowed the Association to expand its market area by
entering the Youngstown and Boardman markets. Salaries and benefits and net
occupancy costs are expected to increase as a result of the additional branches
and due to an additional in-store Phar-Mor branch which opened during the third
quarter of 1998. Additional costs will also arise from the stock benefit plans
discussed elsewhere in this prospectus. See "Management of the
Association--Benefits."
Income Taxes. The provision for income taxes totaled $45,000 at June
30, 1998 compared to $156,000 at June 30, 1997, due to the decrease in income
before income taxes.
Comparison of Financial Condition at December 31, 1997 and December 31, 1996
Total assets of the Association were $118.3 million at December 31,
1997, compared to $124.2 million at December 31, 1996, representing a decrease
of $5.9 million, or 4.75%. This decline was primarily attributable to decreases
in total securities, which was partially offset by an increase in total loans.
The decline resulted in a reduction in advances from the FHLB-Cincinnati, which
was partially offset by an increase in deposits. The changes in the balance
sheets and the factors that caused the changes are discussed below.
Securities. Total securities decreased $15.0 million, or 23.33%, from
$64.3 million at December 31, 1996 to $49.3 million at December 31, 1997. The
decrease was the result of the Association using funds obtained through
maturities and paydowns of investment and mortgage-backed securities to fund
loan growth and reduce advances from the FHLB-Cincinnati.
41
<PAGE>
Loans. Loans increased $8.3 million, or 16.73% from $49.6 million at
December 31, 1996 to $57.9 million at December 31, 1997. Average loans comprised
45.17% of interest-earning assets at December 31, 1997 compared to 42.13% at
December 31, 1996. The increase in loans was primarily due to the increase of
$4.8 million, or 13.28%, of single-family loans and $4.5 million, or 49.30%
increase in consumer loans. The increase in single-family loans is due to the
continued emphasis in growing the company's core loan product. The increase in
consumer loans is directly related to an increase in indirect automobile lending
as the Association continues to expand its dealer relationships and continues to
emphasize increasing the consumer loan portfolio. Management continues to seek
growth in both the single-family loan and consumer loan portfolios. See "Risk
Factors--Increased Credit Risks Associated with Consumer Loans."
Deposits and Borrowings. The Association's deposits are obtained
primarily from individuals and businesses in its market area. Total deposits
increased $1.2 million, or 1.58%, from $75.8 million at December 31, 1996 to
$77.0 million at December 31, 1997. The growth was primarily in certificates of
deposit, which increased $2.2 million, or 5.50%. Advances from the FHLB
decreased $8.1 million, or 23.91% during the period.
Comparison of Results of Operations for the Years Ended December 31, 1997 and
December 31, 1996
General. Net income for the year ended December 31, 1997 increased by
$394,000 or 137.28% from $287,000 for the year ended December 31, 1996 to
$681,000 for the year ended December 31, 1997. The increase was primarily due to
an increase in net interest income and other income and the one-time $449,000
SAIF assessment in 1996. Excluding the one-time SAIF assessment, net income for
1996 would have been $583,000.
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
volumes, interest rates and composition of interest-earning assets and
interest-bearing liabilities.
Net interest income increased approximately $114,000, or 3.34%, from
$3.4 million for the year ended December 31, 1996 to $3,530,000 for the year
ended December 31, 1997. The primary component of this change was $190,000, or
2.21%, increase in interest income. The increase in interest income consisted of
a $198,000 increase due to increased average volume of interest-earning assets
and an $8,000 decrease due to decreasing average interest rates. The increase in
interest income was partially offset by a $76,000, or 1.46%, increase in
interest expense.
Average loans outstanding for the year ended December 31, 1997
increased $4.4 million, or 8.94%, compared to average loans outstanding for the
year ended December 31, 1996, while average securities decreased $2.2 million,
or 3.55%, compared to the prior year. For the year ended December 31, 1997, the
Association experienced an increase in average yield on assets of 5 basis points
and an increase in the average cost of liabilities of 1 basis point, resulting
in a $114,000 increase in net interest income over net interest income for the
year ended December 31, 1996. Average net interest margin increased 6 basis
points from 2.92% for the year ended December 31, 1996 to 2.98% for the year
ended December 31, 1997. The Association's average interest rate spread
increased 4 basis points from 2.44% for the year ended December 31, 1996 to
2.48% for the year ended December 31, 1997.
The tables appearing elsewhere in this prospectus 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 changes in average rates. See "Average Balance Sheet,"
"Rate/Volume Analysis" and "Weighted Average Yields."
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
42
<PAGE>
losses was $0 for each of the years ending December 31, 1996 and December 31,
1997. At December 31, 1997, the allowance for loan losses represented 0.40% of
total loans compared to 0.46% at December 31, 1996.
Noninterest Income. The Association experienced a $72,000, or 42.60%,
increase in noninterest income for the year ended December 31, 1997 over the
year ended December 31, 1996. The increase was primarily due to a $41,000
increase in service charges and fees compared to the prior year due to
restructuring and increasing fees on certain deposit accounts and transactions.
Noninterest Expense. Noninterest expense for the year ended December
31, 1997 decreased $369,000, or 11.35%, as compared with the year ended December
31, 1996, primarily due to $449,000 expensed during fiscal 1996 for the
assessment to recapitalize the SAIF, which was not repeated in 1997. The
increase in both salaries and benefits and net occupancy expense were related to
the full year impact of the branch office opened in Wintersville during the
first half of 1996 and due to the branch office located in Boardman opened
during the fourth quarter of 1997. The decrease in FDIC expense was partially
offset by increases in salaries and employee benefits of $112,000, or 7.77%, and
an increase in net occupancy expense of $56,000, or 18.86%.
Income Taxes. The provision for income taxes totaled $207,000 for the
year ended December 31, 1997 compared to $46,000 for the year ended December 31,
1996, due to the increase in income before income taxes.
Comparison of Results of Operations for the Years Ended December 31, 1996 and
December 31, 1995
General. Net income for the year ended December 31, 1996 decreased by
$382,000 or 57.10% from $669,000 for the year ended December 31, 1995 to
$287,000 for the year ended December 31, 1996. The decrease was primarily due to
the increase in noninterest expense partially offset by an increase in net
interest income and a decrease in tax expense. The increase in noninterest
expense was substantially due to the one-time SAIF assessment during 1996.
Excluding the one-time SAIF assessment, net income for 1996 was $583,000.
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-earning assets and interest expense incurred on
interest-bearing liabilities. Net interest income is primarily affected by the
volumes, interest rates and composition of interest-earning assets and
interest-bearing liabilities.
Net interest income increased approximately $70,000, or 2.09%, from
$3,346,000 for the year ended December 31, 1995 to $3,416,000 for the year ended
December 31, 1996. The primary component of this change was a $496,000, or
6.11%, increase in interest income. The increase in interest income consisted of
a $335,000 increase due to increased average volume of interest-earning assets
and a $161,000 increase due to increasing average interest rates. The increase
in interest income was partially offset by a $426,000, or 8.93%, increase in
interest expense.
Average securities for the year ended December 31, 1996 increased $4.5
million, or 7.80%, compared to the year ended December 31, 1995, while average
loans outstanding increased $178,000, or 0.36%, compared to the prior year. In
1996, the Association experienced increases in yields on assets of 11 basis
points and an increase in the cost of liabilities of 18 basis points, resulting
in the $70,000 increase in net interest income. Net interest margin decreased 7
basis points from 2.99% for the year ended December 31, 1995 to 2.92% for the
year ended December 31, 1996. The Association's average interest rate spread
decreased seven basis points from 2.51% for the year ended December 31, 1995 to
2.44% for the year ended December 31, 1996.
The tables appearing elsewhere in this prospectus 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 Balance Sheet,"
"Rate/Volume Analysis" and "Weighted Average Yields."
43
<PAGE>
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 was
$42,000 for the year ended December 31, 1995 and $0 for the year ended December
31, 1996. At December 31, 1996, the allowance for loan losses represented 0.46%
of total loans compared to 0.51% at December 31, 1995.
Noninterest Income. The Association experienced a $12,000, or 7.64%,
increase in noninterest income for the year ended December 31, 1996, as compared
with the year ended December 31, 1995. The increase was primarily due to a
$21,000 increase in service charges and fees compared to the prior year based on
an increase in both individual fees and the volume of transactions.
Noninterest Expense. Noninterest expense increased $767,000, or 30.87%,
for the year ended December 31, 1996 as compared with the year ended December
31, 1995, primarily due to a $454,000 increase in FDIC expense due to a one time
assessment of $449,000 to recapitalize the SAIF. The increase in noninterest
expense was also due to higher salaries and employee benefit costs of $184,000,
or 14.64%, and an increase in net occupancy expense of $92,000, or 44.88%. The
increase in both salaries and benefits and net occupancy expense was a result of
the new branch office opened in Wintersville during the first half of 1996.
Income Taxes. The provision for income taxes totaled $46,000 for the
year ended December 31, 1996 compared to $307,000 for the year ended December
31, 1995, due to a decrease in income before income taxes.
Liquidity and Capital Resources
The Association's primary sources of funds are deposits and other
borrowings, including advances from the FHLB-Cincinnati, 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-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 Association maintains a liquidity ratio above the regulatory requirement.
This requirement, which may be varied at the direction of the OTS depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The required ratio is currently 4.0%. The
Association's average regulatory liquidity ratios were 8.36%, 10.99%, 10.26%,
6.14% and 5.61% for the years ended December 31, 1997, 1996, 1995, 1994 and 1993
and 5.12% and 10.09% for the six months ended June 30, 1998 and 1997,
respectively. Management expects the Association's regulatory liquidity ratio to
increase immediately after the consummation of the Conversion because the bulk
of the net conversion proceeds will initially be invested in short-term
investment securities.
The Association's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities and
financing activities. Cash flows provided by operating activities were $1.0
million and $600,000 for the six months ended June 30, 1998 and 1997,
respectively, and were $1.7 million, $0.8 million and $1.7 million for the years
ended December 31, 1997, 1996 and 1995, respectively. Net cash from investing
activities consisted primarily of disbursements for loan originations and the
purchase of investments and mortgage-backed securities, offset by principal
collections on loans and proceeds from maturation of investments and paydowns on
mortgage-backed securities. Net cash from financing activities consisted
primarily of activity in deposit accounts. The net increase in deposits was $1.9
million for the six months ended June 30, 1998, and $1.2 million, $3.8 million
and $0.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
At June 30, 1998, the Association exceeded all of its regulatory
capital requirements with a tangible capital level of $14.3 million, or 11.78%,
of adjusted total assets, which is above the required level of $1.8 million, or
1.50%; core capital of $14.3 million, or 11.78%, of adjusted total assets, which
is above the required level of $4.8
44
<PAGE>
million, or 4.00%; and risk-based capital of $14.6 million, or 23.09%, of
risk-weighted assets, which is above the required level of $5.0 million, or
8.00%. See "Regulatory Capital Compliance."
The Association's most liquid assets are cash and short-term
investments. The levels of these assets are dependent on the Association's
operating, financing, lending and investing activities during any given period.
At June 30, 1998, cash and short-term investments totalled $3.4 million. The
Association has other sources of liquidity if a need for additional funds
arises, including securities maturing within one year and the repayment of
loans. The Association may also utilize FHLB advances or the sale of securities
available for sale as a source of funds. At June 30, 1998, the Association had
advances outstanding from the FHLB-Cincinnati of $27.7 million and $16.2 million
of securities available for sale.
At June 30, 1998, the Association had outstanding commitments to
originate loans of $4.7 million compared to $3.4 million at December 31, 1997.
The Association anticipates that it will have sufficient funds available to meet
its current loan origination commitments. See "Business of the
Association--General." Certificate accounts which are scheduled to mature in
less than one year from June 30, 1998 totalled $25.6 million. The Association
expects that a substantial portion of the maturing certificate accounts will be
retained by the Association at maturity. However, if a substantial portion of
these deposits are not retained, the Association may utilize FHLB advances, or
raise interest rates on deposits to attract new accounts, which may result in
higher levels of interest expense.
Year 2000 Compliance
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "98" is stored on the
system to represent 1998. Accordingly, operating systems upon which the
Association relies may recognize "00" as the year 1900 rather than 2000, causing
the systems to fail or generate erroneous information. Although there can be no
assurance that the Association and its service providers and vendors will be
successful in remedying all potential problems, the Association has conducted a
comprehensive review of its computer systems and equipment to identify
applications that could be affected by the "Year 2000" problem and has
implemented a plan designed to ensure that all software used in connection with
the Association's business will manage and manipulate data involving the
transition with data from 1999 to 2000 without functional or data abnormality
and without inaccurate results related to such data. Pursuant to the plan, the
Association has developed and implemented testing strategies and plans for
testing internal mission critical systems and testing mission critical systems
of service providers and vendors. Pursuant to the plan, the Association also
proposes to identify material customers and evaluate Year 2000 risks that may be
associated with them.
The Association's mission critical data processing is performed under
agreements with FISERV, Inc. ("FISERV"), a nationwide financial service bureau
which performs loan processing, savings deposit processing, and other financial
services. Consequently, the Association is very dependent on this service bureau
to conduct its business. The Association has already contacted FISERV, as well
as each of its other service providers to request schedules for Year 2000
compliance and expected costs, if any, to be passed along to the Association. To
date, the Association has been informed that FISERV and other primary service
providers anticipate that all reprogramming efforts will be completed by
December 31, 1998, allowing the Association adequate time for testing. The
Association believes that FISERV has completed its remediation efforts and is
engaged in the testing phase of its Year 2000 plan. However, the Association has
not received written assurances by FISERV that it is Year 2000 compliant. As a
member of FISERV's client advisory group, the Association is participating in
the group testing of the FISERV systems that is expected to be completed by
December 31, 1998. The Association is scheduled to engage in individual testing
with FISERV as needed during the first quarter of 1999. The Association's other
service providers, which interface with FISERV, are scheduled for testing for
Year 2000 compliance prior to March 31, 1999. While the Association's in-house
computers play a less critical role in the Association's operations, they have
also been upgraded for Year 2000 compliance and testing of those systems is
expected to be completed by December 31, 1998. The Association believes that its
costs related to Year 2000 will be approximately $70,000, in addition to any
increased costs passed through as higher fees charged by service providers,
which costs are not yet determined. Management
45
<PAGE>
does not expect these costs to have a significant impact on the Association's
financial position or results of operations. However, there can be no assurance
that all service providers' systems will be Year 2000 compliant; consequently,
the Association could incur incremental costs to convert to another service
provider.
In addition to possible expense related to its own systems, the
Association could incur losses if year-2000 issues adversely affect the
Association's depositors or borrowers. Such problems could include delayed loan
payments due to year-2000 problems affecting any of the Association's
significant borrowers or impairing the payroll systems of large employers in the
Association's market area. The Association has determined that Year 2000
non-compliance by any individual loan customer would have no material impact on
the Association. Because the Association's loan portfolio is highly diversified
with regard to individual borrowers and types of businesses, the Association
does not expect any significant or prolonged year-2000 related difficulties
arising from its customers that will affect net earnings or cash flows. The
risks associated with the Year 2000 issue, however, could go beyond the
Association's own ability to solve Year 2000 problems. Should suppliers of
critical services fail in their efforts to be Year 2000 compliant, it could have
significant adverse financial results for the Association. Accordingly, the
Association is developing Year 2000 remediation contingency plans for
mission-critical systems. These plans would likely involve replacement of
service providers and alternatives to the Association's established plan. The
Association expects that the contingency plans will be developed further or
halted depending on the Association's view of the development and success of the
established plan. Such determinations will likely be reached upon the conclusion
of the testing phase, which is expected to occur by March 31, 1999.
The above discussion contains certain forward-looking statements. The
discussion is based on the Association's current estimates that are subject to
uncertainties that could cause the implementation of the schedule, the costs and
the results contemplated by the plan to differ materially from the Association's
expectation. Such uncertainties include, but are not limited to, the continued
progress and eventual success of service providers and other persons on which
the Association and its customers depend. See "Risk Factors--Year 2000
Compliance."
Impact of New Accounting Standards
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 1995. 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, 1995,
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 1995, 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 1996 was not material to the 1996 financial
statements and the impact of the complete adoption in 1998 was not material to
the 1998 financial statements.
In June 1996, 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 1996, 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.
46
<PAGE>
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 does not have any current plans to elect to adopt this
statement prior to January 1, 2000 and does not have any current plans to elect
the one-time reclassification of securities currently classified as held to
maturity, 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 operation.
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.
BUSINESS OF THE ASSOCIATION
General
The Association's principal business is to operate as a
community-oriented savings and loan association. The Association attracts retail
deposits from the general public in the areas surrounding its offices and
invests those deposits, together with funds generated from operations, primarily
in fixed-rate single-family residential mortgage loans and investments in
mortgage-backed securities. The Association also invests in consumer loans,
primarily indirect automobile loans, and on a limited basis, home equity loans,
and construction and land loans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Management Strategy." The
Association's revenues are derived principally from interest on its mortgage
loans and consumer loans, and interest and dividends on its investments and
mortgage-backed securities. The Association's primary sources of funds are
deposits, FHLB advances and principal and interest payments on loans and
securities.
Market Area and Competition
The Association's primary market area includes Columbiana, Mahoning and
Jefferson Counties in Eastern Ohio. In recent years, the market area has
experienced higher unemployment rates than in Ohio and the United States and a
slightly decreasing population. Per capita income and median household income in
the market area are lower and have increased at a lower rate than in Ohio and
the United States.
The Association's primary market area is a competitive market for
financial services and the Association faces significant competition both in
making loans and in attracting deposits. The Association faces direct
competition from a number of financial institutions operating in its market
area, many with a state-wide or regional presence, and in some cases, a national
presence. Many of these financial institutions are significantly larger and have
greater financial resources than the Association. The Association's competition
for loans comes principally from savings institutions, mortgage banking
companies, commercial banks and credit unions. Its most direct competition for
deposits has historically come from savings institutions and commercial banks.
In addition, the Association faces increasing competition for deposits and other
financial products from non-bank institutions such as brokerage firms
47
<PAGE>
and insurance companies in mutual funds and annuities. Competition may also
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions.
Lending Activities
Loan Portfolio Composition. The Association's loan portfolio consists
primarily of conventional first mortgage loans secured by single-family
residences. At June 30, 1998, the Association had gross loans receivable of
$61.1 million, of which $42.7 million were single-family, residential mortgage
loans, or 69.91% of the Association's gross loans receivable. The remainder of
the portfolio consisted of: consumer loans of $15.4 million, or 25.20% of gross
loans receivable; $1.6 million of construction and land loans, or 2.63% of gross
loans receivable; $1.0 million of multi-family mortgage loans, or 1.62% of gross
loans receivable; and $0.4 million of commercial real estate loans, or 0.64% of
gross loans receivable. At that same date, 87.21% of the Association's loan
portfolio had fixed interest rates. The Association had $689,000 in
single-family residential mortgage loans held for sale at June 30, 1998.
The types of loans that the Association may originate are subject to
federal and state law and regulations. Interest rates charged by the Association
on loans are affected by the demand for such loans and the supply of money
available for lending purposes and the rates offered by competitors. These
factors are, in turn, affected by, among other things, economic conditions,
fiscal policies of the federal government, the monetary policies of the Federal
Reserve Board, and legislative tax policies.
48
<PAGE>
The following table sets forth the composition of the Association's
loan portfolio in dollar amounts and as a percentage of the portfolio at the
dates indicated.
<TABLE>
<CAPTION>
At December 31,
At June 30, ------------------------------------------------------------
1998 1997 1996 1995
------------------- ------------------ ------------------- -------------------
Percent Percent Percent Percent
of of of of
Amount Total Amount Total Amount Total Amount Total
-------- -------- -------- -------- -------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family(1) ............. $ 42,712 69.91% $ 42,429 72.80% $ 38,498 77.14% $ 37,060 76.20%
Multi-family and commercial .. 990 1.62 1,006 1.73 1,448 2.90 2,176 4.47
Construction ................. 1,607 2.63 1,017 1.74 612 1.23 -- --
-------- -------- -------- -------- -------- -------- --------- --------
Total real estate loans... 45,309 74.16 44,452 76.27 40,558 81.27 39,236 80.67
-------- -------- -------- -------- -------- -------- --------- --------
Consumer loans:
Home equity loans ............ 2,132 3.49 2,227 3.82 1,598 3.20 928 1.91
Automobile ................... 12,473 20.42 10,585 18.16 6,879 13.79 6,834 14.05
Other ........................ 788 1.29 710 1.22 580 1.16 845 1.74
-------- -------- -------- -------- -------- -------- --------- --------
Total consumer loans ...... 15,393 25.20 13,522 23.20 9,057 18.15 8,607 17.70
-------- -------- -------- -------- -------- -------- --------- --------
Commercial loans ................ 394 0.64 308 0.53 290 0.58 791 1.63
-------- -------- -------- -------- -------- -------- --------- --------
Total loans ............... 61,096 100.00% 58,282 100.00% 49,905 100.00% 48,634 100.00%
-------- -------- -------- --------
-------- -------- -------- --------
Less:
Deferred loan origination fees
and discounts .............. (159) (165) (159) (152)
Allowance for loan losses .... (375) (231) (229) (249)
--------- --------- -------- ---------
Total loans, net .......... $ 60,562 $ 57,886 $ 49,517 $ 48,233
--------- --------- -------- ---------
--------- --------- -------- ---------
<CAPTION>
At December 31,
---------------------------------------
1994 1993
------------------ ------------------
Percent Percent
of of
Amount Total Amount Total
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Single-family(1) ............. $ 37,070 75.49% $ 36,581 76.04%
Multi-family and commercial .. 2,952 6.01 4,005 8.33
Construction ................. -- -- -- --
-------- -------- -------- --------
Total real estate loans .... 40,022 81.50 40,586 84.37
-------- -------- -------- --------
Consumer loans:
Home equity loans ............ 828 1.68 584 1.21
Automobile ................... 6,320 12.87 4,849 10.08
Other ........................ 1,080 2.20 1,205 2.51
-------- -------- -------- --------
Total Consumer Loans........ 8,228 16.75 6,638 13.80
-------- -------- -------- --------
Commercial loans ................ 858 1.75 880 1.83
-------- -------- -------- --------
Total loans ................ 49,108 100.00% 48,104 100.00%
-------- --------
-------- --------
Less:
Deferred loan origination fees
and discounts .............. (149) (153)
Allowance for loan losses .... (211) (177)
---------- ---------
Total loans, net ........... $ 48,748 $ 47,774
---------- ---------
---------- ---------
</TABLE>
- ----------------
(1) Includes loans held for sale.
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<PAGE>
Loan Maturity. The following table shows the remaining contractual
maturity of the Association's total loans at June 30, 1998. The table does not
include the effect of future principal prepayments.
<TABLE>
<CAPTION>
At June 30, 1998
----------------------------------------------------------------------
Multi-
Family and
Single Commercial Total
Family Real Estate Construction (1) Consumer Commercial Loans
-------- ---------- ---------------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Amounts due in:
One year or less........................................ $ 1,097 $ -- $ -- $ 994 $ 146 $ 2,237
After one year: --
More than one year to three years.................... 219 162 -- 3,772 -- 4,153
More than three years to five years.................. 780 20 -- 10,122 -- 10,922
More than five years to 10 years..................... 5,031 263 -- 491 82 5,867
More than 10 years to 15 years....................... 18,392 410 -- -- 166 18,968
More than 15 years................................... 17,193 135 1,607 14 -- 18,949
-------- -------- -------- -------- ------ -------
Total amount due.................................. $42,712 $990 $1,607 $15,393 $394 $61,096
-------- -------- -------- -------- ------ -------
-------- -------- -------- -------- ------ -------
</TABLE>
- ---------------------
(1) Construction loans, which consist of loans to the owner for the
construction of single-family residences, automatically convert to
permanent financing upon completion of the construction phase.
The following table sets forth, at June 30, 1998, the dollar amount of
loans 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 loans:
Single-family............................................................... $35,630 $5,985 $41,615
Multi-family and commercial real estate..................................... 734 256 990
Construction................................................................ 1,336 271 1,607
-------- ------- --------
Total real estate loans.................................................. 37,700 6,512 44,212
Consumer loans................................................................. 14,399 -- 14,399
Commercial loans............................................................... 82 166 248
-------- ------- --------
Total loans.............................................................. $52,181 $6,678 $58,859
-------- ------- --------
-------- ------- --------
</TABLE>
Origination of Loans. The Association's mortgage lending activities are
conducted through its home office and five branch offices. Although the
Association may originate both adjustable-rate and fixed-rate mortgage loans, a
substantial majority of the Association's loan originations have been fixed-rate
mortgage loans. The Association's ability to originate loans depends upon the
relative customer demand for fixed-rate or adjustable-rate mortgage loans, which
is affected by the current and expected future level of interest rates. The
Association has not emphasized the origination of adjustable-rate mortgage loans
due to the relatively low demand for such loans in the Association's primary
market area. The Association sells a portion of the mortgage loans that it
originates, primarily to Freddie Mac and retains only loans that bear an
interest rate above levels established from time to time by the Association's
board of directors based on current market rates. At June 30, 1998, there were 9
loans categorized as held for sale. In addition, the Association also emphasizes
the origination of home equity loans and construction loans secured primarily by
owner-occupied properties.
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<PAGE>
The following table sets forth the Association's loan originations,
purchases, sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
For the Six Months For the Year
Ended June 30, Ended December 31,
----------------------- ----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans at beginning of period..................................... $57,886 $49,517 $49,517 $48,233 $48,748
------- ------- ------- ------- -------
Originations:
Real estate:
Single-family........................................... 10,177 5,238 11,932 11,495 6,513
Multi-family and commercial............................. 32 -- -- 353 --
Construction............................................ 1,095 272 1,042 376 198
Consumer................................................ 5,533 5,073 10,139 5,469 5,652
Commercial.............................................. 177 234 341 283 73
--------- --------- --------- --------- ---------
Total loans originated............................... 17,014 10,817 23,454 17,976 12,436
--------- --------- --------- --------- ---------
Principal loan repayments and prepayments..................... (9,560) (6,548) (14,161) (16,076) (12,331)
Loan sales................................................. (4,624) (115) (877) (629) (547)
Transfers to REO........................................... (4) (39) (39) -- (32)
Change in unearned origination fees........................ (6) (8) (6) (7) (3)
Change in allowance for loan losses........................ (144) (2) (2) 20 (38)
--------- --------- --------- --------- ---------
Net loan activity................................................ 2,676 4,105 8,369 1,284 (515)
--------- --------- --------- --------- ---------
Loans at end of period (1)................................. $60,562 $53,622 $57,886 $49,517 $48,233
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
--------------------
(1) Loans at end of period include loans in process of $1.1 million and
$491,000 for the six months ended June 30, 1998 and 1997, and $574,000,
$550 and $199,000 for fiscal years 1997, 1996 and 1995, respectively.
Single-Family Mortgage Lending. The primary lending activity of the
Association has been and continues to be the origination of permanent
conventional mortgage loans secured by single-family residences located in the
Association's primary market area. The Association sells a portion of the
fixed-rate loans that it originates. The Association retains the servicing
rights on the loans it sells. The Association retains fixed-rate loans with a
rate of interest higher than the level established by the Association's board of
directors as high in relation to the current market based on Freddie Mac's
levels. At June 30, 1998, the Association retained 30-year loans with a rate of
interest of 7.5% or higher and 15-year loans with a rate of interest of 7.0% or
higher. The Association generally retains for its portfolio any ARM loans that
it originates. Most single-family mortgage loans are underwritten according to
Freddie Mac guidelines. Loan originations are obtained from the Association's
loan officers and their contacts with the local real estate industry, existing
or past customers, and members of the local communities. The Association
primarily originates fixed-rate loans in the current low interest rate
environment, but also offers adjustable-rate mortgage loans. At June 30, 1998,
single-family mortgage loans totalled $42.7 million, or 69.91% of total loans at
such date. At that date, of the Association's mortgage loans secured by
single-family residences, $35.7 million, or 83.7%, were fixed-rate loans.
The Association's policy is to originate single-family residential
mortgage loans in amounts up to 80% of the appraised value of the property
securing the loan and up to 95% of the appraised value if private mortgage
insurance is obtained. Mortgage loans originated by the Association generally
include due-on-sale clauses which provide the Association with the contractual
right to deem the loan immediately due and payable in the event the borrower
transfers ownership of the property without the Association's consent.
Due-on-sale clauses are an important means of adjusting the rates on the
Association's fixed-rate mortgage loan portfolio and the Association exercises
its rights
51
<PAGE>
under these clauses. The residential mortgage loans originated by the
Association are generally for terms to maturity of up to 30 years.
The Association offers several adjustable-rate loan programs with
terms of up to 25 years and interest rates that adjust either annually or
every three years. Of the Association's mortgage loans secured by
single-family residences, $7.0 million, or 16.3%, had adjustable rates.
Certain of the Association's one-year ARM loans have a maximum adjustment
limitation of 2% per year and a 6% lifetime cap on adjustments. The
Association has additional one-year ARM loans that have no caps. The
Association's three-year ARM loan has a maximum adjustment limitation of 1.5%
per change and a 6% lifetime cap. The interest rate adjustments on ARM loans
currently offered are indexed to the monthly average rate on a variety of
established indices.
The volume and types of ARM loans originated by the Association have
been affected by such market factors as the level of interest rates, consumer
preferences, competition and the availability of funds. In recent years, demand
for ARM loans in the Association's primary market area has been weak due to the
low interest rate environment and consumer preference for fixed-rate loans.
Consequently, in recent years the Association has not originated a significant
amount of ARM loans as compared to its originations of fixed-rate loans. The ARM
loans offered by the Association do not provide for initial deep discount
interest rates or for negative amortization. Although the Association will
continue to offer ARM loans, there can be no assurance that in the future the
Association will be able to originate a sufficient volume of ARM loans to
constitute a significant portion of the Association's loan portfolio.
Multi-Family and Commercial Real Estate Lending. On a limited basis,
the Association occasionally originates multi-family mortgage loans generally
secured by properties located in the Association's primary market area. In
reaching its decision on whether to make a multi-family loan, the Association
considers a number of factors including: the net operating income of the
mortgaged premises before debt service and depreciation; the debt service ratio
(the ratio of net operating income to debt service); and the ratio of loan
amount to appraised value. Pursuant to the Association's current underwriting
policies, a multi-family mortgage loan may be made in an amount up to 80% of the
appraised value of the underlying property. In addition, the Association
generally requires a debt service ratio of 120%. Properties securing a
multi-family loan are appraised by an independent appraiser.
When evaluating a multi-family loan, the Association also considers the
financial resources and income level of the borrower, the borrower's experience
in owning or managing similar property, and the Association's lending experience
with the borrower. The Association's underwriting policies require that the
borrower be able to demonstrate strong management skills and the ability to
maintain the property from current rental income. The borrower is required to
present evidence of the ability to repay the mortgage and a satisfactory credit
history. In making its assessment of the creditworthiness of the borrower, the
Association generally reviews the financial statements, employment and credit
history of the borrower, as well as other related documentation.
On a limited basis, the Association originates commercial real estate
loans that are generally secured by properties used for business or religious
purposes such as farms, churches, small office buildings or retail facilities
located in its primary market area. The Association's underwriting procedures
provide that commercial real estate loans may be made in amounts up to 70% of
the appraised value of the property. The Association's underwriting standards
and procedures are similar to those applicable to its multi-family loans,
whereby the Association considers the net operating income of the property, the
debt service ratio and the borrower's expertise, credit history and
profitability. The largest commercial real estate loan in the Association's
portfolio at June 30, 1998 was $120,000. The loan was current and performing in
accordance with its contractual terms at June 30, 1998.
Multi-family and commercial real estate loans are generally considered
to involve a greater degree of risk than single-family residential mortgage
loans. Because payments on loans secured by multi-family and commercial real
estate properties are often dependent on successful operation or management of
the properties, repayment of such loans may be subject to a greater extent to
adverse conditions in the real estate market or the economy. The Association
seeks to minimize these risks through its underwriting policies, which require
such loans to be qualified at origination on the basis of the property's income
and debt coverage ratio.
52
<PAGE>
The Association's multi-family and commercial real estate loan
portfolio at June 30, 1998 totalled $1.0 million or 1.62% of gross loans
receivable. The Association's largest multi-family loan at June 30, 1998, had a
principal balance outstanding of less than $200,000.
Commercial Lending. On a very limited basis, the Association makes
commercial business loans generally secured by business equipment, inventory,
accounts receivable and other business assets. At June 30, 1998, the
Association's commercial loan portfolio was $394,000 or 0.64% of gross loans
receivable, of which amount $50,000 was in non-accrual status. The Association
does not currently anticipate that commercial lending activities will
significantly increase in the immediate future.
Construction and Land Lending. The Association generally originates
construction and land development loans to contractors and individuals in its
primary market area. The Association's construction loans primarily are made to
finance the construction of owner-occupied single-family residential properties
and, to a significantly lesser extent, individual properties built by developers
for future sale. The Association's construction loans to individuals are
primarily fixed-rate loans which, after a four-month construction period,
convert to permanent loans with maturities of up to 30 years. The Association's
policies provide that construction loans may be made in amounts up to 80% of the
appraised value of the property for construction of single-family residences.
The Association requires an independent appraisal of the property. Loan proceeds
are disbursed in increments as construction progresses and as inspections
warrant. The Association requires regular inspections to monitor the progress of
construction. Land loans are determined on an individual basis, but generally
they do not exceed 75% of the actual cost or current appraised value of the
property, whichever is less. The largest construction and land loan in the
Association's portfolio at June 30, 1998 had a balance of $168,000 and is
secured by a single family residence. This loan is currently performing in
accordance with its terms. At June 30, 1998, the Association had $1.6 million of
construction and land loans totalling 2.63% of the Association's gross loans
receivable.
Construction and land financing is considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development compared to the estimated cost (including interest)
of construction. If the estimate of value proves to be inaccurate, the
Association may be confronted with a project, when completed, having a value
which is insufficient to assure full repayment.
Consumer and Other Lending. The Association's originated consumer loans
generally consist of automobile loans, second mortgage loans, home equity loans
and loans secured by deposits. The Association originates a relatively small
number of home equity lines of credit, which are generally ARM loans with the
rate adjusting monthly at 2% above the prime rate of interest as disclosed in
The Wall Street Journal. At June 30, 1998, the Association's consumer loan
portfolio was $15.4 million, or 25.2% of gross loans receivable.
Loans secured by rapidly depreciable assets such as automobiles entail
greater risks than single-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, consumer loan collections on these loans depend 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. A significant portion of the Association's
automobile loans are originated on the Association's behalf by automobile
dealers at the time of sale. This indirect lending requires the maintenance of
relationships with such dealers. Such loans do not have the benefit of direct
interaction between the borrowers and the Association's lending officers during
the underwriting process.
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies of the Association. Consumer loans in amounts
up to $25,000 may be approved by the Association's loan officers. Loans in
excess of $25,000 and up to $50,000 must be approved by the President or Vice
President. Consumer loans in excess of $50,000 must be approved by the Board of
Directors. All mortgage loans are approved by the Executive
53
<PAGE>
Committee. Pursuant to OTS regulations, loans to one borrower cannot exceed 15%
of the Association's unimpaired capital and surplus. The Association will not
make loans to one borrower that are in excess of regulatory limits.
Delinquencies and Classified Assets. The Board of Directors performs a
monthly review of all delinquent loans thirty days or more past due. The
procedures taken by the Association with respect to delinquencies vary depending
on the nature of the loan and period of delinquency. When a borrower fails to
make a required payment on a loan, the Association takes a number of steps to
have the borrower cure the delinquency and restore the loan to current status.
The Association sends the borrower a written notice of non-payment after the
loan is first past due. In the event payment is not then received, additional
letters are sent and phone calls are made. If management believes that the loan
is well-secured, the Association generally will try to work with the borrower to
have the loan brought current. If the loan is still not brought current and it
becomes necessary for the Association to take legal action, the Association will
commence foreclosure proceedings against any real property that secures the
loan. If a foreclosure action is instituted and the loan is not brought current,
paid in full, or refinanced before the foreclosure sale, the real property
securing the loan is foreclosed upon and sold at a sheriff's sale.
Federal regulations and the Association's Classification of Assets
Policy require that the Association utilize an internal asset classification
system as a means of reporting problem and potential problem assets. The
Association has incorporated the OTS internal asset classifications as a part of
its credit monitoring system. The Association currently classifies problem and
potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset
is considered "Substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss allowance is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, under current OTS policy the Association is
required to consider establishing a general valuation allowance in an amount
deemed prudent by management. The general valuation allowance, which is a
regulatory term, represents a loss allowance which has been established to
recognize the inherent credit risk associated with lending and investing
activities, but which, unlike specific allowances, has not been allocated to
particular problem assets. When an insured institution classifies one or more
assets, or portions thereof, as "Loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation allowances. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
While the Association believes that it has established an adequate allowance for
estimated loan losses, there can be no assurance that regulators, in reviewing
the Association's loan portfolio, will not request the Association to materially
increase its allowance for loan losses, thereby negatively affecting the
Association's financial condition and earnings. Although management believes
that an adequate allowance for loan losses has been established, actual losses
are dependent upon future events and, as such, further additions to the level of
allowances for estimated loan losses may become necessary.
54
<PAGE>
The Association's Classification of Assets Committee reviews and
classifies the Association's assets on a quarterly basis and the Board of
Directors reviews the results of the reports on a quarterly basis. The
Association classifies assets in accordance with the management guidelines
described above. At June 30, 1998, the Association had $19,000 of assets
designated as Special Mention which consisted of two loans, $151,000 of assets
classified as Substandard consisting of ten loans and no assets classified as
doubtful and loss. At June 30, 1998 the largest loan designated as Special
Mention was a $12,000 loan and was secured by real estate. At June 30, 1998, the
largest adversely (other than Special Mention) classified loan was $50,000 and
was secured by lumber yard equipment and inventory.
The following table(1) sets forth the delinquencies in the
Association's loan portfolio as of the dates indicated.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
----------------------------------------- ----------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
------------------ ------------------- -------------------- ------------------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
------ --------- ------ ---------- ------ --------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Single-family ....................... 2 $ 21 8 $ 88 8 $114 6 $128
Multi-family and commercial ......... -- -- -- -- -- -- -- --
Consumer Loans:
Home equity loans and lines of credit -- -- -- -- 3 26 -- --
Automobile .......................... -- -- -- -- -- -- -- --
Unsecured lines of credit ........... -- -- -- -- -- -- -- --
Other ............................... 2 8 2 5 2 5 3 7
Commercial Loans ....................... -- -- 1 50 -- -- 1 50
---- ---- ---- ---- ---- ---- ---- ----
Total ............................ 4 $ 29 11 $143 13 $145 10 $185
---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ----
Delinquent loans to total loans ........ 0.05% 0.23% 0.25% 0.32%
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1996
--------------------------------------- -------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
------------------ ------------------- --------------------- ---------------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
------ ----------- ------ ---------- --------- ----------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Single-family ....................... 6 $215 2 $ 41 2 $ 18 1 $ 7
Multi-family and commercial ......... -- -- -- -- -- -- -- --
Consumer Loans:
Home equity loans and lines of credit -- -- -- -- -- -- 1 2
Automobile .......................... -- -- -- -- -- -- 1 2
Unsecured lines of credit ........... 1 1 -- -- -- -- -- --
Other ............................... 3 10 1 4 1 3 3 11
Commercial Loans ....................... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total ............................ 10 $226 3 $ 45 3 $ 21 6 $ 22
---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ----
Delinquent loans to total loans ........ 0.45% 0.09% 0.04% 0.05%
</TABLE>
- ----------------------
(1) The table does not include delinquent loans less than 60 days past due.
At June 30, 1998 and December 31, 1997, 1996 and 1995, total loans past
due 30 to 59 days amounted to $356,000, $356,000, $471,000 and
$190,000, respectively.
55
<PAGE>
Non-Performing Assets and Impaired Loans. The following table sets
forth information regarding non-accrual loans and REO. At June 30, 1998,
non-accrual loans totalled $138,000, consisting of 9 loans and no REO. It is the
policy of the Association to cease accruing interest on loans 90 days or more
past due (unless the loan principal and interest are determined by management to
be fully secured and in the process of collection) and to charge off all accrued
interest. At June 30, 1998, 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 $10,000. At June 30, 1998, the
Association had a $55,000 recorded investment in impaired loans which had
specific allowances of $0. At December 31, 1997, there were $5,000 of impaired
loans with specific loan loss allowances of $0. At December 31, 1996, there were
$0 of impaired loans.
<TABLE>
<CAPTION>
At June 30, At December 31,
------------------ -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-accruing loans:
Single-family real estate ...... $ 88 $106 $128 $ 41 $ 8 $120 $161
Consumer ....................... -- 11 21 4 16 6 4
Commercial ..................... 50 -- 50 -- -- -- --
---- ---- ---- ---- ---- ---- ----
Total(1) .................... 138 117 199 45 24 126 165
Real estate owned (REO) ........... -- -- -- -- -- -- --
Other repossessed assets .......... -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ----
Total nonperforming assets(2) $138 $117 $199 $ 45 $ 24 $126 $165
Troubled debt restructurings ...... -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ----
Troubled debt restructurings and
total nonperforming assets ...... $138 $117 $199 $ 45 $ 24 $126 $165
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
Total nonperforming loans and
troubled debt restructurings as a
percentage of total loans ....... 0.23% 0.22% 0.34% 0.09% 0.05% 0.26% 0.34%
Total nonperforming assets and
troubled debt restructurings as a
percentage of total assets ...... 0.11% 0.09% 0.17% 0.04% 0.02% 0.11% 0.14%
</TABLE>
- -----------------
(1) Total non-accruing loans equals total nonperforming loans.
(2) Nonperforming assets consist of nonperforming loans (and impaired loans),
other repossessed assets and REO.
56
<PAGE>
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Association's loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover estimated losses in loans receivable which are deemed probable
and estimable. The allowance is based upon a number of factors, including
current economic conditions, actual loss experience and industry trends. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Association's allowance for loan losses. Such
agencies may require the Association to make additional provisions for loan
losses based upon information available at the time of the review. As of June
30, 1998, the Association's allowance for loan losses was 0.61% of gross loans
receivable as compared to 0.40% as of December 31, 1997. The Association had
non-accrual loans of $138,000 and $199,000 at June 30, 1998 and December 31,
1997, respectively. The Association will continue to monitor and modify its
allowances for loan losses as conditions dictate.
The following table sets forth activity in the Association's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
At or For the Six
Months Ended
June 30, At or for the Year Ended December 31,
------------------ -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of year.................. $231 $229 $229 $249 $211 $177 $129
Charged-off loans:
Single-family real estate.................................. 7 -- -- 15 -- -- --
Multi-family and commercial real estate.................... -- -- -- -- -- -- --
Consumer................................................... -- -- 4 5 4 14 --
----- ----- ----- ------ ------ ----- -----
Total charged-off loans................................. 7 -- 4 20 4 14 --
Recoveries on loans previously charged off:
Single-family real estate.................................. -- -- -- -- -- -- --
Consumer................................................... 1 2 6 -- -- -- --
----- ------ ----- ----- ----- ----- -----
Total recoveries........................................ 1 2 6 -- -- -- --
Net loans charged-off (recovered)............................. 6 (2) (2) 20 4 14 --
Provision for loan losses..................................... 150 -- -- -- 42 48 48
----- ------ ----- ----- ----- ----- -----
Allowance for loan losses, end of period...................... $375 $231 $231 $229 $249 $211 $177
----- ------ ----- ----- ----- ----- -----
----- ------ ----- ----- ----- ----- -----
Allowance for loan losses to total loans...................... 0.61% 0.43% 0.40% 0.46% 0.51% 0.43% 0.37%
Allowance for loan losses to nonperforming loans
and troubled debt restructuring............................ 2.72x 1.97x 1.16x 5.09x 10.38x 1.67x 1.07x
Net loans charged-off (recovered) to
allowance for loan losses................................. 1.60% (0.87)% (0.87)% 8.73% 1.61% 6.64% --
Net loans charged-off (recovered) to average loans............ 0.01% -- -- 0.04% 0.01% 0.03% --
</TABLE>
57
<PAGE>
The following table sets forth the Association's allowance for loan
losses in each of the categories listed at the dates indicated and the
percentage of such amounts to the total allowance and to total loans.
<TABLE>
<CAPTION>
At June 30, At December 31,
---------------------------------- --------------------------------------------------------------------
1998 1997 1996
---------------------------------- ---------------------------------- ---------------------------------
% of Percent % of Percent % of Percent
Allowance of Loans Allowance of Loans Allowance of Loans
in each in Each in each in Each in each in Each
Category Category Category Category Category Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
--------- ---------- --------- --------- ------------- -------- ---------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate .......... $135 36.00% 74.16% $107 46.32% 76.27% $107 46.73% 81.27%
Consumer ............. 103 27.47 25.20 37 16.02 23.20 35 15.28 18.15
Commercial ........... 137 36.53 0.64 87 37.66 0.53 87 37.99 0.58
Unallocated .......... -- -- -- -- -- -- -- -- --
---- ------ ------ ---- ------ ------ ---- ------ ------
Total allowance
for loan losses $375 100.00% 100.00% $231 100.00% 100.00% $229 100.00% 100.00%
---- ------ ------ ---- ------ ------ ---- ------ ------
---- ------ ------ ---- ------ ------ ---- ------ ------
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------- ------------------------------------------------------------------------------------
1995 1994 1993
-------------------------------- --------------------------------- ---------------------------------
% of Percent % of Percent % of Percent
Allowance of Loans Allowance of Loans Allowance of Loans
in each in Each in each in Each in each in Each
Category Category Category Category Category Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
--------- ----------- -------- -------- --------- -------- ------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate .......... $120 48.19% 80.67% $111 52.61% 81.50% $ 87 49.15% 84.37%
Consumer ............. 42 16.87 17.70 30 14.22 16.75 32 18.08 13.80
Commercial ........... 87 34.94 1.63 70 33.17 1.75 58 32.77 1.83
Unallocated .......... -- -- -- -- -- -- -- -- --
---- ------ ------ ---- ------ ------ ---- ------ ------
Total allowance
for loan losses $249 100.00% 100.00% $211 100.00% 100.00% $177 100.00% 100.00%
---- ------ ------ ---- ------ ------ ---- ------ ------
---- ------ ------ ---- ------ ------ ---- ------ ------
</TABLE>
Real Estate Owned
At June 30, 1998, the Association had no REO. If the Association
acquires any REO, it is initially recorded at fair value less costs to sell and
thereafter REO is recorded at the lower of the recorded investment in the loan
or the fair value of the related assets at the date of foreclosure, less costs
to sell. Thereafter, REO is valued at the lower of the recorded investment or
the fair value of the property less costs to sell. If there is a further
deterioration in value, the Association provides for a specific valuation
allowance.
Investment Activities
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances and federal funds. Subject to
various restrictions, federally chartered savings institutions may also invest
their assets in commercial paper, investment-grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally chartered
savings institution is otherwise authorized to make directly. Additionally, the
Association must maintain minimum levels of investments that qualify
58
<PAGE>
as liquid assets under OTS regulations. See "Regulation--Federal Savings
Institution Regulation--Liquidity." Historically, the Association has maintained
liquid assets above the minimum OTS requirements and at a level considered to be
more than adequate to meet its normal daily activities.
The investment policy of the Association as established by the Board of
Directors attempts to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk, and
complement the Association's lending activities. The Association's policies
generally limit investments to government and federal agency securities. The
Association's policies provide the authority to invest in U.S. Treasury and
federal agency securities meeting the Association's guidelines and in
mortgage-backed securities guaranteed by the U.S. government and agencies
thereof. The Association funds such investments not only through payments on
deposit accounts and the proceeds from the repayment of loans and the
Association's operations, but also through FHLB-Cincinnati advances. The success
of such use of FHLB-Cincinnati advances depends on management's ability to
maintain a positive spread between the interest earned on the investment
securities and the interest cost of the FHLB-Cincinnati advances. At June 30,
1998, the Association had investment and mortgage-backed securities with a
carrying value of $51.7 million and a market value of $51.3 million. At June 30,
1998, the Association had $16.2 million in mortgage-backed and investment
securities classified as available for sale and $35.6 million in investment and
mortgage-backed securities classified as held to maturity. Of the Association's
mortgage-backed securities, $5.8 million had adjustable rates at June 30, 1998.
At June 30, 1998, all of the Association's mortgage-backed securities
were insured or guaranteed by either Freddie Mac, Fannie Mae or Ginnie Mae. In
addition, the Association owned one CMO which has passed stress testing at June
30, 1998. Investments in mortgage-backed securities involve a risk that actual
prepayments will be greater than estimated prepayments over the life of the
security which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments thereby reducing or
increasing, respectively, the net yield on such securities. There is also the
risk associated with the necessity to reinvest the cash flows from such
securities at market interest rates which may be lower than the interest rates
received on such securities. In addition, the market value of such securities
may be adversely affected by changes in interest rates.
59
<PAGE>
The following table sets forth certain information regarding the
amortized cost and fair value of the Association's securities at the dates
indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
1998 1997 1996 1995
------------------- ------------------ ---------------- --------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
--------- --------- --------- -------- -------- -------- --------- --------
Investment securities: (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities held-to-maturity:
Obligations of U.S. government agencies $ 1,497 $ 1,511 $ 2,497 $ 2,515 $ 5,499 $ 5,507 $-- $--
Commercial paper ...................... -- -- 992 992 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total ................................. 1,497 1,511 3,489 3,507 5,499 5,507 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Debt securities available-for-sale:
Obligations of U.S. Treasury and U.S. . 9,990 9,977 9,989 9,905 10,988 10,540 2,499 2,500
government agencies
Municipal securities .................. 225 231 275 284 328 339 426 448
-------- -------- -------- -------- -------- -------- -------- --------
Total ................................. 10,215 10,208 10,264 10,189 11,316 10,879 2,925 2,948
Total debt securities ................. 11,712 11,719 13,753 13,696 16,815 16,386 2,925 2,948
-------- -------- -------- -------- -------- -------- -------- --------
Mortgage-related securities:
Mortgage-related securities
held-to-maturity:
Freddie Mac ........................... 19,927 19,555 22,714 22,884 31,991 30,967 31,908 31,815
Fannie Mae ............................ 4,425 4,410 5,273 5,234 5,902 6,033 6,577 6,550
Collateralized Mortgage
Obligations ........................... 9,724 9,623 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total mortgage-related securities
held-to-maturity ...................... 34,076 33,588 27,987 28,118 37,893 37,000 38,485 38,365
-------- -------- -------- -------- -------- -------- -------- --------
Mortgage-related securities
available-for-sale:
Freddie Mac ........................... 367 354 391 396 490 491 538 533
Fannie Mae ............................ 2,530 2,568 3,734 3,809 5,452 5,531 6,611 6,660
Ginnie Mae ............................ 2,949 3,025 3,358 3,424 4,014 4,071 4,633 4,678
-------- -------- -------- -------- -------- -------- -------- --------
Total mortgage-related securities
available-for-sale .................... 5,846 5,947 7,483 7,629 9,956 10,093 11,782 11,871
-------- -------- -------- -------- -------- -------- -------- --------
Total mortgage-related securities ..... 39,922 39,535 35,470 35,747 47,849 47,093 50,267 50,236
-------- -------- -------- -------- -------- -------- -------- --------
Net unrealized (losses) gains on
available-for-salesecurities .......... 94 -- 71 -- (300) -- 112 --
-------- -------- -------- -------- -------- -------- -------- --------
Total securities ...................... $ 51,728 $ 51,254 $ 49,294 $ 49,443 $ 64,364 $ 63,479 $ 53,304 $ 53,184
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
60
[caad 136]n<PAGE>
The following table sets forth the Association's securities activities
for the periods indicated.
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
--------------------- ---------------------------------
1998 1997 1997 1996 1995
--------- ---------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Investment securities:
Investment securities, beginning of period(1)......................... $49,294 $64,364 $64,364 $53,304 $60,306
Purchases:
Investment securities - held-to-maturity........................... 8,243 2,000 3,987 11,499 --
Investment securities - available-for-sale......................... 1,929 -- 4,989 11,144 1,000
Sales:
Investment securities - available-for-sale......................... (180) -- -- (1,518) --
Calls, maturities and payments:
Investment securities - held-to-maturity........................... (4,179) (3,457) (15,964) (6,451) (5,403)
Investment securities - available-for-sale......................... (3,460) (740) (8,522) (3,137) (2,916)
Net increase (decrease) in premium
amortization and discount accretion................................ 58 60 67 (66) (341)
Net increase (decrease) in unrealized gain (loss)..................... 23 69 373 (411) 658
--------- --------- --------- -------- --------
Net increase (decrease) in investment
securities.................................................... 2,434 (2,068) (15,070) 11,060 (7,002)
--------- --------- --------- -------- --------
Investment securities, end of period.................................. $51,728 $62,296 $49,294 $64,364 $53,304
--------- --------- --------- -------- --------
--------- --------- --------- -------- --------
</TABLE>
- -------------------
(1) Includes mortgage-related securities.
61
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Association's
investment securities and mortgage-related securities as of June 30, 1998.
<TABLE>
<CAPTION>
At June 30, 1998
--------------------------------------------------------------------------------------------------------------
More than
More than One Year Five Years More than Ten
One Year or Less to Five Years to Ten Years Years Total
------------------- ------------------ -------------------- ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
--------- -------- -------- -------- -------- ---------- -------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity securities:
Investment securities:
Obligations of U.S.
government agencies....... $ -- --% $1,497 7.05% $ -- --% $ -- --% $ 1,497 7.05%
Mortgage-related securities:
Freddie Mac................ -- -- 148 9.50 2,727 6.00 17,052 6.57% 19,927 6.51
Fannie Mae................. -- -- -- -- -- -- 4,425 6.44 4,425 6.44
Collateralized Mortgage
Obligations.................. -- -- -- -- -- -- 9,724 6.75 9,724 6.75
---- ------- ------ ------- -------
Total securities at
amortized cost......... $ -- --% $1,645 7.27% $2,727 6.00% $31,201 6.61% $35,573 6.59%
---- ------- ------ ------- -------
---- ------- ------ ------- -------
Available-for-sale securities:
Investment securities:
Obligations of U.S.
government agencies....... $ -- --% $ -- --% $ -- --% $9,977 7.00% $9,977 7.00%
Municipal securities (1)... 102 9.89 129 9.85 -- -- -- -- 231 9.87
Mortgage-related securities:
Freddie Mac................ -- -- -- -- -- -- 354 6.95 354 6.95
Fannie Mae................. -- -- -- -- -- -- 2,568 7.51 2,568 7.51
Ginnie Mae................. -- -- -- -- -- -- 3,025 6.91 3,025 6.91
---- ---- ------- ------ ------ ----- ------- ----- ------- ----
Total securities at
fair value.............. $102 9.89% $129 9.85% $ -- --% $15,924 7.06% $16,155 7.06%
---- ---- ------- ------ ------ ----- ------- ----- ------- ----
---- ---- ------- ------ ------ ----- ------- ----- ------- ----
</TABLE>
- -----------------------
(1) Weighted Average Yield data for municipal securities is presented on a
tax equivalent basis based on an assumed tax rate of 34%.
Sources of Funds
General. Deposits, loan repayments and prepayments and cash flows
generated from operations are the primary sources of the Association's funds for
use in lending, investing and for other general purposes. The Association has
historically also used FHLB-Cincinnati advances as a source of funds.
Deposits. The Association offers a variety of deposit accounts with a
range of interest rates and terms. The Association's deposits consist of
passbook accounts, savings and club accounts, NOW accounts, money market
accounts and certificates of deposit. For the six months ended June 30, 1998,
certificates of deposit constituted 56.27% of total average deposits. The term
of the certificates of deposit offered by the Association vary from six months
to four years and the offering rates are established by the Association on a
weekly basis. Once a certificate account is established, no additional amounts
are permitted to be deposited in that account, with the exception of Individual
Retirement Account certificates. Specific terms of an individual account vary
according to the type of account, the minimum balance required, the time period
funds must remain on deposit and the interest rate, among other factors. The
flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition. At
June 30, 1998, the Association had $25.6 million of certificate accounts
maturing in less than one year. The Association expects that most of these
accounts will be reinvested and does not believe that there are any material
risks associated with the respective maturities of these certificates. The
Association's deposits are obtained predominantly from the area in which its
banking offices are located. The Association relies primarily on a willingness
to pay market-competitive interest rates to attract and retain these deposits.
Accordingly, rates offered by competing financial institutions significantly
affect the Association's ability to attract and retain deposits.
62
<PAGE>
The following table presents the deposit activity of the Association
for the periods indicated:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
--------------------- --------------------------------
1998 1997 1997 1996 1995
--------- --------- -------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Increase (decrease) before interest credited................... $1,626 $(807) $ 510 $3,174 $ (308)
Interest credited.............................................. 300 327 645 655 1,025
------- ----- ------- ------- -------
Net increase................................................... $1,926 $(480) $1,155 $3,829 $ 717
------- ----- ------- ------- -------
------- ----- ------- ------- -------
</TABLE>
At June 30, 1998, the Association had $3.3 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Weighed
Average
Maturity Period Amount Rate
- -------------------------------- --------- ----------
(Dollars In thousands)
<S> <C> <C>
Three months or less........................................................ $ 210 5.71%
Over 3 through 6 months..................................................... 531 5.96
Over 6 through 12 months.................................................... 1,391 6.01
Over 12 months.............................................................. 1,212 5.95
------
Total.............................................................. $3,344 5.96%
------
------
</TABLE>
63
<PAGE>
The following table sets forth the distribution of the Association's
average deposit accounts for the periods indicated and the weighted average
interest rates on each category of deposits presented and such information at
June 30, 1998. Averages for the periods presented utilize month-end balances.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------------------------------
At June 30, 1998 1997 1996 1995
----------------------- -------------------------- -------------------------- ----------------------------
Percent Percent Percent
Percent of Total Average of Total Average of Total Average
of Total Rate Average Average Rate Average Average Rate Average Average Rate
Balance Deposits Paid Balance Deposits Paid Balance Deposits Paid Balance Deposits Paid
------- -------- ---- ------- -------- ------- ------- -------- ------- ------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts .... $ 7,953 10.08% 2.50% $ 7,611 10.08% 2.63% $ 7,237 9.90% 2.72% $ 7,446 10.59% 2.93%
Money market
accounts ...... 2,585 3.28 3.00 2,741 3.63 3.36 2,888 3.95 3.29 3,583 5.10 3.27
Savings
accounts ...... 23,945 30.35 3.10 23,424 31.01 3.09 24,536 33.58 3.09 25,282 35.96 3.09
Certificates
of deposit .... 43,449 55.05 5.74 41,001 54.29 5.73 37,740 51.65 5.78 33,383 47.49 5.32
Noninterest-
bearing
deposits:
Demand
deposits ...... 977 1.24 -- 751 0.99 -- 666 0.92 -- 605 0.86 --
------- ------ ------- ------ ------- ------ ------- ------
Total average
deposits ...... $78,909 100.00% 4.50% $75,528 100.00% 4.46% $73,067 100.00% 4.42% $70,299 100.00% 4.12%
------- ------ ------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------ ------- ------
</TABLE>
64
<PAGE>
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding.
<TABLE>
<CAPTION>
Period to Maturity from June 30, 1998 At December 31,
------------------------------------------------ -------------------------------
Less Two to Over
than One to Three Three
One Year Two Years Years Years Total 1997 1996 1995
--------- --------- -------- ------- ------ ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 3.99% ............... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
4.00 to 4.99% ............ 3,650 -- -- -- 3,650 3,976 5,171 5,410
5.00 to 5.99% ............ 15,147 11,218 1,065 227 27,657 24,615 24,770 23,140
6.00 to 6.99% ............ 6,766 5,265 -- -- 12,031 12,437 8,864 7,142
7.00 to 7.99% ............ -- -- -- -- -- 1,098 1,088 --
Over 8.00% ............... 22 -- -- 89 111 121 121 122
------- ------- ------- ------- ------- ------- ------- -------
Total certificate accounts $25,585 $16,483 $ 1,065 $ 316 $43,449 $42,247 $40,014 $35,814
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
Borrowings. The Association utilizes FHLB-Cincinnati advances as an
alternative to retail deposits to fund its operations as part of its operating
strategy. These FHLB-Cincinnati advances are collateralized primarily by certain
of the Association's mortgage loans and mortgage-backed securities and
secondarily by the Association's investment in capital stock of the
FHLB-Cincinnati. FHLB-Cincinnati advances are made pursuant to several credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB-Cincinnati will advance to member institutions,
including the Association, fluctuates from time to time in accordance with the
policies of the FHLB-Cincinnati. See "Regulation--Federal Home Loan Bank
System."
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 Six
Months At or For the Year Ended
Ended June 30, December 31,
--------------------- --------------------------------
1998 1997 1997 1996 1995
---------- ---------- --------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
FHLB advances and other borrowings:
Average balance outstanding .................... $28,009 $34,177 $31,907 $32,953 $30,727
Maximum amount outstanding at any month-end
during the period ............................ 31,951 35,098 35,098 37,588 33,751
Balance outstanding at end of period ........... 27,680 34,997 26,161 34,277 24,524
Weighted average interest rate during the period 5.89% 5.91% 5.97% 5.96% 6.11%
Weighted average interest rate at end of period 5.86% 5.88% 6.51% 6.06% 6.19%
</TABLE>
65
<PAGE>
Subsidiary Activities
As of June 30, 1998, the Association did not own any subsidiaries.
Properties
The Association conducts its business through six banking offices
located in Columbiana, Mahoning and Jefferson Counties, Ohio. The following
table sets forth certain information regarding the Association's offices as of
June 30, 1998.
<TABLE>
<CAPTION>
Net Book Value
Original of Property or
Year Leasehold
Leased Leased Date of Improvements
or or Lease at June 30,
Location Owned Acquired Expiration 1998
- ---------- -------- --------- ---------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Administrative/Home Office:
601 Main Street
Wellsville, Ohio 43968 .................. Owned 1989(1) -- $502
Branch Offices:
49028 Foulks Drive
East Liverpool, Ohio 43920 .............. Owned 1979 -- $273
100 Main Street
Wintersville, Ohio 43952 ................ Leased 1996 2011 $200
7121 Tiffany Boulevard
Boardman, Ohio 44514 .................... Leased 1997 2012 $243
3551 Belmont Avenue
Youngstown, Ohio 44505 .................. Leased 1998 2013 $216
4755 Mahoning Avenue
Austintown, Ohio 44515 ................. Leased 1998(2) 2013 --
</TABLE>
- ---------------
(1) Expansion completed 1989.
(2) Opened September 1998.
Legal Proceedings
At June 30, 1998, the Association was not involved in any pending legal
proceedings. However, from time to time, the Association is involved in legal
proceedings occurring in the ordinary course of business.
Personnel
As of June 30, 1998, the Association had 48 full-time employees and 19
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--Benefits" for a
description of certain compensation and benefit programs offered to the
Association's employees.
66
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Association will report their income on a
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 not been
audited by the IRS in the past five 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
may have been deducted in arriving at their taxable income. The Association's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on the Association's actual loss experience, or a percentage equal
to 8% of the Association's taxable income, computed with certain modifications
and reduced by the amount of any permitted addition to the non-qualifying
reserve. Due to the Association's loss experience, the Association generally
recognized a bad debt deduction equal to 8% of taxable income.
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 allowed 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 was 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 was permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to 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.
67
<PAGE>
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). In addition, for
taxable years beginning after June 30, 1986 and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Association, whether
or not an Alternative Minimum Tax ("AMT") is paid. The Association does not
expect to be subject to the AMT.
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 net worth are apportioned or allocated are determined by
complex formulas. The minimum 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 0.11% of the first $50,000 of computed Ohio taxable income and
0.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to 0.014% times taxable
net worth.
Ohio corporation franchise tax law is scheduled to change markedly
beginning on January 1, 1999 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 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 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.
68
<PAGE>
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.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a
material impact on the Company, the Association, their operations or the
Association's Conversion. Congress has been considering in 1998 the
elimination of the federal thrift charter, abolishment of the OTS and the
limitation of unitary savings and loan holding company powers. The results of
such consideration, including possible enactment of legislation is uncertain.
Therefore, the Association is unable to determine the extent to which the
results of consideration or possible legislation, if enacted, would affect
its business. See "Risk Factors--Financial Institution Regulation and
Legislative Uncertainty."
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.
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 general
limit on loans-to-one borrower was $2.2 million. At June 30, 1998, the
Association's largest aggregate amount of loans-to-one borrower consisted of a
$350,000 residential loan.
QTL Test. The HOLA requires savings institutions to meet a Qualified
Thrift Lender ("QTL") test. Under the QTL test, a savings association is
required to maintain at least 65% of its "portfolio assets" (total assets less:
(i) specified liquid assets up to 20% of total assets; (ii) intangibles,
including goodwill; and (iii) the value of property used to conduct business) in
certain "qualified thrift investments" (primarily residential mortgages and
related
69
<PAGE>
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 maintained 98.21% of
its portfolio assets in qualified thrift investments and, therefore, 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
and supervisory condition. An institution, such as the Association, that
exceeds all fully phased-in regulatory capital requirements before and after
a proposed capital distribution ("Tier 1 Bank") and has not been advised by
the OTS that it is in need of more than normal supervision, could, after
prior notice to, but without the approval of the OTS, make capital
distributions during a calendar year equal to the greater of: (i) 100% of its
net earnings to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year;
or (ii) 75% of its net earnings for the previous four quarters. Any
additional capital distributions would require prior OTS approval. In the
event the Association's capital fell below its capital requirements or the
OTS notified it that it was in need of more than normal supervision, the
Association's ability to make capital distributions could be restricted. In
addition, the OTS could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the OTS
determines that such distribution would constitute an unsafe or unsound
practice.
Liquidity. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage (currently 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 six months ended June 30, 1998 was 5.12%, which exceeded the applicable
requirements. The Association has never been subject to monetary penalties for
failure to meet its liquidity requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity 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 December 31, 1997
totalled $38,000.
Branching. OTS regulations permit federally chartered savings
associations to branch nationwide under certain conditions. Generally, federal
savings associations may establish interstate networks and geographically
diversify their loan portfolios and lines of business. The OTS authority
preempts any state law purporting to regulate branching by federal savings
associations. The Association currently operates branch offices in Ohio only.
For a discussion of the impact of proposed legislation, see "Risk
Factors--Financial Institution Regulation and Legislative Uncertainty."
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.
70
<PAGE>
The Association's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is governed by Section 22(g) and 22(h) of the FRA and Regulation O
thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans to insiders made pursuant to a benefit or compensation
program that are widely available to all employees of the institution and do not
give preference to insiders over other employees. Regulation O also places
individual and aggregate limits on the amounts of loans the Association may make
to insiders based, in part, on the Association's capital position and requires
that certain board approval procedures be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
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;
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 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
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<PAGE>
limits, the allowance for loan and lease losses. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director of
the OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has postponed 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.
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. The capital categories are (1)
well-capitalized, (2) adequately capitalized, or (3) undercapitalized. An
institution is also placed in 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
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<PAGE>
by the institution's primary federal regulator and information that 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 with
the most well-capitalized, healthy institutions receiving the lowest rates.
Deposits of the Association are presently insured by the SAIF. Both the
SAIF and the BIF are statutorily required to achieve and maintain a ratio of
insurance reserves to total insured deposits equal to 1.25%. Until recently,
members of the SAIF and BIF were paying average deposit insurance assessments of
between 25 and 25 basis points. The BIF met the required reserve level in 1995,
whereas the SAIF was not expected to meet or exceed the required level until
2002 at the earliest. This situation was primarily due to the statutory
requirement that SAIF members make payments on bonds issued in the late 1980s by
the Financial Corporation ("FICO") to recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately
adopted a new assessment rate schedule of from 0 to 27 basis points under which
92% of BIF members paid an annual premium of only $2,000. With respect to SAIF
member institutions, the FDIC adopted a final rule retaining the previously
existing assessment rate schedule applicable to SAIF member institutions of 23
to 31 basis points. As long as the premium differential continued, it may have
had adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Association, could have been placed at a substantial
competitive disadvantage to BIF members with respect to pricing of loans and
deposits and the ability to achieve lower operating costs.
On September 30, 1996, the President of the United States signed into
law the Funds Act which, among other things, imposed a special one-time
assessment on SAIF member institutions, including the Association, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Association as an expense in the
quarter ended September 30, 1996 and is generally tax deductible. The SAIF
Special Assessment recorded by the Association amounted to $449,000 on a pre-tax
basis and $296,000 on an after-tax basis.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay 6.48
basis points. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000, or the date the BIF and
SAIF are merged.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the FICO payments
described above. The FDIC also lowered the SAIF assessment schedule for the
fourth quarter of 1996 to 18 to 27 basis points. Management cannot predict the
level of FDIC insurance assessments on an ongoing basis, whether the federal
thrift charter will be eliminated or whether the BIF and SAIF will eventually be
merged.
The Association's assessment rate for fiscal 1997 ranged from .01575 to
.0162 basis points, excluding the SAIF Special Assessment rate of 65.7 basis
points, and the regular premium paid for this period was $39,000.
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.
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.
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<PAGE>
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 $2.6 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 $27.7 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 December 31, 1997, 1996 and 1995,
dividends from the FHLB to the Association amounted to approximately $173,000,
$157,000 and $143,000, 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--QTL Test" for a discussion
of the QTL requirements. Upon any non-supervisory acquisition by the Company of
another savings association, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities of
a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC
Act"), subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation.
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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. See "Risk Factors--Financial
Institution Regulation and Legislative Uncertainty."
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. Upon completion of the Conversion, the Company's Common Stock
will be registered with the SEC under the Exchange Act. The Company will then be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock
to be issued in the Conversion does not cover the resale of such shares. Shares
of the Common Stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company will consist of the following
five members, each of whom is also a director of the Association: Gerry W.
Grace, William R. Williams, Jeffrey W. Aldrich, Thomas P. Ash, Fred C. Jackson.
The Board is divided into three classes, each of which contains approximately
one-third of the Board. The directors shall be elected by the stockholders of
the Company for staggered three-year terms, or until their successors are
elected and qualified. One class of directors, consisting of Gerry W. Grace and
Jeffrey W. Aldrich, has a term of office expiring at the first annual meeting of
stockholders; a second class, consisting of William R. Williams and Thomas P.
Ash, has a term of office expiring at the second annual meeting of stockholders;
and a third class, consisting of Fred C. Jackson, has a term of office expiring
at the third annual meeting of stockholders. Their names and biographical
information are set forth under "Management of the Association--Directors."
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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 Company
- ---- -------------------------------------------------------
<S> <C>
William R. Williams ............ President, Chief Executive Officer and Director
John A. Rife ................... Executive Vice President and Treasurer
Charles O. Standley ............ Vice President of Commercial and Consumer Lending
Daniel F. Galeoti .............. Vice President of Mortgage Operations
</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 or removal by the Board of Directors. Since the
formation of the Company, none of the executive officers, directors or other
personnel has received remuneration from the Company. Information concerning
the principal occupations, employment and compensation of the directors and
officers of the Company during the past five years is set forth under
"Management of the Association--Biographical Information."
MANAGEMENT OF THE ASSOCIATION
Directors
The following table sets forth certain information regarding the Board
of Directors of the Association.
<TABLE>
<CAPTION>
Position(s) Held With the Director Term
Name Age(1) Association Since Expires
- ---- ------ ---------------------------------------------- ---------- -------
<S> <C> <C> <C> <C>
Gerry W. Grace ................. 59 Chairman of the Board 1986 1998
William R. Williams ............ 54 President, Chief Executive Officer and Director 1979 2000
Jeffrey W. Aldrich ............. 55 Director 1979 1999
Thomas P. Ash .................. 49 Director 1985 2000
Fred C. Jackson ................ 73 Director 1977 2000
William R. Porter(2) ........... 82 Director 1964 1998
Joseph M. Wells, Jr.(2) ........ 82 Director 1958 1998
</TABLE>
- ---------------
(1) As of June 30, 1998.
(2) Messrs. Porter and Wells will retire December 31, 1998, and the number
of directors of the Association shall be reduced accordingly by
amending the Association's bylaws.
Executive Officers Who Are Not Directors
The following table sets forth certain information regarding the
executive officers of the Association who are not also a director.
<TABLE>
<CAPTION>
Name Age(1) Position(s) Held with the Association
- --------- -------- -------------------------------------------------
<S> <C> <C>
John A. Rife .................... 43 Executive Vice President and Treasurer
Daniel F. Galeoti ............... 43 Vice President of Mortgage Operations
Charles O. Standley ............. 45 Vice President of Commercial and Consumer Lending
</TABLE>
- ---------------
(1) As of June 30, 1998.
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Each of the executive officers of the Association will retain his
office in the converted Association until the annual meeting of the Board of
Directors of the Association, held immediately after the first annual meeting of
stockholders subsequent to Conversion, and until their successors are elected
and qualified or until they resign, retire, or are removed or replaced. Officers
are re-elected by the Board of Directors annually.
Biographical Information
Directors
Gerry W. Grace has served as a Director of the Association since 1987.
Mr. Grace is the owner and president of Grace Services, Inc., a weed and pest
control company located in Canfield, Ohio. Mr. Grace is also a member of the
Board of Trustees of Ellsworth Township.
William R. Williams has served as a Director of the Association since
1979. Mr. Williams was also appointed as President and Chief Executive Officer
of the Association in 1979.
Jeffrey W. Aldrich has served as a Director of the Association since
1979. Mr. Aldrich is the President and Chief Executive Officer of Sterling China
Co., a dishware manufacturing company.
Thomas P. Ash has served as a Director of the Association since 1985.
Mr. Ash has served as the Superintendent of the East Liverpool City School
District since 1984.
Fred C. Jackson has served as a Director of the Association since 1977.
Mr. Jackson has been retired since 1987.
William F. Porter has served as a Director of the Association since
1964. Mr. Porter has been retired since 1980. Before retiring, Mr. Porter was
the President of Globe Refractories, Inc., a brick manufacturing company.
Joseph M. Wells, Jr. has served as a Director of the Association since
1958. Mr. Wells serves currently as the Chairman of the Board of the Homer
Laughlin China Co., located in Newell, West Virginia.
Executive Officers Who Are Not Directors
John A. Rife currently serves as the Executive Vice President and
Treasurer of the Association. Mr. Rife has served as Executive Vice President
since 1991.
Daniel F. Galeoti is the Vice President of Mortgage Lending of the
Association, and is responsible for supervising all residential mortgage
lending. Mr. Galeoti has served in this position since January 1989.
Charles O. Standley currently serves as the Vice President of
Commercial and Consumer Lending. Mr. Standley supervises all commercial and
consumer lending operations including direct and indirect auto, home equity and
home improvement loans. Mr. Standley has served in this position since March
1989.
Committees and Meetings of the Board of Directors of the Association and Company
The Association's Board of Directors meets once per month and may have
additional special meetings called in the manner specified in the Bylaws. During
fiscal year 1998, no current Director attended less than 75% of the aggregate of
the total number of Board meetings and the total number of committee meetings of
the Board of Directors on which he served.
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The Board of Directors of the Association has established the following
committees:
The Audit Committee consists of the entire Board of Directors. The
purpose of this committee is to review the audit function and management actions
regarding the implementation of audit findings. The committee meets once a year.
The Executive Committee meets weekly throughout the year. Each member
of the Board serves on this committee for 4 months each year. The Board Chairman
is on this committee 12 months a year and the President is an ex officio member
except when a quorum cannot be reached. The purpose of this committee is to act
in the absence of the Board of Directors between meetings of the Board of
Directors.
Additionally, the Association has a number of other management
committees including the Asset/Liability Committee and the Compliance Committee.
The Board of Directors of the Company has established the following
committees: the Audit Committee, consisting of the entire Board of Directors;
and the Compensation Committee, consisting of the Chairman and Messrs. Wells and
Aldrich.
Director Compensation
All directors of the Association receive an annual retainer of $9,000 a
year, and $100 per executive committee meeting attended.
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Executive Compensation
Cash Compensation. The following table sets forth the cash compensation
paid by the Association for services rendered in all capacities during the year
ended December 31, 1997, to the chief executive officer and the executive
officers of the Association who received compensation in excess of $100,000.
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------
Annual Compensation Awards Payouts
------------------------------------ --------------------- -------
Other Restricted Securities
Name and Annual Stock Underlying LTIP All Other
Principal Salary Bonus Compensation Awards Options Payouts Compensation
Positions Year ($)(1) ($) ($)(2) ($)(3) (#)(4) ($)(5) ($)
- ---------------- ---- --------- ------- ------------ --------- --------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William R. Williams ......... 1997 $132,585 $16,000 $-- $-- -- $-- $--
President and
Chief Executive Officer
</TABLE>
- ---------------
(1) Includes base salary and director's fees for the President and Chief
Executive Officer.
(2) For 1997, there were no (a) perquisites over the lesser of $50,000 or
10% of the individual's total salary and bonus for the year;
(b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term
incentive plans prior to settlement or maturation; (d) tax payment
reimbursements; or (e) preferential discounts on stock.
(3) Does not include awards pursuant to the Stock Programs, which may be
granted in conjunction with a meeting of stockholders of the Company,
as such awards were not earned, vested or granted in fiscal 1997. For a
discussion of the terms of the Stock-Based Incentive Plan, see
"--Benefits--Stock-Based Incentive Plan." For 1997, the Association had
no restricted stock plans in existence.
(4) Does not include options, which may be granted in conjunction with a
meeting of stockholders of the Company, as such options were not earned
or granted in 1997. For a discussion of the terms of the grants and
vesting of options, see "--Benefits--Stock-Based Incentive Plan."
(5) For 1997, there were no long-term incentive plans in existence.
Employment Agreements
Upon consummation of the Conversion, the Association and the Company
intend to enter into employment agreements (collectively, the "Employment
Agreements") with William R. Williams, John A. Rife, Charles O. Standley and
Daniel F. Galeoti (individually, the "Executive"). 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 upon
the merits of such arrangements. The Association and Company intend the
Employment Agreements to ensure that the Association and the Company will
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 Messrs. Williams, Rife, Standley and
Galeoti.
The Employment Agreements provide for a three-year term for each
Executive and shall become effective upon consummation of the Conversion. The
Association Employment Agreements provide that, commencing on the first
anniversary date of the agreement and continuing each anniversary date
thereafter, the Board of Directors of the Association may extend each of the
agreements for an additional year so that the remaining term shall be three
years unless written notice of non-renewal is given by the Board of Directors
after conducting a performance evaluation of the Executive. The terms of the
Company Employment Agreements shall be extended on a daily basis, unless
written notice of non-renewal is given by the Board of Directors of the
Company. The Association and Company Employment Agreements provide that the
Executive's base salary will be reviewed annually. The base salary, which
will be effective for the Employment Agreement for Mr. Williams, will be
$135,638. In addition to the base salary, the Employment Agreements provide
for, among other things, participation in various employee benefit plans and
stock-based compensation programs, as well as furnishing certain fringe
benefits available to similarly situated executive personnel. The Employment
Agreements provide for termination by the Association or the Company for
cause (as described in the agreements) at any time. In the event the
Association or the Company chooses to terminate
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the Executive's employment for reasons other than for cause or, in the event
of the Executive's resignation from the Association or the Company upon: (i)
failure to re-elect the Executive to his/her current offices; (ii) a material
change in the Executive's functions, duties or responsibilities; (iii) a
relocation of the Executive's principal place of employment by more than 25
miles; (iv) liquidation or dissolution of the Association or the Company; or
(v) a breach of the Employment Agreements by the Association or the Company;
the Executive or, in the event of the Executive's death, the Executive's
beneficiary would be entitled to receive an amount generally equal to the
remaining base salary and bonus payments that would have been paid to the
Executive during the remaining term of the Employment Agreements. In
addition, the Executive would receive a payment attributable to the
contributions that would have been made on the Executive's behalf to any
employee benefit plans of the Association or the Company during the remaining
term of the Employment Agreements, together with the value of certain
stock-based incentives previously awarded to the Executive. The Association
and the Company would also continue and pay for the Executive's life and
disability coverage for the remaining term of the Employment Agreement, as
well as provide medical and hospitalization coverage until the Executive at
least attains eligible Medicare age. Upon any termination of the Executive,
the Executive is subject to a covenant not to compete with the Company or the
Association for one year. The Association and the Company would also continue
or pay for the Executive's life, health and disability coverage for the
remaining term of the Employment Agreement.
Under the agreements, if voluntary or involuntary termination follows a
change in control of the Association or the Company, the Executive or, in the
event of the Executive's death, the Executive's beneficiary would be entitled to
a severance payment generally equal to the greater of: (i) the payments due for
the remaining terms of the agreement, including the value of certain stock-based
incentives previously awarded to the Executive; or (ii) three times the average
of the five preceding taxable years' annual compensation. The Association and
the Company would also continue the Executive's life, health, and disability
coverage for thirty-six months (except medical and hospitalization would be
provided at least until the Executive attains eligible Medicare age).
Notwithstanding that both 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. 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 salaries to be paid to Messrs.
Williams, Rife, Standley and Galeoti effective upon the consummation of the
Conversion, and excluding any benefits under any employee benefit plan which may
be payable, would equal approximately $1.2 million.
Payments to the Executive under the Association Employment Agreement
will be guaranteed by the Company in the event that payments or benefits are not
paid by the Association. Payments under the Company Employment Agreements 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, Ohio and Delaware law, respectively.
Employee Severance Compensation Plan
Upon consummation of the Conversion, the Association intends to
establish the Central Federal Savings and Loan Association of Wellsville
Employee Severance Compensation Plan (the "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. Management personnel with employment
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. 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 employment within one
year after the change in control (for reasons specified under the Severance
Plan), will be entitled to receive a severance payment. A participant, whose
employment has terminated, will be entitled to a cash severance payment equal to
one-twelfth of his or her current annual compensation for each year of service
up to a maximum of 199% of current annual compensation. In the event the
provisions of the Severance Plan were triggered, the total amount of payments
that would be due thereunder, based solely upon current salary levels, would
equal approximately $1.2 million.
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Insurance Plans
All full-time employees of the Association are covered as a group for
life, comprehensive hospitalization, including major medical, and long-term
disability insurance.
Benefits
Pension Plan. The Association participates in a multiple-employer
defined benefit pension plan known as the Financial Institutions Retirement
Fund (the "Pension Plan"). Generally, employees of the Association become
members of the Pension Plan upon the completion of one year of service with
the Association (as described in the plan document adopted by the
Association) and the attainment of age twenty-one. The Association makes
annual contributions to the Financial Institutions Retirement Fund sufficient
to fund retirement benefits for its employees, as determined in accordance
with a formula set forth in the plan document. Participants generally become
vested in their accrued benefits under the Pension Plan after completing five
years of vesting service (as described in the plan document). In general,
accrued benefits under the Pension Plan, including reduced benefits payable
upon early retirement or in the event of a disability, are based on an
individual's years of benefit service (as described in the plan document) and
the average of the individual's highest five years' salary (as described in
the plan document).
The table below reflects the annual pension benefit payable to a member
of the Pension Plan upon retirement at age 65, based on various levels of the
highest five-year average salary and years of benefit service:
<TABLE>
<CAPTION>
Years of Benefit Service
---------------------------------------------------------------------
Highest Five-Year
Average Salary 15 20 25 30 35 40
- --------------------------------------------------------- --------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 25,000 $ 7,500 $10,000 $12,500 $15,000 $17,500 $20,000
$ 50,000 15,000 20,000 25,000 30,000 35,000 40,000
$ 75,000 22,500 30,000 37,500 45,000 52,500 60,000
$100,000 30,000 40,000 50,000 60,000 70,000 80,000
$125,000 37,500 50,000 62,500 75,000 87,500 100,000
$150,000 45,000 60,000 75,000 90,000 105,000 120,000
</TABLE>
As of January 1, 1998, Mr. Williams had 25 years of benefit service
credited to him for purposes of determining benefits under the Pension Plan.
Employee Stock Ownership Plan and Trust. The Association intends to
establish a tax-qualified employee stock ownership plan (the "ESOP") in
connection with the Conversion. Generally, eligible employees will become
participants in the ESOP upon the completion of one year of service with the
Association (with credit given for service with the Association prior to
adoption of the plan) and attainment of age 21. With the consent of the
Association, an affiliate of the Association may also adopt the ESOP for the
benefit of its employees.
The Association expects a committee of the Board of Directors to serve
as the administrative committee of the ESOP (the "ESOP Committee"). The ESOP
Committee will appoint an unrelated corporate trustee for the ESOP prior to
the Conversion. Among other matters, the ESOP Committee may generally
instruct the trustee regarding the investment of funds contributed to the
ESOP, subject to the terms of the plan document and the related trust
agreement. The Association expects the ESOP to purchase 8% of the Common
Stock issued in the Conversion. As part of the Conversion, and in order to
fund the ESOP's purchase of the Common Stock issued in the Conversion, the
ESOP will borrow 100% of the aggregate purchase price of the Common Stock
from either the Company or a third-party lender.
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<PAGE>
The trustee of the ESOP will repay the loan principally from the
Association's annual contributions to the ESOP over an expected period of 12
years. Subject to receipt of any necessary regulatory approvals or opinions,
the Association may make contributions to the ESOP for repayment of the loan
since some participants in the ESOP will be employees of the Association or,
alternatively, the Association may reimburse the Company for contributions
made by the Company with respect to employees of the Association. The
Association expects the initial interest rate (which may be fixed or
variable) for the loan to be at or near the prime rate on or about the date
of Conversion.
The trustee of the ESOP will pledge the shares of Common Stock purchased
by the ESOP in connection with the Conversion as collateral for the loan and
will hold the shares in a suspense account under the plan. As the trustee
repays the loan, the trustee will release a portion of the shares from the
suspense account and allocate them to the accounts of active participants in
the ESOP based on each participant's compensation (as determined under the
terms of the plan) relative to all participants' compensation for the plan
year. In the event of a change in control of the Association or the Company
prior to complete repayment of the loan, the ESOP trustee, in accordance with
the terms of the plan document, will sell enough shares of Common Stock held
in the suspense account to repay the loan in full. Upon repayment of the
loan, the ESOP trustee will then allocate all remaining shares of Common
Stock held in the suspense account to the accounts of active participants
based on each participant's account balance as of a specific date or based on
some other method set forth in the plan document.
Participants will become vested in contributions made to the ESOP by the
Association at the rate of twenty percent per year of vesting service (with
credit given for service with the Association prior to its adoption of the
ESOP). Accordingly, participants will become fully vested in their accounts
under the ESOP after completing five years of vesting service. The
Association expects that participants will also become fully vested in their
accounts under the ESOP upon the attainment of their early or normal
retirement age while an employee of the Association, upon their death or
incurring disability, upon a change in control of the Association or the
Company, or upon termination of the plan. Benefits generally become
distributable under the ESOP and potentially become subject to income tax
upon death, retirement, disability or other separation from service.
The ESOP trustee will vote all allocated shares held in the ESOP in
accordance with the instructions of the plan participants. The ESOP trustee,
subject to its fiduciary duties under ERISA, will vote the unallocated shares
(i.e., those held in the suspense account) and allocated shares for which it
receives no proper voting instructions in a manner calculated to most
accurately reflect the instructions it receives from participants regarding
the allocated stock. In the event no shares have been allocated under the
ESOP at the time such shares are to be voted, each participant shall be
deemed to have one share allocated to his or her account for voting purposes.
Supplemental Executive Retirement Plan. The Code limits the amount of
compensation the Association may consider in providing benefits under its
tax-qualified retirement plans, such as the Pension Plan and the ESOP. The
Code further limits the amount of contributions and benefit accruals under
such plans on behalf of any employee. To provide benefits to make up for the
reduction in benefits flowing from these limits in connection with the
Pension Plan and ESOP, the Association intends to implement a non-qualified
deferred compensation arrangement known as a "Supplemental Executive
Retirement Plan" ("SERP"). The SERP will generally provide benefits to
eligible individuals (designated by the Board of Directors of the Association
or its affiliates) that cannot be provided under the Pension Plan and/or ESOP
as a result of the limitations imposed by the Code, but that would have been
provided under the Pension Plan and/or ESOP but for such limitations. In
addition to providing for benefits lost under tax-qualified plans as a result
of limitations imposed by the Code, the SERP will also make up lost ESOP
benefits to designated individuals who retire, who terminate employment in
connection with a change in control, or whose participation in the ESOP ends
due to termination of the ESOP in connection with a change in control
(regardless of whether the individual terminates employment) prior to the
complete scheduled repayment of the ESOP loan. Generally, upon the retirement
of an eligible individual or upon a change in control of the Association or
the Company prior to complete repayment of the ESOP Loan, the SERP will
provide the individual with a benefit equal to what the individual would have
received under the ESOP had he remained employed throughout the term of the
ESOP or had the ESOP not been terminated prior to the scheduled repayment of
the ESOP loan. An individual's benefits under the SERP become payable upon
the participant's retirement (in accordance with the standard retirement
policies of
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the Association), upon the change in control of the Association or the Company
or as determined under the ESOP and Pension Plan.
The Association may establish a grantor trust in connection with the
SERP to satisfy the obligations of the Association with respect to the SERP.
The assets of the grantor trust would remain subject to the claims of the
Association's general creditors in the event of the Association's insolvency
until paid to the individual pursuant to the terms of the SERP.
Stock-Based Incentive Plan. Following the Conversion, the Board of
Directors of the Company intends to adopt the Stock-Based Incentive Plan
which will provide for the granting of options to purchase Common Stock
("Stock Options"), and Common Stock ("Stock Awards") to eligible officers,
employees, and directors of the Company and Association. The plan may also
provide for certain rights related to the grant of stock options and the
award of Common Stock. The Company may provide such stock-based benefits
under the Stock-Based Incentive Plan or may establish one or more separate
plans to provide for the benefits described in the following paragraphs.
In the event the Stock-Based Incentive Plan (or any separate plan(s)) is
adopted within one year after the Conversion, OTS regulations require such
plan to be approved by a majority of the Company's stockholders at a meeting
of stockholders to be held no earlier than six months after the completion of
the Conversion. Under the Stock-Based Incentive Plan, the Company intends to
grant Stock Options in an amount up to 10% of the shares of Common Stock
issued in the Conversion (195,500 shares based upon the maximum of the
Estimated Price Range), and intends to grant Stock Awards in an amount up to
4% of the shares of Common Stock issued in the Conversion (78,200 shares
based upon the maximum of the Estimated Price Range). Any Common Stock
awarded under the Stock-Based Incentive Plan (Stock Awards) will be awarded
at no cost to the recipients. The Company may fund the plan through the
purchase of Common Stock by a trust established in connection with the
Stock-Based Incentive Plan (or any separate plan(s)) or from authorized but
unissued shares. The Board of Directors of the Company intends to appoint an
independent fiduciary to serve as trustee of any trust established in
connection with the Stock-Based Incentive Plan. In the event that additional
authorized but unissued shares are acquired by the Stock-Based Incentive Plan
or its participants after the Conversion, the interests of existing
shareholders would be diluted. See "Pro Forma Data."
The grants of Stock Options and Stock Awards will be designed to attract
and retain qualified personnel in key positions, provide officers and key
employees with a propriety interest in the Company as an incentive to
contribute to the success of the Company, and reward key employees for
outstanding performance. All employees of the Company and its subsidiaries,
including the Association, will be eligible to participate in the Stock-Based
Incentive Plan. It is expected that the committee administering the plan will
determine the terms of awards granted to officers and employees. The
committee will also determine whether Stock Options will be Incentive or
Non-Statutory Stock Options, as defined below, the number of shares subject
to each Stock Option and Stock Award, the exercise price of each Stock
Option, the method of exercising Stock Options, and when Stock Options become
exercisable or Stock Awards vest. Only employees may receive grants of
Incentive Stock Options. Therefore, under the Stock-Based Incentive Plan,
outside directors may receive only grants of Non-Statutory Stock Options. 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-Based Incentive
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-Based Incentive Plan (or any
separate plan for directors). OTS regulations also provide that no individual
officer or employee of the Association may receive more than 25% of the
restricted stock awards available under the Stock-Based Incentive 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
restricted stock awards available under the Stock-Based Incentive Plan (or
any separate plan for outside directors).
The Stock-Based Incentive Plan will provide for the grant of: (i) Stock
Options intended to qualify as Incentive Stock Options under Section 422 of
the Code ("Incentive Stock Options") and (ii) Stock Options that do not so
qualify ("Non-Statutory Stock Options"). The plan may also provide for
certain limited rights that become
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<PAGE>
exercisable only upon a change in control of the Association or the Company.
Unless sooner terminated, the Stock-Based Incentive Plan will remain in effect
for a period of ten years from the earlier of adoption by the Board of Directors
of the Company or approval by the Company's stockholders. Subject to stockholder
approval, the Company anticipates granting Stock Options under the plan at an
exercise price equal to at least the fair market value of the underlying Common
Stock on the date of grant.
An individual will not be deemed to have recognized taxable income upon
the grant or exercise of any Incentive Stock Option, provided that such
shares received through the exercise of such options are not disposed of by
the employee for at least one year after the date the stock is received in
connection with the stock option exercise and two years after the date of
grant of the stock option (a "disqualifying disposition"). No compensation
deduction will generally be available to the Company as a result of the
exercise of Incentive Stock Options unless there has been 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 individual will
realize ordinary income upon exercise of the stock option (or upon the
disqualifying disposition) in an amount equal to the amount by which the
exercise price exceeds the fair market value of the Common Stock purchased by
exercising the stock option on the date of exercise. The amount of any
ordinary income recognized by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an
Incentive Stock Option will be a deductible expense to the Company for tax
purposes.
The Stock-Based Incentive Plan will provide for the granting of Stock
Awards. Grants of Stock Awards to officers and employees may be made in the
form of base grants and/or performance grants (the vesting of which would be
contingent upon performance goals established by the committee administering
the plan). In establishing any performance goals, the committee may utilize
the annual financial results of the Association, actual performance of the
Association as compared to targeted goals such as the ratio of the
Association's net worth to total assets, the Association's return on average
assets, or such other performance standards as determined by the committee
with the approval of the Board of Directors.
When a participant becomes vested with respect to Stock Award, the
participant will realize ordinary income equal to the fair market value of
the Common Stock at the time of vesting (unless the participant made an
election pursuant to Section 83(b) of the Code). The amount of income
recognized by the participants will be a deductible expense for tax purposes
for the Association. When restricted Stock Awards become vested and shares of
Common Stock are actually distributed to participants, the participants would
receive amounts equal to any accrued dividends with respect thereto. Prior to
vesting, recipients of Stock Awards 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 in
proportion to the directions provided with respect to shares subject to
grants. Vested shares will be distributed to recipients as soon as
practicable following the day on which they vest.
The vesting periods for awards under the Stock-Based Incentive Plan will
be determined by the committee administering the Plan. If the Stock-Based
Incentive Plan (or any separate plans for employees and directors) is adopted
within one year after conversion, awards would become vested and exercisable
subject to applicable OTS regulations, which regulations require that any
awards begin vesting no 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 the case of death or disability.
Stock Options could be exercisable for a period of time (likely three months)
following the date on which the employee or director ceases to perform
services for the Association or the Company, except that in the event of
death or disability, options accelerate and become fully vested and could be
exercisable for up to one year thereafter or such other period of time as
determined by the Company. In the case of death or disability, Stock Options
may be exercised for a period of 12 months or such other period of time as
determined by the committee. However, any Incentive Stock Options exercised
more than three months following the date the employee ceases to perform
services as an employee would be treated essentially as a Non-Statutory Stock
Option. In the event of retirement, if the optionee continues to perform
services as a director or consultant on behalf of the Association, the
Company or an affiliate, unvested options and awards would continue to vest
in accordance with their original vesting schedule until the optionee ceases
to serve as a consultant or director. In the event of death, disability or
normal retirement, the Company, if requested by the optionee, or the
optionee's beneficiary, could elect, in exchange for vested options, to pay
the optionee, or the optionee's beneficiary in the event of death, the amount
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<PAGE>
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.
Subject to any applicable regulatory requirements, the Stock-Based
Incentive Plan (or any separate plans for employees and outside directors)
may be amended subsequent to the expiration of the one-year period to provide
for accelerated vesting of previously granted Stock Options or Stock Awards
in the event of a change in control of the Company or the Association. A
change in control would generally be considered to 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 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.
Transactions With Certain Related Persons
The Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA") requires that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more
than the normal risk of repayment or present other unfavorable features. In
addition, loans made to a director or executive officer in excess of the
greater of $25,000 or 5% of the Association's capital and surplus (up to a
maximum of $500,000) must be approved in advance by a majority of the
disinterested members of the Board of Directors.
Prior to FIRREA, the Bank made loans to its executive officers and
Directors which were secured by their primary residences. The rates of
interest charged by the Bank on such loans were the Bank's cost of funds.
Pursuant to FIRREA, in 1989, the Bank discontinued its practice of making
such preferential loans to its officers and Directors. However, all such
pre-FIRREA preferential loans were "grandfathered" under FIRREA. Since the
enactment of FIRREA, the Bank has not made any loans to its executive
officers or Directors. The Bank intends to implement a policy whereby it will
begin to again offer loans to executive officers and Directors. Such loans,
as well as loans made to Bank employees, will be made on the same terms and
conditions offered to the general public. If the Bank implements a policy of
extending credit to executive officers and Directors, such policy will
provide that all such loans will be made in the ordinary course of business,
on substantially the same terms, including collateral, as those prevailing at
the time for comparable transactions with other persons and may not involve
more than the normal risk of collectibility or present other unfavorable
features. As of June 30, 1998, the Bank had $274,000 of loans to executive
officers or Directors all of which had balances of less than $60,000 as of
June 30, 1998 or were made by the Bank in the ordinary course of business
with no favorable terms and do not involve more than the normal risk of
collectibility or present unfavorable features.
The Company intends that all transactions in the future between the
Company and its executive officers, directors, holders of 10% or more of the
shares of any class of its common stock and affiliates thereof, will contain
terms no less favorable to the Company than could have been obtained by it in
arm's-length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any
interest in the transaction.
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Subscriptions by Executive Officers and Directors
The following table sets forth the number of shares of Common Stock the
Association's executive officers and directors propose to purchase, assuming
shares of Common Stock are issued at the minimum and maximum of the Estimated
Price Range and that sufficient shares will be available to satisfy their
subscriptions. The table also sets forth the total expected beneficial
ownership of Common Stock as to all directors and executive officers as a
group.
<TABLE>
<CAPTION>
At the Minimum At the Maximum
of the Estimated Price of the Estimated Price
Range(1) Range(1)
----------------------- -------------------------
Number As a Percent Number As a Percent
of of Shares of of Shares
Name Amount Shares Offered Shares Offered
- ------ ----------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Gerry W. Grace................................. $ 200,000 20,000 1.38% 20,000 1.02%
William R. Williams............................ 200,000 20,000 1.38 20,000 1.02
Jeffrey W. Aldrich............................. 200,000 20,000 1.38 20,000 1.02
Thomas P. Ash.................................. 200,000 20,000 1.38 20,000 1.02
Fred C. Jackson................................ 200,000 20,000 1.38 20,000 1.02
William R. Porter.............................. 200,000 20,000 1.38 20,000 1.02
Joseph M. Wells, Jr............................ 200,000 20,000 1.38 20,000 1.02
John A. Rife................................... 200,000 20,000 1.38 20,000 1.02
Daniel F. Galeoti.............................. 200,000 20,000 1.38 20,000 1.02
Charles O. Standley............................ 200,000 20,000 1.38 20,000 1.02
---------- ------- ---- ------- ----
All Directors and Executive Officers
as a group (10 persons)...................... $2,000,000 200,000 13.8% 200,000 10.2%
---------- ------- ---- ------- ----
---------- ------- ---- ------- ----
</TABLE>
- -------------------------
(1) Includes proposed subscriptions, if any, by associates.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE ASSOCIATION AND THE OTS HAVE APPROVED THE
PLAN OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE ASSOCIATION
ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER
CONDITIONS. SUCH OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION
OR ENDORSEMENT OF THE PLAN BY SUCH AGENCY.
General
On June 11, 1998, the Association's Board of Directors unanimously
adopted, subject to approval by the OTS, the Plan pursuant to which the
Association will be converted from a federally chartered mutual savings and
loan association to a federally chartered capital stock savings and loan
association. It is currently intended that all of the outstanding capital
stock of the Association will be held by the Company, which is incorporated
under Delaware law. The Plan was approved by the OTS, subject to, among other
things, approval of the Plan by the Association's members. A special meeting
of members has been called for this purpose to be held on December 21, 1998.
The Company has filed an application with the OTS to become a savings
and loan holding company and to acquire all of the Common Stock of the
Association to be issued in the Conversion. The Company plans to use 50% of
the net proceeds from the sale of the Common Stock to purchase all of the
then to be issued and outstanding capital stock of the Association. The
Conversion will be effected only upon completion of the sale of all of the
shares of Common Stock to be issued pursuant to the Plan.
The Plan of Conversion 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 Company'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 and loan association to a capital stock savings and loan
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 Employee Plans, Supplemental Eligible Account Holders and Other Members.
Concurrently, shares will be offered in a Community Offering to certain
members of the general public, with preference given to natural persons
residing in 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 in the Syndicated Community Offering. The
Association has the right to accept or reject, in whole or in part, any
orders to purchase shares of the Common Stock received in the Community
Offering or in the Syndicated Community Offering. See "--Community Offering"
and "--Syndicated Community Offering."
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The aggregate price of the shares of Common Stock to be issued in the
Conversion, currently estimated to be between $14.5 million and $19.6
million, will be determined based upon an independent appraisal of the
estimated pro forma market value of the Common Stock. All shares of Common
Stock to be issued and sold in the Conversion will be sold at the same price.
The independent appraisal will be affirmed or, if necessary, updated at the
completion of the Subscription and Community Offerings, if all shares are
subscribed for, or at the completion of the Syndicated Community Offering.
The appraisal has been performed by Keller, a consulting firm experienced in
the valuation and appraisal of savings institutions. See "--Stock Pricing"
for additional information as to the determination of the estimated pro forma
market value of the Common Stock.
The following is a brief summary of pertinent aspects of the Conversion.
The summary is qualified in its entirety by reference to the provisions of
the Plan. A copy of the Plan is available for inspection at the Association's
main office and at the Central Region and Washington, D.C. offices of the
OTS. The Plan is also filed as an Exhibit to the Registration Statement of
which this Prospectus is a part, copies of which may be obtained from the
SEC. See "Additional Information."
Purposes of Conversion
The Association, as a federally chartered mutual savings and loan
association, does not have shareholders and has no authority to issue capital
stock. By converting to the capital stock form of organization, the
Association will be structured in the form used by commercial banks, other
business entities and a growing number of savings institutions. The
Conversion will enhance the Association's ability to expand its current
operations, acquire other financial institutions or branch offices, provide
affordable home financing opportunities to the communities it serves,
increase its equity capital base and access capital markets, or diversify
into other financial services to the extent allowable by applicable law and
regulation.
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. In determining whether to convert to a commercial bank charter,
the Association may consider, among other things, the differences in the
regulatory and supervisory structure applicable to the Association as a
commercial lending institution as opposed to a thrift lending institution. In
particular, a conversion to a commercial bank charter would provide the
Association with added lending flexibility in that the Association would not
be restricted in the types or amounts of commercial loans in which it may not
currently be able to invest due to regulations applicable to federal savings
institutions. However, the Association does not expect to convert to a
commercial bank charter at this time.
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. Due to the Association's capital position, it has sought
to limit its asset growth to a level sustainable by its capital position. 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 $14.3 million, or 11.8% of total 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, the Association's GAAP capital will increase to $21.9 million or
a ratio of GAAP capital to adjusted assets, on a pro forma basis, of 16.6%
after the Conversion. The investment of the net proceeds from the sale of the
Common Stock is expected to provide the Association with
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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 authorized but unissued common
and preferred stock authorized by the Company's Certificate of Incorporation
will permit the Company, subject to market conditions and 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 issuance of additional shares upon
exercise of stock options under the Stock-Based Incentive Plan or the
possible issuance of authorized but unissued shares to the Stock-Based
Incentive Plan under the Stock-Based Incentive Plan. Following the
Conversion, the Company will also be able to use stock-related incentive
programs to attract and retain executive and other personnel for itself and
its subsidiaries. See "Management of the Association--Benefits."
Effects of Conversion
General. Each depositor in a mutual savings institution has both a
deposit account in the institution and a pro rata ownership interest in the
net worth of the institution based upon the balance in his account, which
interest may only be realized in the event of a liquidation of the
institution. However, this ownership interest is tied to the depositor's
account and has no tangible market value separate from such deposit account.
Any depositor who opens a deposit account obtains a pro rata ownership
interest in the net worth of the institution without any additional payment
beyond the amount of the deposit. A depositor who reduces or closes his
account receives a portion or all of the balance in the account but nothing
for his ownership interest in the net worth of the institution, which is lost
to the extent that the balance in the account is reduced. Consequently,
mutual savings institution depositors normally have no way to realize the
value of their ownership interest, which has realizable value only in the
unlikely event that the mutual savings institution is liquidated. In such
event, the depositors of record at that time, as owners, would share pro rata
in any residual surplus and reserves after other claims, including claims of
depositors to the amounts of their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's net worth. The Common Stock is separate and apart from deposit
accounts and cannot be and is not insured or guaranteed by the FDIC or any
other governmental agency. Certificates are issued to evidence ownership of
the capital stock. The stock certificates are transferable and, therefore,
the stock may be sold or traded if a purchaser is available with no effect on
any deposit account the seller may hold in the institution.
Continuity. While the Conversion is being accomplished, the normal
business of the Association of accepting deposits and making loans will
continue without interruption. The Association will continue to be subject to
regulation by the OTS and the FDIC. After the Conversion, the Association
will continue to provide services for depositors and borrowers under current
policies by its present management and staff.
The Directors serving the Association at the time of Conversion will
serve as Directors of the Association after the Conversion. The Directors of
the Company will consist of individuals currently serving on the Board of
Directors of the Association. All officers of the Association at the time of
Conversion will retain their positions after Conversion.
Effect on Deposit Accounts. Under the Plan, each depositor in the
Association at the time of Conversion will automatically continue as a
depositor after the Conversion, and each such deposit account will remain the
same with respect to deposit balance, interest rate and other terms. Each
such account will continue to be insured by the FDIC to the same extent as
before the Conversion (i.e., up to $100,000 per depositor). Depositors will
continue to hold their existing certificates, passbooks and other evidences
of their accounts.
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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 Muldoon,
Murphy & Faucette with regard to federal income taxation and an opinion from
Crowe, Chizek and Company LLP ("Crowe Chizek") with regard to Ohio taxation
which indicate that the adoption and implementation of the Plan of Conversion
set forth herein will not be taxable for federal or Ohio tax purposes to the
Association, its Eligible Account Holders, or its Supplemental Eligible
Account Holders or the Company, except as discussed below. See "--Tax
Aspects."
Effect on Liquidation Rights. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the
extent of deposit balances) would be paid first. Thereafter, if there were
any assets remaining, depositors would be entitled to such remaining assets,
pro rata, based upon the deposit balances in their deposit accounts
immediately prior to liquidation. In the unlikely event that the Association
were to liquidate after Conversion, all claims of creditors (including those
of depositors, to the extent of their deposit balances) would also be paid
first, followed by distribution of the "liquidation account" to certain
depositors (see "--Liquidation Rights"), with any assets remaining thereafter
distributed to the Company as the holder of the Association's capital stock.
Pursuant to the rules and regulations of the OTS, a post-Conversion merger,
consolidation, sale of bulk assets or similar combination or transaction with
another insured savings institution would not be considered a liquidation
and, in such a transaction, the liquidation account would be assumed by the
surviving institution.
Stock Pricing
The Plan of Conversion requires that the purchase price of the Common
Stock must be based on the pro forma market value of the Common Stock giving
effect to the Conversion, as determined on the basis of an independent
valuation. The Association and the Company have retained Keller to make such
valuation. For its services in making such appraisal, Keller will receive a
fee of $21,000 plus out-of-pocket expenses not to exceed $500. The
Association and the Company have agreed to indemnify Keller and its employees
and affiliates against certain losses arising out of its services as
appraiser, except where Keller liability results from its negligence or bad
faith.
An appraisal has been made by Keller in reliance upon the information
contained in this Prospectus, including the Financial Statements. Keller also
considered the following factors, among others: the present and projected
operating results and financial condition of the Company and the Association
and the economic and demographic conditions in the Association's existing
marketing area; certain historical, financial and other information relating
to the Association; a comparative evaluation of the operating and financial
statistics of the Association with those of other similarly situated
publicly-traded savings institutions; the aggregate size of the offering of
the Common Stock; the impact of Conversion on the Association's net worth and
earnings potential; the proposed dividend policy of the Company and the
Association; and the trading market for securities of comparable institutions
and general conditions in the market for such securities.
On the basis of the foregoing, Keller has advised the Company and the
Association that, in its opinion, dated September 18, 1998, and updated as of
October 23, 1998, the estimated pro forma market value of the Common Stock
ranged from a minimum of $14.5 million to a maximum of $19.6 million with a
midpoint of $17.0 million. Based upon the Valuation Range, the Board of
Directors has established the Estimated Price Range of $14.5 million to $19.6
million, with a midpoint of $17.0 million, and the Company expects to issue
between 1,445,000 and 1,955,000 shares
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of Common Stock at the Purchase Price of $10.00 per share. The Board of
Directors of the Company and the Association have reviewed the appraisal of
Keller and in determining the reasonableness and adequacy of such appraisal
consistent with OTS regulations and policies, have reviewed the methodology
and reasonableness of the assumptions utilized by Keller in the preparation
of such appraisal. 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.
Such valuation, 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 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 such shares at prices at or
above the Purchase Price. See "Risk Factors--Absence of Market for Common
Stock"
Following commencement of the Subscription and Community Offerings, the
maximum of the Estimated Price Range may be increased up to 15% and the
number of shares of Common Stock to be issued in the Conversion may be
increased to 2,248,250 shares due to regulatory considerations, changes in
market conditions or 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 and Community Offerings.
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, Keller confirms to the Association and the OTS that, to
the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors including those which would be
involved in a change in the maximum subscription price, would cause Keller to
conclude that the 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 at the conclusion of the Subscription and Community Offerings.
If the pro forma market value of the Common Stock is either more than
15% above the maximum of the Estimated Price Range or less than the minimum
of the Estimated Price Range, the Association and the Company, after
consulting with the OTS, may terminate the Plan and return all funds promptly
with interest at the Association's passbook rate of interest on payments made
by cash, check, bank draft or money order, cancel withdrawal authorizations,
extend or hold a new Subscription and Community Offering, establish a new
Estimated Price Range, commence a resolicitation of subscribers or take such
other actions as permitted by the OTS in order to complete the Conversion. In
the event that a resolicitation is commenced, subscribers will be notified by
mail, and will be permitted to continue their orders if they affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering. If subscribers do not affirmatively reconfirm their subscriptions
prior to the expiration of the resolicitation offering, their subscription
funds will be promptly returned as described above. A resolicitation, if any,
following the conclusion of the Subscription and Community Offerings would
not exceed 45 days unless further extended by the OTS for periods of up to 90
days not to extend beyond December 21, 2000.
If all shares of Common Stock are not sold through the Subscription and
Community Offerings, then the Association and the Company expect to offer the
remaining shares in a Syndicated Community Offering which would occur as soon
as practicable following the close of the Subscription and Community
Offerings but may commence during the Subscription and Community Offerings
subject to prior rights of subscribers. All shares of Common Stock will be
sold at the same price per share in the Syndicated Community Offering as in
the Subscription and Community Offerings. See "--Syndicated Community
Offering."
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No sale of shares of Common Stock may be consummated unless, prior to
such consummation, Keller confirms to the Association, the Company and the
OTS that, to the best of its knowledge, nothing of a material nature has
occurred which, taking into account all relevant factors, including those
which would be involved in a cancellation of the Syndicated Community
Offering, would cause Keller to conclude that the aggregate value of the
Common Stock at the Purchase Price is incompatible with its estimate of the
pro forma market value of the Common Stock of the Company at the time of the
Syndicated Community Offering. Any change which would result in an aggregate
purchase price which is below or more than 15% above the Estimated Price
Range would be subject to OTS approval. If such confirmation is not received,
the Association may extend the Conversion, extend, reopen or commence new
Subscription and Community Offerings or a Syndicated Community Offering,
establish a new Estimated Price Range and commence a resolicitation of all
subscribers with the approval of the OTS or take such other actions as
permitted by the OTS in order to complete the Conversion, or terminate the
Plan and cancel the Subscription and Community Offerings and/or the
Syndicated Community Offering. In the event market or financial conditions
change so as to cause the aggregate purchase price of the shares to be below
the minimum of the Estimated Price Range or more than 15% above the maximum
of such range, and the Company and the Association determine to continue the
Conversion, subscribers will be resolicited (i.e., be permitted to continue
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest at the
Association's passbook rate of interest, or be permitted to decrease or
cancel their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. A resolicitation, if any, following the conclusion of
the Subscription and Community Offerings would not exceed 45 days, or if
following the Syndicated Community Offering, 90 days, unless further extended
by the OTS for periods up to 90 days not to extend beyond December 21, 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 and Community Offerings, the total number of shares to be
issued in the Conversion may be increased or decreased without a
resolicitation of subscribers, provided that the product of the total number
of shares times the Purchase Price is not below the minimum 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 ranging from a minimum of $14.5 million to a maximum, as
increased by 15%, of $22.5 million, the number of shares of Common Stock
expected to be sold in the Conversion is between a minimum of 1,445,000
shares and a maximum, as adjusted by 15%, of 2,248,250 shares. The actual
number of shares sold between this range will depend on a number of factors
and shall be obtained by the Association and the 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 such range, if
the Plan is not terminated by the Company and the Association after
consultation with the OTS, purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering or their subscription funds will be promptly refunded, or be
permitted to modify or rescind their subscriptions). Any change in the
Estimated Price Range must be approved by the OTS. If the number of shares
issued in the Conversion is increased due to an increase of up to 15% in the
Estimated Price Range to reflect changes in market or financial condition,
persons who subscribed for the maximum number of shares will not be given the
opportunity to subscribe for an adjusted maximum number of shares, except for
the ESOP which will be able to subscribe for such adjusted amount. See
"--Limitations on Common Stock Purchases."
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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 pro forma net earnings and
stockholders' equity on a per share basis while increasing the Company's pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease
in the number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and pro forma net earnings and stockholders'
equity on a per share basis while decreasing the Company's pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation
of the effects of such changes, see "Pro Forma Data."
Subscription Offering and Subscription Rights
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to
the following persons in the following order of descending priority: (1)
holders of deposit accounts with a balance of $50 or more as of December 31,
1996 ("Eligible Account Holders"); (2) the Employee Plans consisting of 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
January 18, 1995 which continue to be outstanding as of the Voting Record
Date other than those members which qualify as Eligible Account Holders and
Supplemental Eligible Account Holders ("Other Members"). All subscriptions
received will be subject to the availability of Common Stock after
satisfaction of all subscriptions of all persons having prior rights in the
Subscription Offering and to the maximum and minimum purchase limitations set
forth in the Plan of Conversion and as described below under "--Limitations
on Common Stock Purchases."
Deposit accounts which will provide subscription rights to holders
thereof consist of any "savings accounts," as defined by the Plan consistent
with OTS regulations. Pursuant to the Plan and applicable regulations,
certain deposit accounts do not qualify as "savings accounts" including, but
not limited to, noninterest-bearing demand accounts (primarily
noninterest-bearing checking accounts), or mortgage escrow accounts
maintained at the Association.
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, non-transferable
subscription rights to subscribe in the Subscription Offering for up to the
greater of the amount permitted to be purchased in the Community Offering,
currently $200,000 of the Common Stock offered, one-tenth of one percent
(.10%) of the total offering of shares of Common Stock or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which
the numerator is the amount of the Eligible Account Holder's qualifying
deposit and the denominator is the total amount of qualifying deposits of all
Eligible Account Holders, in each case on the Eligibility Record Date,
subject to the overall maximum purchase limitation and exclusive of an
increase in the shares issued pursuant to an increase in the Estimated Price
Range of up to 15%. See "--Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights
for a number of shares of Common Stock in excess of the total number of such
shares eligible for subscription, the shares of Common Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Common
Stock equal to the lesser of 100 shares or the number of shares subscribed
for by the Eligible Account Holder. Any shares remaining after that
allocation will be allocated among the subscribing Eligible Account Holders
whose subscriptions remain unsatisfied in the proportion that the amount of
the qualifying deposit of each Eligible Account Holder whose subscription
remains unsatisfied bears to the total amount of the qualifying deposits of
all Eligible Account Holders whose subscriptions remain unsatisfied exclusive
of any increase in the shares issued pursuant to an increase in the Estimated
Price Range of up to 15%. If the amount so allocated exceeds the amount
subscribed for by any one or more remaining Eligible Account Holders, the
excess shall be reallocated (one or more times as necessary) among those
remaining Eligible Account Holders whose subscriptions are still not fully
satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied.
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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 fewer shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also directors or officers of the
Association or their associates will be subordinated to the subscription
rights of other Eligible Account Holders to the extent attributable to
increased deposits in the year preceding December 31, 1996.
Priority 2: Employee Plans. To the extent that there are sufficient
shares remaining after satisfaction of the subscriptions by Eligible Account
Holders, the Employee Plans, consisting of the ESOP, will receive, without
payment therefor, second priority, non-transferable subscription rights to
purchase, in the aggregate, up to 10% of Common Stock issued in the
Conversion, including any increase in the number of shares of Common Stock to
be issued in the Conversion after the date hereof as a result of an increase
of up to 15% in the maximum of the Estimated Price Range and provided further
that any such increase in the number of shares to be issued in the Conversion
will first be allocated to satisfy the ESOP's subscription. See
"--Limitations on Common Stock Purchases." The ESOP intends to purchase 8.0%
of the shares to be issued in the Conversion, or 115,600 shares and 156,400
shares, based on the issuance of 1,445,000 shares and 1,955,000 shares,
respectively. Subscriptions by the ESOP will not be aggregated with shares of
Common Stock purchased directly by or which are otherwise attributable to any
other participants in the Subscription and Community Offerings, including
subscriptions of any of the Association's directors, officers, employees or
associates thereof. See "Management of the Association--Benefits--Employee
Stock Ownership Plan and Trust."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third
priority, non-transferable subscription rights to subscribe for in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently $200,000 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 maximum purchase limitation and exclusive of an increase in the
shares issued pursuant to an increase in the Estimated Price Range of up to
15%. See "--Limitations on Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Common Stock in excess of the
total number of such shares eligible for subscription, the shares of Common
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account
Holder, to the extent possible, to purchase a number of shares sufficient to
make his or her total allocation of Common Stock equal to the lesser of 100
shares or the number of shares subscribed for by the Supplemental Eligible
Account Holder. Any shares remaining after that allocation will be allocated
among the subscribing Supplemental Eligible Account Holders whose
subscriptions remain unsatisfied in the proportion that the amount of the
qualifying deposit of each Supplemental Eligible Account Holder whose
subscription remains unsatisfied bears to the total amount of the qualifying
deposits of all Supplemental Eligible Account Holders whose subscriptions
remain unsatisfied exclusive of any increase in the shares issued pursuant to
an increase in the Estimated Price Range of up to 15%. If the amount so
allocated exceeds the amount subscribed for by any one or more remaining
Supplemental Eligible Account Holders, the excess shall be reallocated (one
or more times as necessary) among those remaining Supplemental Eligible
Account Holders whose subscriptions are still not satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
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 fewer
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.
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Priority 4: Other Members. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by the Eligible Account
Holders, the ESOP and the Supplemental Eligible Account Holders, each Other
Member will receive, without payment therefor, fourth priority
non-transferable subscription rights to subscribe for Common Stock in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently $200,000 of Common Stock, or
one-tenth of one percent (.10%) of the total offering of shares of Common
Stock, subject to the overall maximum purchase limitation and exclusive of an
increase in shares issued pursuant to an increase in the Estimated Price
Range of up to 15%.
In the event that Other Members exercise subscription rights for a
number of shares of Common Stock which, when added to the shares of Common
Stock subscribed for by the Eligible Account Holders, the ESOP and the
Supplemental Eligible Account Holders is in excess of the total number of
such shares being issued, the subscriptions of such Other Members will be
allocated among the subscribing Other Members so as to permit each
subscribing Other Member, to the extent possible, to purchase a number of
shares sufficient to make his or her total allocation of Common Stock equal
to the lesser of 100 shares or the number of shares subscribed for by the
Other Member. Any shares remaining after that allocation will be allocated
among the subscribing Other Members whose subscriptions remain unsatisfied
pro rata in the same proportion that the number of votes of a subscribing
Other Member on the Voting Record Date bears to the total votes on the Voting
Record Date of all subscribing Other Members whose subscriptions remain
unsatisfied. If the amount so allocated exceeds the amount subscribed for by
any one or more remaining Other Members, the excess shall be reallocated (one
or more times as necessary) among those remaining Other Members whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire on December 18, 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
cancelled. If an extension beyond the 45-day period following the Expiration
Date is granted, the Association will resolicit subscribers by notifying
subscribers of the extension of time and of any rights of subscribers to
modify or rescind their subscriptions and, unless an affirmative response is
received, have their funds returned promptly with interest. Such extensions
may not go beyond December 21, 2000.
Community Offering
Concurrent with the Subscription Offering, to the extent that shares
remain available for purchase after satisfaction of all subscriptions of the
Eligible Account Holders, the ESOP, the Supplemental Eligible Account Holders
and Other Members, the Association has determined to offer shares pursuant to
the Plan to certain members of the general public. A preference will be given
to natural persons (such persons referred to as "Preferred Subscribers")
residing in Columbiana, Mahoning and Jefferson 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 $200,000 of the Common Stock offered, subject to the
maximum purchase limitation and exclusive of shares issued pursuant to an
increase in the Estimated Price Range by up to 15%. See "--Limitations on
Common Stock Purchases." This amount may be increased to up to a maximum of
5% or decreased to less than $200,000 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 its sole discretion, to accept or reject any such orders
in whole or in part either at the time of receipt of an order or as soon as
practicable following the Expiration Date.
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Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of Preferred Subscribers after completion of
the Subscription and Community Offerings, such stock will be allocated first
to each Preferred Subscriber whose order is accepted by the Association, in
an amount equal to the lesser of 100 shares or the number of shares
subscribed for by each such Preferred Subscriber, if possible. Thereafter,
unallocated shares will be allocated among the Preferred Subscribers whose
orders remain unsatisfied on a 100 shares per order basis until all such
orders have been filled or the remaining shares have been allocated. If there
are any shares remaining, shares will be allocated to other persons of the
general public who purchase in the Community Offering applying the same
allocation described above for Preferred Subscribers.
Persons in Non-Qualified States or Foreign Countries
The Company and the Association will make reasonable efforts to comply
with the securities laws of all states in the United States in which persons
entitled to subscribe for stock pursuant to the Plan reside. However, the
Association and the Company are not required to offer stock in the
Subscription Offering to any person who resides in a foreign country or
resides in a state of the United States with respect to which (i) a small
number of persons otherwise eligible to subscribe for shares of Common Stock
reside, or (ii) the Company or the Association determines that compliance
with the securities laws of such state would be impracticable for reasons of
cost or otherwise, including but not limited to a request that the Company
and the Association or their officers, directors or trustees register as a
broker, dealer, salesman or selling agent, under the securities laws of such
state, or a request to register or otherwise qualify the subscription rights
or Common Stock for sale or submit any filing with respect thereto in such
state. Where the number of persons eligible to subscribe for shares in one
state is small, the Association and the Company will base their decision as
to whether or not to offer the Common Stock in such state on a number of
factors, including the size of accounts held by account holders in the state,
the cost of registering or qualifying the shares or the need to register the
Company, its officers, directors or employees as brokers, dealers or salesmen.
Marketing, Underwriting and Records Management Services Arrangements
The Association and the Company have engaged Webb as a financial and
marketing advisor to advise the Company and the Association with respect to
the Subscription and Community Offerings. Webb is a registered broker-dealer
and is a member of the National Association of Securities Dealers, Inc.
("NASD"). Webb will assist the Company and the Association in the Conversion
by, among other things: (i) developing marketing materials; (ii) targeting
potential investors in the Subscription Offering and other investors eligible
to participate in the Community Offering; (iii) soliciting potential
investors by phone or in person; (iv) training management and staff to
perform tasks in connection with the Conversion; (v) managing and setting up
the Conversion Center; (vi) managing the subscription campaign; and (vii) the
solicitation of proxies.
The Association will pay Webb a management advisory and proxy
solicitation fee equal to 1.3% of the dollar value of all stock sold in the
Subscription and Community Offerings. Such amount is exclusive of any shares
sold to the ESOP, directors, officers and employees and members of their
immediate families. Such fees will be paid upon completion of the Conversion.
Webb has not prepared any report or opinion constituting a recommendation or
advice to the Company or the Association or to persons who subscribe in the
Offerings, nor has it prepared an opinion as to the fairness to the Company
or the Association of the Purchase Price or the terms of the Offerings. Webb
expresses no opinion as to the prices at which Common Stock to be issued in
the Offerings may trade. The Association has agreed to indemnify Webb against
certain liabilities including certain liabilities under the Securities Act
and certain misrepresentations or breaches by the Company or the Association
relating to the agreement with Webb.
In the event any shares of Common Stock are unsold after completion of
the Subscription and Community Offerings, at the request of the Company and
the Association, Webb, will seek to form a syndicate of registered
broker-dealers to assist in the sale of such Common Stock on a best efforts
basis, subject to the terms and conditions set forth in the selected dealers
agreement. Webb will endeavor to distribute the Common Stock among dealers in
a fashion which best meets the distribution objectives of the Association and
the Plan of Conversion. Webb will be paid a fee not to exceed 5.5% of the
aggregate Purchase Price of the shares of Common Stock sold by them. Fees
with respect to purchases effected with the assistance of a selected
broker/dealer other than Webb shall be transmitted
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by Webb to such broker/dealer. Total marketing fees to Webb are expected to be
$146,824 and $207,818 at the minimum and maximum of the Estimated Price Range,
respectively. See "Pro Forma Data" for the assumptions used to arrive at these
estimates.
The Company and Association have jointly and severally agreed to pay or
reimburse the Agent for all reasonable out-of-pocket expenses not to exceed
$10,000 and reasonable legal fees and expenses of its counsel not to exceed
$30,000. Webb has received a management fee of $25,000 which will be credited
against a success fee of 1.3% of the Common Stock sold exclusive of any
shares sold to the ESOP, directors, officers and employees and members of
their immediate families, to be paid to Webb upon completion of the offering.
In addition, the maximum amount of compensation selected broker-dealers who
assist in the Syndicated Community Offering could receive is 5.5% of the
aggregate Purchase Price of the shares of Common Stock sold by them.
Crowe Chizek has performed conversion and records management services
for the Association in the Conversion and will receive a fee for this service
of $60,000 plus reimbursement of reasonable out-of-pocket expenses not to
exceed $5,000.
Directors and executive officers of the Company and Association may
participate in the solicitation of offers to purchase Common Stock. Other
employees of the Association may participate in the Offering in ministerial
capacities or providing clerical work in effecting a sales transaction. Other
questions of prospective purchasers will be directed to executive officers or
registered representatives. Such other employees have been instructed not to
solicit offers to purchase Common Stock or provide advice regarding the
purchase of Common Stock. The Company will rely on Rule 3a4-1 under the
Exchange Act, and sales of Common Stock will be conducted within the
requirements of Rule 3a4-1, so as to permit officers, directors and employees
to participate in the sale of Common Stock. No officer, director or employee
of the Company or the Association will be compensated in connection with his
participation by the payment of commissions or other remuneration based
either directly or indirectly on the transactions in the Common Stock.
Procedure for Purchasing Shares in Subscription and Community Offerings
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange
Act, no Prospectus will be mailed any later than five days prior to such date
or hand delivered any later than two days prior to such date. Execution of
the stock order form and acknowledgment form will confirm receipt or delivery
in accordance with Rule 15c2-8. Stock order forms and acknowledgment forms
will only be distributed with a Prospectus.
To purchase shares in the Subscription and Community Offerings, an
executed stock order form and acknowledgment form with the required payment
for each share subscribed for or appropriate authorization for withdrawal
from a deposit account maintained at the Association (which may be given by
completing the appropriate blanks in the stock order form), must be received
by the Association at its office by 5:00 p.m., 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 facsimilied stock order forms and will not accept stock order
forms unaccompanied by an executed acknowledgment 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 and Community Offerings, unless such period has been extended.
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In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December
31, 1996) 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, the account number
and the approximate deposit balance as of the record date.
To ensure that your subscription rights are properly identified, you
must list 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.
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. Orders for Common Stock submitted by
subscribers in the Subscription Offering which aggregate to $50,000 or more
must be paid by official bank or certified check, a check issued by a
broker-dealer registered with the NASD, or by withdrawal authorization from a
deposit account of the Association. No wire transfers will be accepted.
Interest will be paid on payments made by cash, check, bank draft or money
order at the Association's passbook rate of interest from the date payment is
received until the completion or termination of the Conversion. If payment is
made by authorization of withdrawal from deposit accounts, the funds
authorized to be withdrawn from a deposit account will continue to accrue
interest at the contractual rates until completion or termination of the
Conversion. Such funds will be otherwise unavailable to the depositor until
completion or termination of the Conversion.
If a subscriber authorizes the Association to withdraw the amount of the
purchase price from his deposit account, the Association will do so as of the
effective date of the Conversion. The Association will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum
balance requirement at the time that the funds actually are transferred under
the authorization, the certificate will be cancelled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at
the Association's passbook rate.
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 and
Community Offering, if all shares are sold, or upon consummation 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 Individual Retirement Accounts ("IRAs") and
Qualified Plans may use the assets of such IRAs and Qualified Plans to
purchase shares of Common Stock in the Subscription and Community Offerings,
provided that such IRAs and Qualified Plans 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
and Community Offerings. In addition, the provisions of ERISA and IRS
regulations require that officers, directors and ten percent shareholders who
use self-directed IRA and Qualified Plan funds to purchase shares of Common
Stock in the Subscription and Community Offerings 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.
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Restrictions on Transfer of Subscription Rights and Shares
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights, including the Eligible
Account Holders, the ESOP, the Supplemental Eligible Account Holders and Other
Members of the Association, from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they are
granted and only for his account. Each person exercising such subscription
rights will be required to certify that he is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale or
transfer of such shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
such subscription rights or shares of Common Stock prior to the completion of
the Conversion.
The Association and the Company will pursue any and all legal and
equitable remedies (including forfeiture) in the event they become aware of the
transfer of subscription rights and will not honor orders known by them to
involve the transfer of such rights.
Syndicated Community Offering
As a final step in the Conversion, the Plan provides that, if feasible,
all shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Webb 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 Company and Association have jointly and severally agreed to pay or
reimburse the Agent for all reasonable out-of-pocket expenses not to exceed
$10,000 and reasonable legal fees and expenses of its counsel not to exceed
$30,000. Webb has received a management fee of $25,000 which will be credited
against a success fee of 1.3% of the Common Stock sold exclusive of any shares
sold to the ESOP, directors, officers and employees and members of their
immediate families, to be paid to Webb upon completion of the offering. In
addition, the maximum amount of compensation selected broker-dealers who assist
in the Syndicated Community Offering could receive is 5.5% of the aggregate
Purchase Price of the shares of Common Stock sold by them.
The price at which Common Stock is sold in the Syndicated Community
Offering will be $10.00, the same price as paid by subscribers in the
Subscription and Community Offerings. 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 $200,000 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 $200,000, 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
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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 21, 2000.
See "--Stock Pricing" above for a discussion of rights of subscribers, if any,
in the event an extension is granted.
Limitations on Common Stock Purchases
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in
the Subscription Offering up to the greater of the amount
permitted to be purchased in the Community Offering, currently
$200,000 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 qualifying deposit of the Eligible Account Holder and
the denominator is the total amount of qualifying deposits of
all Eligible Account Holders in each case on the Eligibility
Record Date subject to the overall maximum purchase limitation
described in (8) below and exclusive of an increase in the
total number of shares issued due to an increase in the
Estimated Price Range of up to 15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10%
of the shares of Common Stock issued in the Conversion,
including shares issued in the event of an increase in the
Estimated Price Range of 15%, and intends to purchase 8% of
the shares of Common Stock issued in the Conversion;
(4) Each Supplemental Eligible Account Holder may subscribe for
and purchase in the Subscription Offering up to the greater of
the amount permitted to be purchased in the Community
Offering, currently $200,000 of Common Stock offered,
one-tenth of one percent (.10%) of the total offering of
shares of Common Stock, or fifteen times the product (rounded
down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the
qualifying deposit of the Supplemental Eligible Account Holder
and the denominator is the total amount of qualifying deposits
of all Supplemental Eligible
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Account Holders, in each case on the Supplemental Eligibility
Record Date, subject to the overall maximum purchase
limitation described in (8) below and exclusive of an increase
in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the
Subscription Offering up to the greater of the amount
permitted to be purchased in the Community Offering, currently
$200,000 of Common Stock offered, or one-tenth of one percent
(.10%) of the total offering of shares of Common Stock subject
to the overall maximum purchase limitation described in (8)
below and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range
of up to 15%;
(6) Persons purchasing shares of Common Stock in the Community
Offering, together with associates of and groups of persons
acting in concert with such persons, may purchase in the
Community Offering up to $200,000 of Common Stock offered in
the Conversion, subject to the overall maximum purchase
limitation described in (8) below and exclusive of an increase
in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%;
(7) Persons purchasing shares of Common Stock in the Syndicated
Community Offering, together with associates of and persons
acting in concert with such persons, may purchase in the
Syndicated Offering up to $200,000 of Common Stock offered in
the Conversion subject to the overall maximum purchase
limitation in (8) below and exclusive of an increase in the
total number of shares issued due to an increase in the
Estimated Price Range of up to 15% and, provided further that
shares of Common Stock purchased in the Community Offering by
any persons, together with associates of and persons acting in
concert with such persons, will be aggregated with purchases
in the Syndicated Community Offering in applying the $200,000
purchase limitation;
(8) Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members may purchase stock in the Community
Offering and Syndicated Community Offering subject to the
purchase limitations described in (6) and (7) above, provided
that, except for the ESOP, the maximum number of shares of
Common Stock subscribed for or purchased in all categories by
any person, together with associates of and groups of persons
acting in concert with such persons, shall not exceed the
overall maximum purchase limitation of $200,000, 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 overall maximum purchase limitation referred
to above up to 9.99%, provided that orders for shares exceeding 5% of the shares
being offered in the Subscription and Community Offerings shall not exceed, in
the aggregate, 10% of the shares being offered in the Subscription and Community
Offerings. Requests to purchase additional shares of Common Stock under this
provision will be determined by the Boards of Directors and, if approved,
allocated on a pro rata basis giving priority in accordance with the priority
rights set forth herein.
The overall maximum purchase limitation may not be reduced to less than
$200,000 but the individual amount permitted to be subscribed for may be reduced
by the Association to less than $200,000, subject to paragraphs (2),
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(4) and (5) above without the further approval of members or resolicitation of
subscribers. An individual Eligible Account Holder, Supplemental Eligible
Account Holder or Other Member may not purchase individually in the Subscription
Offering the overall maximum purchase limitation of $200,000 of the shares
offered, but may make such purchase, together with associates of and persons
acting in concert with such person, by also purchasing in other available
categories, subject to availability of shares and the maximum overall purchase
limitation for purchases in the Conversion.
In the event of an increase in the total number of shares offered in
the Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order of priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the Adjusted Maximum number of shares; (ii) in the event
that there is an oversubscription by Eligible Account Holders, to fill
unsatisfied subscriptions of Eligible Account Holders exclusive of the Adjusted
Maximum; (iii) in the event that there is an oversubscription by Supplemental
Eligible Account Holders, to fill unsatisfied subscriptions of Supplemental
Eligible Account Holders, exclusive of the Adjusted Maximum; (iv) in the event
that there is an oversubscription by Other Members, to fill unsatisfied
subscriptions of Other Members exclusive of the Adjusted Maximum; and (v) to
fill unsatisfied subscriptions in the Community Offering to the extent possible
exclusive of the Adjusted Maximum and with preference to Preferred Subscribers.
The term "associate" of a person is defined to mean: (i) any
corporation (other than the Association or a majority-owned subsidiary of the
Association) of which such person is an officer, partner or 10% stockholder;
(ii) any trust or other estate in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; provided,
however, such term shall not include any employee stock benefit plan of the
Association in which such person has a substantial beneficial interest or serves
as a trustee or in a similar fiduciary capacity; and (iii) any relative or
spouse of such person, or any relative of such spouse, who either has the same
home as such person or who is a director or officer of the Association.
Directors are not treated as associates of each other solely because of their
Board membership. For a further discussion of limitations on purchases of a
converting institution's stock at the time of Conversion and subsequent to
Conversion, see "--Certain Restrictions on Purchase or Transfer of Shares After
Conversion," "The Board of Directors and Management of the
Association--Subscriptions by Executive Officers and Directors," and
"Restrictions on Acquisition of the Company and the Association."
Liquidation Rights
In the unlikely event of a complete liquidation of the Association in
its present mutual form, each depositor would receive his pro rata share of any
assets of the Association remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). Each depositor's pro rata share of such remaining assets would be in
the same proportion as the value of his deposit account was to the total value
of all deposit accounts in the Association at the time of liquidation. After the
Conversion, each depositor, in the event of a complete liquidation, would have a
claim as a creditor of the same general priority as the claims of all other
general creditors of the Association. However, except as described below, his
claim would be solely in the amount of the balance in his deposit account plus
accrued interest. He would not have an interest in the value or assets of the
Association above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Association as of the date of its latest balance
sheet contained in the final Prospectus used in connection with the Conversion.
Each Eligible Account Holder and Supplemental Eligible Account Holder, if he
were to continue to maintain his deposit account at the Association, would be
entitled, on a complete liquidation of the Association after the Conversion, to
an interest in the liquidation account prior to any payment to the stockholders
of the Association. Each Eligible Account Holder and Supplemental Eligible
Account Holder would have an initial interest in such liquidation account for
each deposit account, including regular accounts, transaction accounts such as
NOW accounts, money market deposit accounts, and certificates of deposit, with a
balance of $50 or more held in the Association on December 31, 1996 and
September 30, 1998, respectively ("Qualifying Deposit"). Each Eligible Account
Holder and Supplemental Eligible Account Holder will have a pro rata interest in
the total liquidation
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account for each of his deposit accounts based on the proportion that the
balance of each such deposit account on the Eligibility Record Date or
Supplemental Eligibility Record Date, respectively, bore to the total amount of
all deposit accounts of all Eligible Account Holders and Supplemental Eligible
Account Holders in the Association. For deposit accounts in existence at both
dates separate subaccounts shall be determined on the basis of the Qualifying
Deposits in such deposit accounts on such record date.
If, however, on any annual closing date of the Association, subsequent
to December 31, 1996, or September 30, 1998, the amount in any deposit account
of an Eligible Account Holder or Supplemental Eligible Account Holder is less
than the amount in such deposit account on December 31, 1996 or September 30,
1998, respectively, or the previous annual closing date, then the interest in
the liquidation account relating to such deposit account would be reduced from
time to time by the proportion of any such reduction, and such interest will
cease to exist if such deposit account is closed. In addition, no interest in
the liquidation account would ever be increased despite any subsequent increase
in the related deposit account. Any assets remaining after the above liquidation
rights of Eligible Account Holders and Supplemental Eligible Account Holders are
satisfied would be distributed to the Company as the sole stockholder of the
Association.
Tax Aspects
Consummation of the Conversion is expressly conditioned upon the
receipt by the Association of either a favorable ruling from the IRS or an
opinion of counsel with respect to federal income taxation, and an opinion of an
independent accountant with respect to Ohio income and franchise taxation, to
the effect that the Conversion will not be a taxable transaction to the Company,
the Association, Eligible Account Holders, Supplemental Eligible Account Holders
or Other Members except as noted below.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Association has received an opinion of its
counsel, Muldoon, Murphy & Faucette, 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 and their interests in the
liquidation account in exchange for their deposit accounts in the Association;
(iv) the tax basis of the depositors' deposit accounts in the Association
immediately after the Conversion will be the same as the basis of their deposit
accounts immediately prior to the Conversion; (v) the tax basis of each Eligible
Account Holder's and Supplemental Eligible Account Holder's interest in the
liquidation account will be zero; (vi) no gain or loss will be recognized by
Eligible Account Holders or Supplemental Eligible Account Holders upon the
distribution to them of non-transferable subscription rights to purchase shares
of the Common Stock, provided that the amount to be paid for the Common Stock is
equal to the fair market value of such stock; and (vii) the tax basis to the
stockholders of the Common Stock of the Company purchased in the Conversion will
be the amount paid therefore and the holding period for the shares of Common
Stock purchased by such persons will begin on the date on which their
subscription rights are exercised. Crowe Chizek has opined that the Conversion
will not be a taxable transaction to the Company, the Association, Eligible
Account Holders or Supplemental Eligible Account Holders for Ohio income and/or
franchise tax purposes. Certain portions of both the federal and the state and
local tax opinions are based upon the assumption that the subscription rights
issued in connection with the Conversion will have no value. The Company and the
Association have received an opinion issued by Keller stating that pursuant to
Keller's valuation, Keller is of the opinion that subscription rights issued in
connection with the Conversion will have no value.
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS or the Ohio Department of
Taxation ("ODOT") and the IRS or ODOT could disagree with conclusions reached
therein. Keller has stated in its opinion that, pursuant to its valuation,
Keller is of the opinion that the subscription rights do not have any value,
based on the fact that such rights are acquired by the recipients without cost,
are non-transferable and of short duration, and afford the recipients the right
only to purchase the Common Stock at a
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price equal to its estimated fair market value, which will be the same price as
the Purchase Price for the unsubscribed shares of Common Stock. Such valuation
is not binding on the IRS or ODOT. If the subscription rights granted to
Eligible Account Holders or Supplemental Eligible Account Holders are deemed to
have an ascertainable value, receipt of such rights could be taxable to those
Eligible Account Holders or Supplemental Eligible Account Holders who receive
and/or exercise the subscription rights in an amount equal to such value and the
Association could recognize gain on such distribution. Eligible Account Holders
and Supplemental Eligible Account Holders are encouraged to consult with their
own tax advisor as to the tax consequences in the event that such subscription
rights are deemed to have an ascertainable value.
Interpretation and Amendment of the Plan of Conversion
To the extent permitted by law, all interpretations of the Plan by the
Association will be final. The Plan provides that the Association's Board of
Directors shall have the discretion to interpret and apply the provisions of the
Plan to particular circumstances and that such interpretation or application
shall be final. Any and all interpretations, applications and determinations
will be made by the Board of Directors on the basis of such information and
assistance as was then reasonably available for such purpose.
The Plan provides that, if deemed necessary or desirable by the Board
of Directors, the Plan may be substantively amended at any time by a two-thirds
vote of the Association's Board of Directors prior to solicitation of proxies
from members to vote on the Plan. After submission of the proxy materials to the
members, the Plan may be amended by a two-thirds vote of the Board of Directors
at any time prior to the Special Meeting with the concurrence of the OTS. The
Plan may be amended at any time after the approval of members with the approval
of the OTS and no further approval of the members will be necessary unless
otherwise required by the OTS. By adoption of the Plan, the Association's
members will be deemed to have authorized amendment of the Plan under the
circumstances described above.
Certain Restrictions on Purchase or Transfer of Shares After Conversion
All shares of Common Stock purchased in connection with the Conversion
by a director or an executive officer of the Association will be subject to a
restriction that the shares not be sold for a period of one year following the
Conversion, except in the event of the death of such director or executive
officer. Each certificate for restricted shares will bear a legend giving notice
of this restriction on transfer, and instructions will be issued to the effect
that any transfer within such time period of any certificate or record ownership
of such shares other than as provided above is a violation of the restriction.
Any shares of Common Stock issued at a later date as a stock dividend, stock
split, or otherwise, with respect to such restricted stock will be subject to
the same restrictions. The directors and executive officers of the Association
will also be subject to the insider trading rules promulgated pursuant to the
Exchange Act and any other applicable requirements of the federal securities
laws.
Purchases of outstanding shares of Common Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Association after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1.0% 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 except: (i) for an offer to all stockholders on a pro rata basis; or (ii)
for the repurchase of qualifying shares of a director. Notwithstanding the
foregoing, and except as provided below, beginning one year following completion
of the Conversion, the Company may repurchase its Common Stock so long as: (i)
the repurchases within the following two years are part of an open-market
program not involving greater than 5% of its outstanding capital stock during a
twelve-month period; (ii) the repurchases do not cause the Association to become
undercapitalized; and (iii) the Company provides to the Regional Director of the
OTS no later than 10 days prior to the commencement of a repurchase program
written notice containing a full
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description of the program to be undertaken and such program is not disapproved
by the Regional Director. Under current OTS policies, repurchases may be allowed
in the first year following Conversion and in amounts greater than 5% in the
second and third years following Conversion provided there are valid and
compelling business reasons for such repurchases and the OTS does not object to
such repurchases.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE ASSOCIATION
General
The Plan of Conversion provides for the Conversion of the Association
from the mutual to the stock form of organization and, in connection therewith,
a new Federal Stock Charter and Bylaws to be adopted by members of the
Association. The Plan also provides for the concurrent formation of a holding
company, which form of organization may or may not be utilized at the option of
the Board of Directors of the Association. See "The Conversion--General." In the
event that the holding company form of organization is utilized, as described
below, certain provisions in the Company's Certificate of Incorporation and
Bylaws and in its management remuneration entered into in connection with the
Conversion, together with provisions of Delaware corporate law, may have
anti-takeover effects. In the event that the holding company form of
organization is not utilized, the Association's Stock Charter and Bylaws and
management remuneration entered into in connection with the Conversion may have
anti-takeover effects as described below. In addition, regulatory restrictions
may make it difficult for persons or companies to acquire control of either the
Company or the Association.
Restrictions in the Company's Certificate of Incorporation and Bylaws
A number of provisions of the Company's Certificate of Incorporation
and Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of the provisions of
the Company's Certificate of Incorporation and Bylaws which might be deemed to
have a potential "anti-takeover" effect. These provisions may have the effect of
discouraging a future takeover attempt which is not approved by the Board of
Directors but which individual Company stockholders may deem to be in their best
interests or in which shareholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following description
of certain of the provisions of the Certificate of Incorporation and Bylaws of
the Company is necessarily general and reference should be made in each case to
such Certificate of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
Limitation on Voting Rights. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act, and includes shares beneficially owned by such person or any
of his affiliates (as defined in the Certificate of Incorporation), shares which
such person or his affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the ESOP or directors, officers and employees of
the Association or Company or shares that are subject to a revocable proxy and
that are not otherwise beneficially owned, or deemed by the Company to be
beneficially owned, by such person and his affiliates. The Certificate of
Incorporation also contains provisions authorizing the Board of Directors to
construe and apply the Limit and to demand that any person reasonably believed
to beneficially own Common Stock in excess of the Limit (or hold of record
Common Stock beneficially owned in excess of the Limit) to provide the Company
with certain information. No assurance can be given that a court applying
Delaware law would enforce such provisions of the Certificate of Incorporation.
The Certificate of
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Incorporation of the Company further provides that this provision limiting
voting rights may only be amended upon the vote of 80% of the outstanding shares
of voting stock (after giving effect to the limitation on voting rights).
Board of Directors. The Board of Directors of the Company is divided
into three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected each
year. The Company's Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the directors. The
Certificate of Incorporation and the Bylaws provide that any vacancy occurring
in the Board, including a vacancy created by an increase in the number of
directors or resulting from death, resignation, retirement, disqualification,
removal from office or other cause, may be filled for the remainder of the
unexpired term exclusively by a majority vote of the directors then in office.
The classified Board is intended to provide for continuity of the Board of
Directors and to make it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the Board of Directors
without the consent of the incumbent Board of Directors of the Company. The
Certificate of Incorporation of the Company provides that a director may be
removed from the Board of Directors prior to the expiration of his term only for
cause, upon the vote of 80% of the outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a
majority of the shares could remove the entire Board, with or without cause, and
replace it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be called
only by the Board of Directors of the Company. The Certificate of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of the Company may be taken only at an annual or special meeting
and prohibits stockholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 6,000,000 shares of Common Stock and 1,000,000 shares of Preferred
Stock. The shares of Common Stock and Preferred Stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these 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-Based Incentive Plan and upon exercise of stock options to be
issued pursuant to the terms of the Stock-Based Incentive 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
Principal Stockholders. The Certificate of Incorporation requires the approval
of the holders of 80% of the Company's outstanding shares of voting stock to
approve certain "Business Combinations," as defined therein, and related
transactions. Under Delaware law, absent this provision, Business Combinations,
including mergers, consolidations and sales of all or substantially all of the
assets of a corporation must, subject to certain exceptions, be approved by the
vote of the holders of only a majority of the outstanding shares of Common Stock
of the Company and any other affected class of stock. Under the Certificate of
Incorporation, 80% approval of shareholders is required in connection with any
transaction involving an Interested Stockholder (as defined below) except (i) in
cases where the proposed transaction has been approved in advance by a majority
of those members of the Company's Board of Directors who are unaffiliated with
the Interested Stockholder and were directors prior to the time when the
Interested Stockholder became an Interested Stockholder or (ii) if the proposed
transaction meets certain conditions set forth therein which are designed to
afford the
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shareholders a fair price in consideration for their shares in which case, if a
stockholder vote is required, approval of only a majority of the outstanding
shares of voting stock would be sufficient. The term "Interested Stockholder" is
defined to include any individual, corporation, partnership or other entity
(other than the Company or its subsidiary) which owns beneficially or controls,
directly or indirectly, 10% or more of the outstanding shares of voting stock of
the Company. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include: (i) any merger or
consolidation of the Company or any of its subsidiaries with or into any
Interested Stockholder or Affiliate (as defined in the Certificate of
Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, transfer, or other disposition to or with any Interested Stockholder
or Affiliate of 25% or more of the assets of the Company or combined assets of
the Company and its subsidiary; (iii) the issuance or transfer to any Interested
Stockholder or its Affiliate by the Company (or any subsidiary) of any
securities of the Company in exchange for any assets, cash or securities the
value of which equals or exceeds 25% of the fair market value of the Common
Stock of the Company; (iv) the adoption of any plan for the liquidation or
dissolution of the Company proposed by or on behalf of any Interested
Stockholder or Affiliate thereof; and (v) any reclassification of securities,
recapitalization, merger or consolidation of the Company which has the effect of
increasing the proportionate share of Common Stock or any class of equity or
convertible securities of the Company owned directly or indirectly by an
Interested Stockholder or Affiliate thereof. The directors and executive
officers of the Association are purchasing in the aggregate approximately 8.7%
of the shares of the Common Stock at the maximum of the Estimated Price Range.
In addition, the ESOP intends to purchase 8% of the Common Stock sold in the
Conversion. Additionally, if at a meeting of stockholders following the
Conversion stockholder approval of the proposed Stock-Based Incentive Plan is
received, the Company expects to acquire 4% of the Common Stock issued in the
Conversion on behalf of the Stock Awards and expects to issue an amount equal to
10% of the Common Stock issued in the Conversion under the Stock-Based Incentive
Plan to directors and executive officers. As a result, assuming the Stock-Based
Incentive Plan is approved by Stockholders, directors, executive officers and
employees have the potential to control the voting of approximately 25.8% of the
Company's Common Stock, thereby enabling them to prevent the approval of the
transactions requiring the approval of at least 80% of the Company's outstanding
shares of voting stock described hereinabove.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein) to: (i) make a tender or exchange
offer for any equity security of the Company; (ii) merge or consolidate the
Company with another corporation or entity; or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company, the Association and the stockholders of the
Company, give due consideration to all relevant factors, including, without
limitation, the social and economic effects of acceptance of such offer on the
Company's customers and the Association's present and future account holders,
borrowers and employees; on the communities in which the Company and the
Association operate or are located; and on the ability of the Company to fulfill
its corporate objectives as a savings and loan holding company and on the
ability of the Association to fulfill the objectives of a federally chartered
stock savings association under applicable statutes and regulations. No
assurance can be given that a court applying Delaware law would enforce the
foregoing provision of the Certificate of Incorporation. By having these
standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then market
price of any equity security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of the
outstanding voting stock entitled to vote (after giving effect to the provision
limiting voting rights) is required to amend or repeal certain provisions of the
Certificate of Incorporation, including the provision limiting voting rights,
the provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by the Company and amendment of the Company's Bylaws and
Certificate of Incorporation. The Company's Bylaws may be amended by its Board
of Directors, or by a vote of 80% of the total votes eligible to be voted at a
duly constituted meeting of stockholders.
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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, the Severance Plan, or
the Stock-Based Incentive 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" and "--Benefits--Stock-Based Incentive
Plan."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of the Company and
that otherwise is in the best interest of all stockholders.
Delaware Corporate Law
The state of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined therein)
who owns 15% or more of the outstanding voting stock of a Delaware corporation
(an "Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by certain employee stock plans; (iii) any business
combination with an Interested Stockholder that is approved by the Board of
Directors and by a two-thirds vote of the outstanding voting stock not owned by
the Interested Stockholder; and (iv) certain business combinations that are
proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the Board of Directors. A corporation may exempt itself from the requirements of
the statute by adopting an amendment to its Certificate of Incorporation or
Bylaws
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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--Certain
Anti-Takeover Provisions."
The Association's Federal Stock Charter will contain a provision
whereby the acquisition of or offer to acquire beneficial ownership of more than
10% of the issued and outstanding shares of any class of equity securities of
the Association by any person (i.e., any individual, corporation, group acting
in concert, trust, partnership, joint stock company or similar organization),
either directly or through an affiliate thereof, will be prohibited for a period
of five years following the date of completion of the Conversion. Any stock in
excess of 10% acquired in violation of the Federal Stock Charter provision will
not be counted as outstanding for voting purposes. This limitation shall not
apply to any transaction in which the Association forms a holding company
without a change in the respective beneficial ownership interests of its
stockholders other than pursuant to the exercise of any dissenter or appraisal
rights. In the event that holders of revocable proxies for more than 10% of the
shares of the Common Stock of the Company seek, among other things, to elect
one-third or more of the Company's Board of Directors, to cause the Company's
stockholders to approve the acquisition or corporate reorganization of the
Company or to exert a continuing influence on a material aspect of the business
operations of the Company, which actions could indirectly result in a change in
control of the Association, the Board of Directors of the Association will be
able to assert this provision of the Association's Federal Stock Charter against
such holders. Although the Board of Directors of the Association is not
currently able to determine when and if it would assert this provision of the
Association's Federal Stock Charter, the Board of Directors, in exercising its
fiduciary duty, may assert this provision if it were deemed to be in the best
interests of the Association, the Company and its stockholders. It is unclear,
however, whether this provision, if asserted, would be successful against such
persons in a proxy contest which could result in a change in control of the
Association indirectly through a change in control of the Company. Finally, for
five years, stockholders will not be permitted to call a special meeting of
stockholders relating to a change of control of the Association or a charter
amendment or to cumulate their votes in the election of directors. Furthermore,
the staggered terms of the Board of Directors could have an anti-takeover effect
by making it more difficult for a majority of shares to force an immediate
change in the Board of Directors since only one-third of the Board is elected
each year. The purpose of these provisions is to assure stability and continuity
of management of the Association in the years immediately following the
Conversion.
Although the Association has no arrangements, understandings or plans
at the present time for the issuance or use of the shares of undesignated
preferred stock (the "Preferred Stock") proposed to be authorized, the Board of
Directors believes that the availability of such shares will provide the
Association with increased flexibility in structuring possible future financings
and acquisitions and in meeting other corporate needs which may arise. In the
event of a proposed merger, tender offer or other attempt to gain control of the
Association of which management does not approve, it might be possible for the
Board of Directors to authorize the issuance of one or more series of Preferred
Stock with rights and preferences which could impede the completion of such a
transaction. An effect of the possible issuance of such Preferred Stock,
therefore, may be to deter a future takeover attempt. The Board of Directors
does not intend to issue any Preferred Stock except on terms which the Board
deems to be in the best interest of the Association and its then existing
stockholders.
Regulatory Restrictions
The Plan of Conversion prohibits any person, prior to the completion of
the Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise.
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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 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 6,000,000 shares of Common Stock
having a par value of $.01 per share and 1,000,000 shares of preferred stock
having a par value of $.01 per share (the "Preferred Stock"). The Company
currently expects to issue up to 1,955,000 shares of Common Stock (or 2,248,250
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 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.
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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 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 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.
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 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.
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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 6,000,000
shares of common stock, par value $1.00 per share, and 1,000,000 shares of
preferred stock, par value $1.00 per share, which preferred stock may be issued
in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of Common Stock
of the Association will have the same relative rights as, and will be identical
in all respects with, each other share of common stock. After the Conversion,
the Board of Directors will be authorized to approve the issuance of Common
Stock up to the amount authorized by the Federal Stock Charter without the
approval of the Association's stockholders. Assuming that the holding company
form of organization is utilized, all of the issued and outstanding common stock
of the Association will be held by the Company as the Association's sole
stockholder. The capital stock of the Association will represent
non-withdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC.
Common Stock
Dividends. The holders of the Association's common stock will be
entitled to receive and to share equally in such dividends as may be declared by
the Board of Directors of the Association out of funds legally available
therefor. See "Dividend Policy" for certain restrictions on the payment of
dividends and "Federal and State Taxation--Federal Taxation" for a discussion of
the consequences of the payment of cash dividends from income appropriated to
bad debt reserves.
Voting Rights. Immediately after the Conversion, the holders of the
Association's common stock will possess exclusive voting rights in the
Association. Each holder of shares of common stock will be entitled to one vote
for each share held, subject to the right of shareholders to cumulate their
votes for the election of directors. During the five-year period after the
effective date of the Conversion, cumulation of votes will not be permitted. See
"Restrictions on Acquisition of the Company and the Association--Anti-Takeover
Effects of the Company's Certificate of Incorporation and Bylaws and Management
Remuneration Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding
up of the Association, the holders of common stock will be entitled to receive,
after payment of all debts and liabilities of the Association (including all
deposit accounts and accrued interest thereon), and distribution of the balance
in the special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders, all assets of the Association available for
distribution in cash or in kind. If additional preferred stock is issued
subsequent to the Conversion, the holders thereof may also have priority over
the holders of common stock in the event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the
Association will not be entitled to preemptive rights with respect to any shares
of the Association which may be issued. The common stock will not be subject to
redemption. Upon receipt by the Association of the full specified purchase price
therefor, the common stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company, Cranford, New Jersey.
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EXPERTS
The financial statements of the Association and its subsidiaries as of
December 31, 1997 and 1996 and for each of the years in the three-year period
ended December 31, 1997, have been included herein in reliance upon the report
of Robb, Dixon, Francis, Davis, Oneson & Company, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
Keller & Company, Inc. has consented to the publication herein of the
summary of its report to the Association and Company setting forth its opinion
as to the estimated pro forma market value of the Common Stock upon Conversion
and its valuation with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for the Association and the
Company by Muldoon, Murphy & Faucette, Washington, D.C., special counsel to the
Association and the Company. Muldoon, Murphy & Faucette will rely as to certain
matters of Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell. The
State of Ohio tax consequences of the Conversion will be passed upon for the
Association and the Company by Crowe, Chizek and Company LLP. Certain legal
matters will be passed upon for Webb by Breyer & Aguggia LLP, Washington, D.C.
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ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information and all
exhibits to the Registration Statement, can be examined without charge at the
public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of such material can be obtained from the SEC
at prescribed rates. 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 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
with respect to the Conversion. Pursuant to the rules and regulations of the
OTS, this Prospectus omits certain information contained in that application.
The application may be examined at the principal office of the OTS, 1700 G
Street, N.W., Washington, D.C. 20552 and at the Office of the Regional Director
of the OTS located at 200 West Madison Street, Suite 1300, Chicago, Illinois
60606.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion. In
the event that the Association amends the Plan to eliminate the concurrent
formation of the Company as part of the Conversion, the Association will
register its stock with the OTS under Section 12(g) of the Exchange Act and,
upon such registration, the Association and the holders of its stock will become
subject to the same obligations and restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the
Company and the Federal Stock Charter and Bylaws of the Association are
available without charge from the Association.
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No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such information or representation shall not be relied upon as having been
authorized by the Company, the Association or Charles Webb & Company. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any of the securities offered hereby to any person in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so, or to any person to whom
it is unlawful to make such offer or solicitation in such jurisdiction. Neither
the delivery of this Prospectus nor any sale hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of the Company or the Association since any of the dates as of which
information is furnished herein or since the date hereof.
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Until December 18, 1998 or 25 days after commencement of the Syndicated
Community Offering, if any, whichever is later, all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
Up to 1,955,000 Shares
GRAND CENTRAL FINANCIAL CORP.
(Proposed Holding Company for
Central Federal Savings and Loan Association of Wellsville)
COMMON STOCK
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PROSPECTUS
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Charles Webb & Company
a Division of Keefe, Bruyette &
Woods, Inc.
November 12, 1998
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